Author: Joe Iafigliola

A well-structured Accounts Payable (A/P) process ensures timely payments, accurate financial records, and effective cash flow management.

Vendor Management and Setup

• Objective: Establish and maintain accurate and up-to-date vendor records.
• Vendor Onboarding: Collect and verify necessary documentation from vendors, including W-9 forms, contact information, and banking details.
• Vendor Approval: Ensure that the vendor meets company standards and compliance requirements. Obtain internal approval before entering the vendor into the system.
• Vendor Setup in ERP System: Enter the vendor details into the ERP system or accounting software. Assign vendor codes for easy tracking.
• Contract Management: Upload and maintain vendor contracts, agreements, and terms of payment in the system.
• Impact: Proper vendor setup reduces errors in payments, minimizes compliance risks, and ensures accurate financial reporting.

Invoice Receipt and Verification

• Objective: Ensure that all vendor invoices are accurate and match the agreed-upon terms.
• Invoice Receipt: Receive invoices via mail, email, or electronic data interchange (EDI). Log the receipt date.
• Invoice Matching: Match the invoice with the corresponding purchase order (PO) and receiving report (3-way matching). Verify quantities, prices, and terms.
• Invoice Approval: Route the invoice for approval to the relevant department or manager. Ensure that the approval follows the company’s hierarchy and authority matrix.
• Impact: Accurate invoice verification helps avoid overpayments, duplicates, and fraud, improving overall financial control.

Data Entry and Coding

• Objective: Ensure accurate recording of expenses in the general ledger.
• Invoice Data Entry: Enter invoice details into the accounting system, ensuring accuracy in date, amount, vendor, and description.
• GL Coding: Assign general ledger (GL) codes to the invoice based on the nature of the expense. This step is critical for accurate financial reporting and analysis.
• Impact: Proper coding ensures that expenses are recorded in the correct accounts, which is essential for accurate financial statements and budgeting.

Payment Processing

• Objective: Ensure timely and accurate payment to vendors.
• Payment Scheduling: Schedule payments based on the vendor’s payment terms (e.g., Net 30, Net 60). Optimize payment timing to maintain cash flow.
• Payment Approval: Obtain necessary approvals for the payment batch according to company policy.
• Payment Execution: Process payments via check, ACH, or wire transfer. Ensure payments are processed on or before the due date to avoid late fees.
• Impact: Timely payments improve vendor relationships and can result in early payment discounts, which positively impacts cash flow.

Exception Management

• Objective: Handle discrepancies and errors in the A/P process efficiently.
• Identify Exceptions: Regularly review invoices, payments, and vendor statements to identify discrepancies (e.g., unmatched invoices, incorrect amounts).
• Resolve Discrepancies: Communicate with the vendor or internal departments to resolve discrepancies. Document the resolution process.
• Escalation Process: If the issue cannot be resolved at the operational level, escalate it to higher management for further action.
• Impact: Effective exception management reduces financial discrepancies and prevents issues from escalating into larger problems.

Statement Reconciliation

• Objective: Ensure that A/P records match vendor statements and resolve any discrepancies.
• Monthly Reconciliation: Reconcile A/P sub-ledger with vendor statements at the end of each month.
• Discrepancy Investigation: Investigate and resolve any discrepancies between the A/P records and the vendor statement.
• Adjustment Entries: Make necessary adjustments in the accounting system to correct any errors identified during reconciliation.
• Impact: Regular statement reconciliation ensures the accuracy of financial records and prevents issues such as overpayments, missed payments, and unrecorded liabilities.

A well-managed A/P process maintains strong vendor relationships, provides accurate financial reporting, and effective cash flow management. According to a study by The Hackett Group, companies with efficient A/P processes can achieve cost reductions of up to 60% compared to those with less efficient systems. Conversely, poor A/P management can lead to financial inaccuracies, strained vendor relationships, and missed opportunities for discounts, all of which negatively impact a company’s bottom line .

Managing accounts receivable (A/R) and collections is essential for maintaining healthy cash flow and ensuring the financial stability of your business. This guide breaks down the key functions of A/R management—customer billing dispute resolution, credit card processing, collections, and cash application—into specific, actionable steps. According to Deloitte, effective A/R management can reduce DSO by up to 10%, leading to improved cash flow and reduced reliance on external financing .

1. Customer Billing Dispute and Resolution

Overview: Customer billing disputes can arise from various issues, such as incorrect charges, product or service discrepancies, or timing errors. Efficiently managing and resolving these disputes is crucial to maintaining good customer relationships and ensuring timely payment. A study by the Credit Research Foundation found that companies with a streamlined dispute resolution process are 30% more likely to receive timely payments compared to those without such processes.

Steps to Execute:

1. Prompt Acknowledgment:
   
   • How to Do It: As soon as a billing dispute is identified (either through customer communication or internal review), send an automated email or make a phone call to acknowledge the issue. Use a customer service management (CSM) tool or CRM system to log the dispute and set a follow-up reminder.
   • Tools: CRM systems (e.g., Salesforce, HubSpot), customer service platforms (e.g., Zendesk), email automation tools.  Specific ERP platforms for your industry also will be effective.
2. Investigative Process:
   
   • How to Do It: Assign a dedicated team or individual to investigate the dispute. This person should gather all relevant documentation, such as contracts, invoices, order confirmations, and previous communication records. The investigator should compare the details of the dispute against these documents to determine the validity of the claim.
   • Tools: Document management systems, CRM, and ERP systems.
3. Resolution Timeline:
   
