Best Practice Financial Processes: Accounts Payable

1
Best Practice Financial Processes Accounts
Payable
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Accounts Payable - Best Practice Objectives
Organisation
People

• Centralised processing
• Outsourcing potential

• Supplier relations
• Creditor control

Accounts Payable Objectives

• To maximise processing efficiency
• To ensure invoices are processed to agreed terms
• To ensure payments made only when due and payable
• To ensure liabilities are fully recorded and
  distributed correctly
• To achieve effective balance between extending
  credit and maintaining good relations with
  suppliers
• To take full advantage of opportunities to
  recover VAT

Processes
Information Systems

• Maintaining supplier details
• Process vouchers
• Process payments
• Period end processing and reporting

• Interface between Accounts Payable and other
  related processes
• Shared employee and supplier details
• System validation and approval checks

Measures
Controls

• Speed of processing supplier amendments
• Invoices processed
• Invoice processing time
• Number of payments
• Period end closure time

• Authorisation rules
• System access controls
• User procedures
• Validation and matching rules

3
Accounts Payable - Measures/Cost drivers
Number of purchase invoices per FTE per annum
Cost per purchase invoice processed
15,000
6
7,000
3,000 or less
2
17
10 percentile
90 percentile
90 percentile
Median
10 percentile
Median
Cost drivers
Invoice processing time in days

• Number of invoices received per month
• Number of suppliers
• Number of different terms and conditions
• Complexity of authorisation process
• Proportion of invoices automatically matched with
  PO's
• Number of supplier queries
• Proportion of invoices received electronically
• Proportion of payments made electronically

16 days
49 days
6 days
10 percentile
Median
90 percentile
Source statistics taken from Benchmarking
database 21 January 1997
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Accounts Payable - Trends
From
To

• Integrated systems
• Electronic payment
• On-line matching
• Shared Service Centres or outsourced services

• Separate AP module
• Payment by cheque
• Manual matching
• Performed by finance department

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Accounts Payable - Critical Success Factors

• These are a summary of the key business
  requirements, which must be met to achieve the
  objectives.

• Single supplier database
• Staff trained in AP process and have clear roles
  and responsibilities
• Payment terms defined and agreed with supplier
• Effective communication and feedback mechanisms
  in place to handle queries
• Establish and maintain good supplier relations
• Process in place for monitoring the status of
  invoices and payment schedules
• AP calendar in place and communicated to staff
• Authorisation levels and payment terms held on
  the system
• Automated workflow to route documents to relevant
  personnel when problems need to be resolved
• Forward payment schedule to cashflow management
• Flexible matching criteria

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Accounts Payable - Appendix 1 IDEF Process Flow
The diagram below provides a key to the process
diagrams used in this document.
Controls
(i.e.

• Procedures
• Standards
• Requirements for rework)

Process / activity
Output
Input
(i.e.
(i.e.

• Information
• Material)

• Information
• Material)

Resources
(i.e.

• People
• Functions
• IT systems
• Machines)

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Accounts Payable - Level 0 Context Diagram
8
Accounts Payable - Level 1 Overview

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Accounts Payable - Notes Maintain Supplier
Details

• Best Practice Features
• Shared supplier database with Purchasing.
  Purchasing responsible for approving suppliers
  (having made the required checks), agreeing terms
  and conditions and maintaining general and
  purchasing related supplier details on the
  database, including payment terms. Accounts
  Payable responsible for maintaining all payment
  related supplier data, such as bank details,
  payment method, payee name and address, payment
  contacts.
• Shared employee database with Human Resources.
  Employee details are maintained by Human
  Resources, but sufficient details must be held
  and maintained by Accounts Payable, to allow
  payment of expenses. Employee details required
  include payment method, bank details, remittance
  address, payee name and employee cost centre.
  Accounts Payable should not have access to other
  confidential employee data.
• One payment address for each vendor. Where a
  vendor provides goods or services from a number
  of locations, the consolidation of the payment
  process not only reduces the number of payments
  necessary but also removes the potential need to
  reconcile a number of individual accounts.
• Centralise the vendor set-up capability in order
  to minimise the risk of unauthorised or duplicate
  vendors being set up more than once. From an
  audit point of view, the control over vendor set
  up is also viewed as a critical activity which
  needs to be tightly controlled.
• Changes to supplier details are processed
  expeditiously.
• If, the vendor is also a customer, details are
  consistent in both databases.

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Accounts Payable - Notes Maintain Supplier
Details

• Internal Control requirements
• New suppliers must be checked and approved by
  Purchasing in accordance with company policy.
  Similarly, Purchasing are responsible for
  processing any mergers, acquisitions or
  deletions. To enable efficient invoice payment
  processing and ensure segregation of duties,
  Accounts Payable are responsible for the
  maintenance of all payment related supplier data.
  In addition, authorisation for payments within
  Accounts Payable should be separate from the
  responsibility of maintaining supplier payment
  data and processing vouchers. Audit of changes to
  supplier payment details must be possible.
• Key Performance Indicators
• Time taken to process supplier amendments.

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Accounts Payable - Notes Process Payments

• Best Practice Features
• Use of electronic banking systems for payments,
  thus minimising the need for manual intervention
  in the process.
• Centralisation of the payment processing in order
  to minimise the risk of making duplicate
  payments.
• Payments made no sooner than the due date in
  order to maximise cash flow benefits.
• Facility to suspend individual payments. The
  withholding of payment can be a powerful tool in
  ensuring that the vendor complies with any
  requirements asked of it.
• Avoid payments in cash. Apart from being costly
  to administer, the potential for fraud is greatly
  increased.

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Accounts Payable - Notes Process Payments

• Internal Control requirements
• Payment processing needs to be tightly controlled
  and totally segregated from vendor set-up and
  invoice processing activities.
• Key Performance Indicators
• Number of payments per FTE.
• Number of overdue payments.
• Number of payments made too early.

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Accounts Payable - Notes Process Payments

• Cost Drivers
• The following generate the costs for the
  processing of payments-
• Number of payment runs.
• Number of manually prepared payments.
• Number of payment media (cheques, vouchers,
  diskettes, etc.).
• Number of foreign payments.
• Varied payment terms.
• Reports
• Summary of payments per run.
• Payments on hold.
• Reports on Key Performance Indicators.
• Overdue unpaid invoices

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Accounts Payable - Notes Period end processing
and reporting

• Best Practice Features
• Automatic process requiring little or no manual
  intervention.
• Posting to GL should be daily. This ensures GL
  data is up to date and also reduces the time
  taken for the period end posting as fewer records
  are being processed.
• Internal Control requirements
• The basic requirement is to ensure that the data
  transmitted to the general ledger is complete and
  on time. There is a requirement to ensure that
  the information recorded in the general ledger
  agrees with the output from accounts payable.
• Key Performance Indicators
• Delivery of information to general ledger on time
• Timely delivery of end of period reports
• Cost Drivers
• Volume of transactions
• Time to close periods
• Degree of automation in the interface with
  general ledger