All businesses must expertly manage payments they owe to other people or entities. This function, known as accounts payable, is critical to business operations, financial management, and building long-term relationships across industries.
Accounts payable teams must find the balance between speed and accuracy to make the right payments to the right partners. on time. The possibility of payment errors requires the implementation of several accounts payable controls throughout the accounts payable process.
Accounts payable internal controls have been carefully developed, widely implemented, and continually refined to protect companies from payment risks no matter where in the AP process they originate. We’ll examine the different types of accounts payable controls, internal accounts payable controls best practices, and how to manage accounts payable controls in today’s digital landscape.
Understanding Accounts Payable Internal Controls
When it comes to disbursing funds, whether to a customer making a return, a supplier shipping raw materials, or a government entity collecting taxes or fees, it’s important that processing errors don’t get in the way. The company that is owed money will send an invoice, that invoice will be processed by the AP team and then the AP team will send funds to the owner of the invoice. Once the funds have cleared, the process will be completed and business can continue as usual.
Internal Accounts Payable Controls are a set of standards and requirements that make accounts payable processes more efficient, reduce business risks associated with the function, and optimize long-term cash management. In short, a efficient and effective AP team will positively impact all subsequent business functions.
Accounts Payable Risks
Accounts payable The risks go far beyond late payments and damaged business relationships; If severe enough, the viability of the business may be questioned due to issues with accounts payable. Some of the biggest risks within this business function are:
- Fraud
- Late or incomplete payments
- Failure to comply with audit requirements
- Inadequate invoice management
- Overpayments
The Business Function of Accounts Payable Controls
When implemented correctly, accounts payable internal controls divide roles and responsibilities throughout the process, ensure accuracy of invoices and payments, mitigate the risk of multiple payments, maintain an auditable paper trail, and reduce Human error from start to finish.
With the right AP controls, business leaders, customers, and other vendors can sleep easy knowing that the risk of fraud is minimal, funds transfer will be fast and accurate, and your organization’s financial management is reliable. There are many accounts payable internal controls best practices that every company should prioritize; Let’s get into them.
Types of internal controls for accounts payable
Accounts payable internal controls are divided into three main subcategories: payment obligation controls, data entry controls, and payment entry controls. Each category aligns with the main steps of the payment process: validating incoming invoices, ensuring data is correctly recorded internally, and disbursing the correct amount of funds to the payment recipient.
Obligation to pay controls
The first type of internal controls for accounts payable focuses on a company’s payment obligation. When incoming invoices are sent to a company, the company must validate each invoice. They must match the goods or services received and must not be duplicates of invoices that have already been processed. In this part of the process, your AP team should perform their due diligence using the following methods:
- Invoice approval
Depending on the structure of your organization, the exact role in charge of invoice approvals It could vary, but there is usually one person or a small team of people who reviews incoming invoices, verifies that the amount due is correct, and approves payment of that invoice.
This may be harder to do than you think. The approver needs to know how much of a product is being purchased, what the agreed upon sales price is, and whether that product has been received. Using the invoice, original purchase order, and shipping receipts, they can verify the information to ensure its accuracy.
- Purchase order approval
When a company decides to make a purchase, the procurement team must issue and approve the purchase order. Once the purchase order is approved, it is assigned an order number and shared with the supplier. This gives the invoice approver a simple check before approving payment for each invoice. This is a great way to mitigate overspending and manage spending forecasts.
- Three-way pairing
The process of comparing invoices with purchase orders and receiving information is called three way match. This ensures that your paid items have been received. The matching must be done before authorizing payment.
- Duplicate Invoice or Payment Audit
The last is to verify that payment has not already been sent to a supplier for the invoice items. It used to be manual, but now most businesses rely on a software tool like Nanonets to review their system, look up the associated invoice number and order number, and flag any duplicate payments.
Data entry controls
Data entry controls, especially with the digital solutions used in most cases. accounting and FP&A functions – are key internal controls for accounts payable teams today. After determining your payment obligation, data entry controls are implemented to enter the correct data into your accounts payable software. Whether you use an ERP, an automation platform, or a combination of tools, accurate data entry should be prioritized. There are two ways to navigate these internal controls for accounts payable:
- Register invoice before approval
With this approach, an invoice and its respective debit are recorded as soon as the AP team receives it from the sender. It is then sent through the approval process, often resulting in faster processing and disbursement of funds.
- Post invoice after approval
If you are concerned about duplicate payments, choose to post the invoice in your system after it has been approved internally by the relevant authority. If you are overly cautious, this is the recommended approach.
- Payment entry controls
The last major type of internal controls for accounts payable processes are all payment entry controls. These focus on sending payments associated with invoices that have been approved and uploaded to your system. The accounts payable controls in this category are:
- Segregation of duties
Do not assign the same person to prepare and sign checks; keep them separate to create an extra layer of security. This also ensures that everything is verified by a second person before payment is made. This may seem simple, but it plays an important role in overall accounts payable internal controls.
- Manual check signing
Stay away from signature stamps and require old-fashioned manual check signing for all vendor payments. Stamps could be used by unauthorized persons, increase the risk of fraud and lead to accidental duplicate payments.
- Secure Check Storage
Store checks in a locked storage area that is separate from any signature stamps your organization uses.
- Tracking Check Numbers
By keeping a close eye on all checks that have been sent through a verification run, AP teams can identify if any checks are missing and flag the issue through the appropriate channels.
- Double signature
Accounts payable controls would not be complete without a double signature policy for any payments over a certain amount. A manager or senior executive can serve as an effective safeguard when a lot of money is at stake.
Accounts Payable Internal Controls Best Practices
All categories of AP controls come with best practice recommendations. It is important to stay up to date on current accounts payable internal controls best practices, especially as new technologies change the AP process internally and externally.
Best practices: Obligation to pay controls
For the greatest protection of payment obligation controls, be sure to use a consistent document storage solution. If your company accepts paper invoices, keeps them all in different places, and doesn’t have a standard process for determining where they go, things will get lost.
Instead, invest in AP software like Nanonets, which can save a digital copy of each invoice, track the approval flow, and match invoice data to other systems within your organization. Software solutions can also flag duplicates or notify people when a payment has already been sent. Even with a digital tool, be sure to avoid conflicts of interest and keep multiple people involved in the approval and payment processes to help segregate roles and responsibilities.
Best Practices: Data Entry Controls
Data entry is a great candidate for human error. Instead of relying on one of your AP staff members to enter the information for each invoice or purchase order by hand, scan the documents into a document reader tool that can automatically extract the information and distribute it across the commercial systems you use. Flow by Nanonets is customized for eliminate manual data entry and communicates perfectly with everyone best ERPCRM and other business tools.
Best Practices: Payment Entry Controls
Consistent with your own payment entry controls, be sure to maintain some segregation of duties in the process. You don’t want the same person who approved the invoice to be the person who writes and signs the check; another set of eyes should check everything before making payment. Even better, consider switching to ACH payments or wire transfers instead of paper checks. Things cannot be lost, the paper trail is indestructible and payments are received almost immediately.
Internal controls for accounts payable protect your business, suppliers and customers
If you’re eager to implement new AP controls but aren’t sure where to start. Sit down and audit the process from start to finish. Who is involved? What are the exact steps involved from receiving an invoice to paying it? What are the weak points of the current process? How does technology influence?
Once you have the answers to these questions as a starting point, you can begin to identify the most immediate issues and the most complex changes before you begin. You will need people who understand the function very well to help implement new controls or updated processes. But once completed, these controls will protect your business and all people or organizations involved in it.
