How to Establish an AP Process for Physical Goods

All organizations, no matter their size, have bills to pay. The larger the company, the more formal the accounts payable process tends to be. That doesn’t mean small business owners can’t benefit from a formal accounts payable process. Establishing one can be a great way to set controls and avoid unnecessary and unapproved spending. Let’s look at the accounts payable workflow to see where we can put some controls in place to protect your organization’s hard-earned money.

Purchase Order

A good first step is to initiate a purchase ordering process. All spending over a certain amount, such as $500, should require pre-approval from a manager or officer of your company. This step can take the form of a purchase order.

A purchase order (PO) is simply a pledge on the part of your company to purchase an item or group of items from a particular vendor. It should include the vendor’s information, the item(s) and quantities, the price that the vendor has agreed to, and who initiated and approved the proposed purchase. It will look similar to a bill, but it’s not a bill and should be appropriately marked.

If the price is not standard or the items are custom, there may be an estimate from the vendor that documents the price on the purchase order. The vendor writes the estimate document, while your company originates the purchase order.

While the purchase order is important, it does not create any entry on your accounting records, as no transaction has taken place yet.

Bill

The bill is the documentation of the purchase with a payment request. It is created by the vendor from which you are obtaining goods or services. It should be recorded on your accounting books once you have received it from the vendor.

The bill should be matched with the purchase order, checking to see if each item, quantity, and price match the same on the purchase order. Any discrepancies require explanation.

The timing of the bill can vary. For example, you may receive it before or after you’ve received the goods or services it covers.

Packing Slip

If the goods ordered are physical and will be shipped to you, then a packing slip or shipping document will usually be included with your package. The shipping document will have quantities but may not have prices listed. The document should match the actual items received, and any shortages or overages should be noted.

A process to stock the items into your inventory should then occur. A transaction should be entered into your system to increase inventory for the goods you receive.

The (corrected) packing slip should be matched against the bill to ensure sure you have received everything included on the bill. Again, if there is a discrepancy, it should be noted.

It’s common for back-ordered items to come in a later shipment, especially when supply chains become disrupted due to the pandemic. If your organization deals with multiple shipments for a single order often, you’ll need to set up a process for tracking them.

Approvals

As you can see, there might be a couple new checks and balances for you to implement in your organization, and there should be a documented processes for each one: one for matching the documents, another for any discrepancies that arise, and a final one for approval as you move from purchase order to packing slip to bill.

Your workflow may vary from the one listed above, depending on the order the documents are received and when payment is required. You may even have a different workflow for different vendors. 

Once the purchase order, shipping document, and bill have been matched and corrected, it’s time to get them approved for payment by the appropriate level of management that you desire. You’ll want to determine which of your employees can spend and approve certain amounts in advance of this step.

Payment

Once your bill is approved, review the payment terms and due date, then prepare the bill for payment. This can be accomplished through your accounting system or by using a company credit card, sending a bank transfer or wire, or writing, signing, and mailing a manual check.

Workflow

A strong accounts payable workflow will protect your company from unauthorized payments, missing items, and even hasty purchasing decisions. There are also many accounts payable systems to support the automation of this procedure so you can implement it with greater ease. 

New Business Directions provides custom workflow development and training, so if you’re interested in refining your processes around accounts payable, visit newbusinessdirections.com/custom-workflow-development/ or reach out to us via our inquiry form, located on our contact page.