Understanding the accounts payable process

Whether you’re running a mid-sized business or starting out as an entrepreneur, getting to grips with the accounts payable process within your expenditure and purchasing cycle is crucial. 

So, what is it, and why should you care? This guide will explain everything you need to know about the accounts payable process and why it’s important for your business’s financial health. 

Here’s what we will cover: 

What is the accounts payable process?

Accounts Payable (AP) is the money your business owes to suppliers and vendors for the goods and services you’ve received but haven’t yet paid. It shows up as a liability on your balance sheet and is critical when tracking how cash moves in and out of your business. 

The accounts payable process, also known as the “full cycle of accounts payable,” covers everything from getting a Purchase Order (PO) and invoice to actually making the payment. At a high level: 

• You receive an invoice (and, where applicable, a purchase order) from a supplier 

• You review the invoice against the PO to ensure accuracy 

• You approve the invoice 

• You authorise and send payment 

This sequence is also part of the broader P2P (Procure-to-pay) process. 

The importance of an optimised accounts payable workflow

If your accounts payable workflow is full of bottlenecks, you risk late payments, duplicate bills, extra fees, and frustrated suppliers. A smooth AP process helps avoid these problems and brings many advantages. 

It helps you:

Keep track of invoices

An automated AP system updates invoices in real-time, so you always know which payments are due.

Pay on time, every time

Automated reminders and scheduling help ensure you don’t miss deadlines and avoid penalties.

Eliminate manual work

Automation reduces the need for manual data entry and processing, minimising the risk of errors and freeing up your team from repetitive tasks.

Speed up finance operations

With streamlined workflows and automation, your finance team can process payments quickly, allowing them to focus on higher-value tasks. 

Save time for other goals

By reducing time spent on manual AP tasks, you give your team more time to tackle strategic priorities and contribute to the business’s growth and success. 

Build supplier relationships

Consistent and timely payments build trust and strengthen relationships with vendors, potentially leading to better terms, discounts, and partnerships.

Avoid late fees and penalties

An organised accounts payable process ensures that payments are never missed, helping you avoid costly late fees and penalties.

Prevent fraud

Built-in controls help detect and prevent fraudulent activities by flagging suspicious transactions and enforcing proper approvals. 

Challenges in accounts payable procedures

When your AP workflow is manual, you can run into several issues, including: 

• Missing invoices: paper or email invoices can get lost, risking late fees, supplier disputes, and VAT reporting issues. 

• Time-consuming oversight: Sage found that 77% of CEOs in European markets spend time each month chasing overdue invoices. In fact, 4 in 10 are doing this weekly. That’s time they’re not spending on growth or new ideas. 

• Errors in data entry: manual AP work can lead to typos, misplaced documents, and miscalculations—all of which skew your financial data. 

• Scaling problems: rapid growth or seasonal spikes in invoices can overwhelm a manual AP process. Automated systems handle high volumes more smoothly. 

• Multiple payment methods: managing everything from BACS transfers to paper cheques can get messy fast. Without the right tools, you risk mistakes and delays. 

The accounts payable process steps

A end-to-end accounts payable cycle includes four key steps:

1. Invoice capture

First, collect the invoice—via email, post, or a digital invoicing system—and record it in your accounting system. Automated tools like cash flow management software can handle this step automatically.

2. Invoice approval

Then review the invoice for accuracy, including quantities, prices, and discounts. Once you’ve verified it, the invoice needs to be approved, usually by someone in your finance team or management.

3. Payment processing

With the invoice approved, it’s time to pay your supplier. Common payment methods include BACS, faster payments, cheques, and virtual cards. Make sure you match the payment to the correct invoice to avoid confusion.

4. Payment recording

Lastly, log the payment in your accounting system to keep your books accurate and make future reporting easier. Automation helps here, too, by updating records without the need for extra data entry.

Implementing best practices in the accounts payable process

You now know what the accounts payable process is and its full cycle. Now it’s time to make sure you’re doing it correctly. Here are three best practices to keep your AP process running smoothly: 

1. Cut down on cheque runs

Paper cheques can be time-consuming. Instead of issuing them every few days, try consolidating payments and running cheques fortnightly (or even monthly). Fewer cheque runs mean fewer opportunities for errors and confusion and a simpler AP workflow overall. 

2. Limit access and establish controls

Ask yourself: who can change supplier information? Limiting access to your supplier master file helps you keep tight control over critical details. Assign specific roles and permissions so only trusted team members can add or update vendor info. Everyone else can view but not edit.

3. Eliminate AP fraud

Unfortunately, fraud is a real concern—79% of organisations faced payment fraud attempts in 2024. You can protect your business by: 

• Setting strong internal controls. 

• Watching for fake vendor accounts. 

• Restricting the ability to add new vendors to authorised employees. 

• Using multi-factor authentication (MFA) to secure financial systems. 

• Training your team to recognise red flags and report suspicious activity. 

Optimise accounts payable process with AP automation

AP automation tools let you scan invoices, match them to purchase orders, and handle VAT. It’s a game-changer for businesses looking to save time and reduce errors. In fact, by 2030, up to 30% of current work hours could be automated with AI, according to McKinsey. 

Here’s why AP automation matters: 

• Simplifies accounts payable: AP automation software keeps your cash flow in check and ensures invoices are paid on time. By automating the AP process, you reduce human error and minimise costs, freeing up time and resources for other important tasks. 

• Boosts productivity: manual AP processing can be a huge drain on your team’s time and energy. Tracking every supplier agreement and processing hundreds of invoices a day can be overwhelming. Automation handles all of the work, eliminating thousands of hours of manual data entry. 

• Improves cash flow control: with automated AP software, you get real-time visibility into your cash flow. No more confusion, simply clear, up-to-date reporting that helps you manage your finances better. 

• Streamlines approval process: manual approval processes often lead to late fees, missed invoices, and overworked teams. AP automation software streamlines the entire approval process, from routing invoices for review to notifying stakeholders. It also includes built-in permissions to prevent fraud and unauthorised purchases. 

Next steps to streamline and strengthen your accounts payable workflow

With the right approach, you can sidestep common pitfalls, streamline your workflow, and make sure your finances stay in tip-top shape. 

Sage’s accounts payable automation software solutions are designed to make your life easier. From invoice handling to real-time reporting, you can improve your AP through its automation and easy integrations.

Accounts payable process FAQs