1. Best Practice Financial Processes: Accounts Payable

2. 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 - Best practice features
Maintain supplier
details
Process vouchers
Process payments
Period end
processing
and reporting
Process Features
Authorise and set up new suppliers payment details
Maintain supplier payment details
Segregation of duties between supplier set up, voucher processing and payment processing
Accounts payable process vouchers: invoices, expense claims, credit notes, debit memos and prepayment requests
Suppliers required to use PO number on all documents and three way match wherever possible
Consolidated periodic invoicing for high frequency suppliers
Optimisation of early payment discounts
Payment runs properly authorised
All transactions completed before period closed
Reconciliation of Accounts Payable activity and reconciliation with General Ledger control account
Management reports run once period is finally closed

4. Accounts Payable - Best practice features
Maintain supplier
details
Process vouchers
Process payments
Period end
processing
and reporting
System Features
Single supplier database
Single employee database
Audit trail of changes to supplier payment details
Purchase invoices transacted via EDI with major suppliers wherever possible
Electronic validation and approval of invoices
Automatic matching of invoice to order and goods received note (GRN)
Interface with General Ledger, Purchasing, Fixed Assets and Project Accounting
Use of workflow software to resolve queries and monitor process
Electronic payments
Default payment terms held on supplier file with manual override at P.O. and invoice
Production of forward payment entry schedules to aid cash flow management
Interface with General Ledger, Fixed Assets, Project Accounting and Cash Management
Facility to suspend payments
Integration with General Ledger minimises reconciliation adjustments
Transaction processing prevented for closed periods

5. 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
Invoice processing time in days
Cost drivers
6 days
16 days
49 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
10 percentile
Median
90 percentile
Source: statistics taken from Benchmarking database 21 January 1997

6. 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

7. 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

8. 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
Input
Output
(i.e.
(i.e.
Information
Material)
Information
Material)
Resources
(i.e.
People
Functions
IT systems
Machines)

9. Accounts Payable - Level 0 Context Diagram
Group / Mgt.
team
Fixed Asset
Register
Purchasing
General
Ledger
Suppliers /
Employees
Fixed Asset details
Supplier/Employee
amendments
Project expense details
Invoice / Payment
details
Purchase orders
Reconcile payments
Human
Resources
Cash
Management
Management reports
Payments
Cash requirements
Employee details
Project
Accounting
Accounts Payable
Receipts

10. Accounts Payable - Level 1 Overview
Voucher approved for payment
New period open
Payment details ready to post to General Ledger
Payment and
remittance advice
Voucher : Invoice/expense claim/
Credit note/prepayment request
Notification of changes from supplier or employee
Maintain supplier details
AP 1.1
Process vouchers
AP 1.2
Process payments
AP 1.3
Period end processing and reporting
AP 1.4
Voucher processing procedures
Authorisation rules
Matching rules
System validation and approval checks
Exception handling procedures
AP dept
AP system
PO system
Supplier
Requisitioner
Batch controls
Reporting guidelines
Posting controls
Reconciliation procedures
Period end timetable
Payment device
Authorised personnel AP
AP System HR
Authorisation procedures
System access controls
Up to date
supplier
records
Vouchers filed
GL system
Management Reports
Employee joiners and leavers details
Maintenance request
Approved vouchers ready to post to General Ledger
Voucher details available on-lne to Fixed Assets and Project Accounting
Cancelled vouchers reversed out of AP and filed
Payment details available on-line to cash management
Payment cancelled

11. 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.

12. 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.

13. 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.

14. 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.

15. 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

16. 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