What is the Full Cycle of Accounts Payable?
Full cycle accounts payable, as the name implies, is the complete cycle that an accounts payable department goes through to complete and archive a purchase. This journey includes:
- Documenting and transmitting the purchase order
- Invoice processing
- Matching all documents
- Transferring funds
- Recording all transactions
Although the bookkeeping for all of this paperwork may sound like an arduous task, especially in high-volume AP offices, today’s accounting software does reduce the burden significantly.
Breaking Down the Cycle
Full cycle accounts payable is also known as procure to pay. Whatever you wish to call it, the path from start to finish can be divided into the following segments:
- Purchase order
- Receipt of goods or service
Each part entails its own unique accounting activities. Here they are in detail:
- A PO from a purchasing department begins the payment cycle. A purchase order must be created, approved, and sent to an appropriate vendor. The document will detail the items for purchase, the quantity, and any important issues in the transaction. This will create an account payable once the PO order is received and approved by the other side; generally, the accounts receivable office handles this part of the payment process.
- When the ordered goods or services are received, the buyer’s receiving department will create a receiving report. This document will show what items were received in the shipment and will note if any goods were damaged in transit.
This is where order discrepancies can crop up; if any do occur, it is up to the AP office to notify the accounts receivable office at the vendor and have them rectify the situation.
- The supplier of purchased items will generate a vendor invoice with the total amount due and send it to the buying party. This bill will be handled by the business’s accounts payable office. A large company may settle invoices with its treasury department, while a small business will typically use an AP office or an accounts payable specialist.
Whichever person or group is responsible for handling the invoice, they will inevitably perform three-way matching to verify that all data across the three relevant documents—the purchase order, the vendor invoice, and the receiving report—don’t conflict with each other. Once this step is finished, the invoice is green-lighted for payment processing.
The due date will be clearly noted on the invoice, and early payment often leads to discounts on the bottom line. This of course assumes that all of the steps noted above are completed in a timely manner.
A payable clerk will issue the final payment for an invoice, and this can be accomplished with a credit card or other digital form of payment. A bookkeeper should verify that everything has been properly recorded, including the payment form and any payment discounts.
The Flow of Full Cycle Accounts Payable
The full cycle accounts payable process can be thought of as flowing in two directions, upstream and downstream.
- Upstream. This is where procurement takes place. In this phase, the business will conduct strategic sourcing, supply chain management, and negotiate contracts. Payment terms are negotiated during this first half, and purchases can be monitored for risk.
- Downstream. In the second half, goods and services are received with an invoice that is verified and paid. As with the upstream phase, risk management is a crucial component.
In both halves, it’s important to continually strive to reduce human error, maximize efficiency, and incorporate modifications to achieve greater productivity.
Benefits of Mastering Full Cycle Accounts Payable
Bookkeeping departments that learn to efficiently process payments in the complete cycle of accounts payable will reap many benefits, not least of which is consistent control over the payment of invoices, which helps to decrease fraud. Other advantages include:
- Greater cost savings. Paying invoices on time frequently results in greater cost savings through dynamic discounting and early payment programs.
- Better vendor relationships. Greater efficiency translates into better relationships with vendors, who will find a greater level of responsiveness from the accounts payable department.
- Greater efficiency. The AP office that is able to seamlessly manage multiple accounting activities will achieve a greater degree of accuracy and make fewer errors.
Accounting Software for Full Cycle Accounts Payable
Invoicing, data entry, cash flow tracking, and other functions in the payable process today have been greatly simplified, thanks to many advanced digital tools that are able to perform a wide variety of tasks that were unthinkable for a computer program just a few decades ago.
In its most basic form, a digital accounting system for a full cycle accounts payable office could be an Excel spreadsheet. In addition to Microsoft Windows, the program today runs on Apple machines, and there are a variety of other spreadsheets as well. For analyzing expense reports, financial statements, and the general ledger, a spreadsheet works well for a small AP office.
A larger business will need much more. It will need something to manage multiple vendor relationships and vendor payments. That’s where these more powerful software platforms come in.
Quickbooks. AP offices that use Intuit’s Quickbooks get several accounting features that spreadsheets aren’t able to deliver. For example, the software offers:
- Audit Trail: This tool displays a history of all changes made to a transaction, including when the edits were made, who made the modifications, and what the specific changes were.
- Roles and permissions: It’s possible to establish custom permissions for various types of employees. For example, you can create a custom login for accountants.
Tipalti. For ERP integration and global payment capabilities, Tipalti offers a suite of software tools that can accomplish many tasks. These include:
- Ability to send payments to suppliers in over 180 countries.
- Invoice processing with optical character recognition (OCR).
- VAT and tax compliance with multiple tax forms.
- Compatibility with Quickbooks.
Efficient AP Management is Possible
Although end-to-end accounts payable entails a great deal of red tape, it doesn’t have to be a tedious process. With adequate knowledge, experience, and tools, every AP office can efficiently manage cash flow and payment processing.