Best Practices: Accounts Payable
How a company manages its accounts payable processing affects two important business matters: cash flow and supplier relationships. Companies that apply best practices manage accounts payable so that the process both contributes positively to cash flow and supports mutually beneficial relationships with suppliers.
Regarding cash flow, accounts payable practices make a significant difference both in minimizing late-payment costs -- such as late-payment penalties, interest charges, and lost prompt-payment discounts -- and in creating efficient operations. A company with smooth-running, streamlined accounts payable operations saves money by processing invoices with a minimum of staff and a low cost of materials. According to an accounts payable study sponsored by the American Institute of CPAs, the average billion-dollar company processes 12,500 invoices per accounts payable employee annually, at a cost of $3.55 per invoice; the world's best finance and accounting departments, however, process invoices at a cost of only $0.35 each. Reducing processing costs from $3.55 to $0.35 for 12,500 invoices saves $40,000 per accounts payable employee, which is higher than their average annual salary.
Regarding supplier relations, accounts payable actions inevitably impact the trust between a company and its suppliers. Whether or not a company honors its agreed-upon payment terms -- by paying its bills on time, as promised -- does more to build trust with suppliers or to tear it down than any other action the company can take. And strong relations with suppliers are important to a company because suppliers provide valuable trade credit, have ideas for new methods and products, and play an important role in customer service.
Implementing the best practices in this report helps a company to manage its accounts payable activities with multiple goals in mind: (1) to pay invoices on a predetermined schedule of the company's choosing, (2) to ensure the accuracy and authenticity of invoices that the company pays, and (3) to process accounts payable paperwork with a minimum of handling and expense.
Note:Arthur Andersen has studied the leading companies that are high performers in processing accounts payable. It has also tapped the knowledge of experts, consultants, and industry leaders. The insights Arthur Andersen has gained from these extensive studies are the focus of this executive summary.