How AP & AR Can Transform Your Financial Health

Why Transforming AP and AR is critical for Financial Health

All the finances that flow in and out of an organization are handled by two processes – Accounts Payable (AP) and Accounts Receivable (AR). Accounts Payable process deals with recording and paying supplier invoices, supplier advances, and employee payments. Recording the customer invoices, billing, order fulfillment, and revenue recognition happen in the Accounts Receivable process. 

There is a lot of literature that explains these processes in depth. However, in this article, we would like to focus on the challenges related to the AP and AR process, and some of the key points that businesses can consider to overcome these challenges.

Before proceeding further, let’s have a brief introduction to the AP and AR Processes.

Accounts Payable (AP)

           Accounts Payable handles all the payments to the vendors for the products and services that have been purchased from them to fulfill the business requirement. Though the payments are handled by the finance department, for the AP process to be successful a tight integration of purchasing, inventory, warehouse, and finance processes is required. The below infographic depicts the AP cycle from initiation of the purchase requisition till the reconciliation.

The process starts with Purchase Requisitions (PR) for products and services from various departments within the organization. All the requirements that can be fulfilled by a vendor are grouped and a Purchase Order (PO) is floated to the vendor. Once the vendor sends the products or services, the business receives them, inspects if necessary, and creates a receipt if the requirement is rightly fulfilled. Then an Invoice is created either by matching Invoice and PO Quantity and Amount (2-Way), or by matching Invoice, PO, and receipt (3-Way), or by matching Invoice, PO, receipt, and also inspection (4-Way). Then the invoice is closed by releasing the payment to the Vendor, making the payment, and duly recording all the transactions in the Ledger. 

Accounts Receivable (AR)

           The Accounts Receivable process handles all invoices, credit notes, return sales, adjustments, and write-offs related to the sales in a business. AP teams closely coordinate with the inventory, order fulfillment, and purchasing and AR teams on the customer’s end to maintain the steady stream of incoming finances into the business.

The process starts with Sales Quotation requests from the customers. Once the quotation is accepted, the customer releases a sales order with the desired quantity of the products. After the business delivers the products to the customers an Invoice is raised and floated to the customer. The customer then releases the payment and the transactions are recorded and reconciled.

Challenges in AP and AR Processes

Modern-day ERP systems enable businesses to create role and hierarchy-based customized workflows that automate the AP and AR processes. These systems also allow businesses to set hierarchy-based approval limits and validations in case of payments. However, because of the complexity of the whole process businesses are still plagued with a myriad of challenges that hamper the efficiency of these processes. The below infographic depicts some of the challenges in AP and AR processes.

  • Awareness about integrated ERP  As mentioned earlier both AP and AR teams need to coordinate with multiple departments within and outside the organization to process the invoices. In such a scenario, any change made to the business process should be documented and communicated to all the teams involved to avoid issues related to the continuity of the business. Businesses often fail to understand the need and importance to have dedicated teams to validate the new process, revise the SOP’s, document the changes, and train the employees.  
  • System Issues – No ERP system is 100% accurate. Common problems in AP and AR systems include Matching Errors, System Configuration errors related to tolerance limits, and improper workflow setups. Also, improper and inadequate user training results in data errors which impact the accuracy and efficiency of the overall process.
  • Lack of accounting knowledge – A lot of time in the AP and AR process is spent on dealing with exceptions, including incorrect, incomplete, and nonmatching information in invoices, and Goods Received and Not Invoiced (GRNI). Resolving these issues requires a deep understanding of finance concepts in addition to the knowledge of finance systems. 
  • Security – Lack of transparency, compromise of user accounts, improper system integration, and manual activity results in misuse of funds, fraud, and theft.
  • Duplicate Payments  Inconsistencies in the data can cause a single invoice to be paid more than once. Manual data entry is one of the prime reasons for duplicate payments. Usage of multiple financial systems may also cause this problem.
  • Headcount – Due to the complex nature of the process both AP and AR require an additional workforce compared to other departments. Businesses need to identify the opportunities, automate or outsource the activities within the process wherever possible.

Key Points to Consider

To tackle the above-mentioned challenges and smoothen the AP and AR processes within an organization, businesses can consider some key metrics/points mentioned in the below infographic.

  • Transaction Volume/Time – This is one of the key metrics that can be considered by businesses to identify the bottlenecks in the AP and AR process. This metric captures the overall time consumed by the AP and AR teams to process a standard volume of Invoices. By comparing the standard and actual times business can identify the problematic activities and improve the processes. This helps in reducing the overall turnaround time per invoice.
  • Refresher Training – Refresher training is vital for business continuity and process efficiency. There are multiple ways in which businesses can keep their employees abreast with the latest changes in the AP and AR processes. 
    • Cross-Skilling – Since AP and AR teams need to coordinate with multiple departments scattered across the organization, it is a good practice to allow them to get acquainted with the processes, practices, and SOPs of these departments. This practice helps to create well-rounded professionals and creates an environment of learning by sharing. Troubleshooting the problems becomes easier with awareness of the end-to-end business process.
    • Training Audits – Timely training audits help businesses and employees to assess their knowledge and understanding of the AP and AR process. Businesses can gauge the effectiveness of their training programs, identify the gaps and focus on improvements, additions, and deletions wherever possible. Constant feedback from the trainees also helps in the continuous improvement of the training process.
    •  Building a Culture – An organization focused on learning encourages employees to continuously pursue, share, and apply new knowledge and skills to improve individual and organizational performance. Cultivating the culture of learning needs a conscious effort from the organization. Small acts like a snippet of the day emails, knowledge sharing sessions, and rewards for up-skilling go a long way in encouraging employees to make learning a continuous habit. 
    • Accountability – It is good practice to appoint a training coordinator and assemble a training committee to assess the training needs, organize the training, and monitor the progress of all the training activities within the AP and AR departments.
  •  IT Support – A proper IT support is essential to streamline the AP and AR processes. Having robust IT support plays a prominent role in implementing Robotic Process Automation (RPA), data analytics, systems integration, and troubleshooting.
  • Errorless Transactions – Another metric that can help AP and AR teams is the number of transactions that are First Time Right (FTR). The higher this number higher is the efficiency of the process. A higher FTR count assures that there are no bottlenecks and the entire process is streamlined.
  • Disputed Invoice Clearance – As mentioned earlier errors in manual data entry result in disputed invoices. Businesses need to handle such invoices carefully to avoid mistrust of vendors and customers in the business. It is a good practice to have a dispute resolution plan in place which can guide the teams to foster the process of dispute resolution without hurting the vendor and customer confidence.
  • Data Discipline – As a part of the AP and AR process, the ERP systems collect, store, and share a lot of sensitive information. The accuracy of this data impacts the finances of the entire business. To avoid duplicity of financial transactions, fraud, and theft businesses need to develop and implement an action plan that aims at errorless and qualitative reconciliation, timely measures to correct the data inaccuracies, and maintenance of highly accurate master data.

How to start and not stop at the end of this article piece?

I would recommend starting simply by just taking this approach, which has negligible risk, simple and yet an amazingly effective positive step towards our goal of a proactive strategy

A) Take pen -paper or manual method (start now)

Start implementing the recommended strategy using your existing technology resources for a known and low-risk segment of Suppliers within your supply chain business to find out what works and what doesn’t. Indeed, this causes efforts, but this will pave the way for better clarity around unknown risks.

B) Take help from technology

Work towards making it unattended, assisted by using Super-fast digital solution such that it works autonomously without losing its efficacy by engaging a solid, affordable Business and Technology solution partner.

If you are a CEO/COO/CIO/Managing Director/General Manager who is spending more time in reactive/preventive mode than future-facing, please reach out for an exploratory conversation.

Our Contact details

Pradeep Mishra (Director and Co-founder)

Ashok Mulchandani (Partner – Business Success and Strategic Transformation)

Amit Bhagat (Director – Business Strategy)

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