   • How to Do It: Establish a timeline for resolving disputes, typically within 7-10 business days. Communicate this timeline to the customer, and set reminders in your CRM to ensure follow-ups occur as scheduled. Regularly update the customer on the status of their dispute.
4. Documentation:
   
   • How to Do It: Record every step of the dispute process, including initial communications, investigation findings, and the final resolution. Store this documentation in a central database where it can be easily accessed for future reference.
   • Tools: Document management systems, cloud storage (e.g., Google Drive, SharePoint).
5. Root Cause Analysis:
   
   • How to Do It: After resolving the dispute, conduct a root cause analysis to identify why the issue occurred and what can be done to prevent it in the future. This might involve reviewing process workflows, training gaps, or system errors. Implement corrective actions based on the findings.
   • Tools: Root cause analysis tools (e.g., fishbone diagram software), process improvement platforms (e.g., Six Sigma).
   • This is the most critical step, customers dispute invoices for a reason.  90% of the time that is an operational issue that should be addressed.  Utilize these exceptions to make your Company better.

2. Credit Card Processing

Overview: Credit card processing is vital for allowing customers to pay invoices quickly and securely. Efficient processing ensures payments are received promptly, reducing DSO. The National Retail Federation highlights that companies optimizing their credit card processing experience a 15% reduction in payment processing time, directly improving cash flow.

Steps to Execute:

1. Payment Gateway Integration:
   
   • How to Do It: Choose a payment gateway that integrates seamlessly with your accounting or ERP system. Set up the integration to automate the flow of payment data directly into your financial records. Ensure the gateway supports all the credit card types your customers use.
   • Tools: Payment gateways (e.g., Stripe, PayPal, Authorize.net), ERP systems (e.g., SAP, Oracle).
2. PCI Compliance:
   
   • How to Do It: Ensure that your credit card processing system complies with PCI DSS. Conduct regular audits, secure cardholder data, and use encryption where necessary. Train staff on PCI compliance requirements and maintain up-to-date documentation.
   • Tools: PCI compliance tools (e.g., Trustwave, Qualys), security software (e.g., firewalls, encryption tools).
3. Automated Reconciliation:
   
   • How to Do It: Set up automated reconciliation within your ERP or accounting system to match credit card payments with open invoices. This reduces manual errors and speeds up the reconciliation process. Regularly review reconciliation reports to ensure accuracy.
   • Tools: ERP systems, accounting software (e.g., QuickBooks, Xero).

3. Collections

Overview: Collections involve pursuing overdue payments from customers. An effective collections strategy minimizes bad debt and ensures strong cash flow. According to a study by Dun & Bradstreet, companies with a proactive collections process are 20% more likely to recover outstanding debts within 90 days .

Steps to Execute:

1. Aging Reports:
   
   • How to Do It: Generate aging reports regularly (weekly or monthly) from your accounting system. These reports should categorize overdue accounts by the length of time they’ve been outstanding (e.g., 30, 60, 90+ days). Use these reports to prioritize collection efforts.
   • Tools: Accounting software, ERP systems.
2. Proactive Communication:
   
   • How to Do It: Develop a communication plan that includes sending reminder emails, making phone calls, and mailing letters as accounts approach and exceed due dates. Begin with a friendly reminder and escalate the tone as necessary if payment is not received. Automate these communications where possible.
   • Tools: CRM systems, email marketing tools (e.g., Mailchimp, Constant Contact).
   • Send Statements: Sending Statements every 30 days is critical to ensure properly reconciled accounts. 
3. Payment Plans:
   
   • How to Do It: Offer payment plans to customers who are struggling to pay. Work with them to establish a plan that breaks the total amount into manageable installments. Document the agreement in writing and ensure both parties sign off on the terms.
   • Tools: Payment plan management software, CRM systems.
4. Third-Party Collection Agencies:
   
   • How to Do It: For significantly overdue accounts, outsource collections to a third-party agency. Choose an agency that aligns with your company’s values and maintains a professional approach to collections. Monitor the agency’s performance and provide feedback as needed.
   • Tools: Collection agency management platforms, CRM systems.

4. Cash Application

Overview: Cash application involves applying incoming payments to the correct customer accounts and invoices. Efficient cash application is crucial for maintaining accurate A/R records and directing collections efforts appropriately. The Aberdeen Group reports that companies with automated cash application processes see a 30% reduction in manual processing time, leading to quicker invoice matching and reduced errors .

Steps to Execute:

1. Automation:
   
   • How to Do It: Implement automation tools to streamline the cash application process. Set up rules within your ERP or accounting system to automatically match payments with open invoices based on criteria such as customer name, invoice number, and payment amount. Regularly review and update these rules to improve matching accuracy.
   • Tools: ERP systems, cash application software (e.g., HighRadius, BlackLine).
2. Remittance Information:
   
   • How to Do It: Encourage customers to provide detailed remittance information with their payments. This can be done by including instructions on your invoices and reinforcing the importance during customer interactions. Ensure your system captures and uses this information effectively.
   • Tools: Invoice templates, customer portals.
3. Daily Reconciliation:
   
   • How to Do It: Reconcile cash applications daily to ensure all payments are accurately recorded. This involves reviewing the previous day’s transactions, verifying that all payments are matched to the correct invoices, and resolving any discrepancies immediately.
   • Tools: Accounting software, bank reconciliation tools.
4. Exception Handling:
   
   • How to Do It: Establish clear procedures for handling exceptions, such as payments that do not match any open invoices. Designate a team or individual responsible for investigating and resolving these issues promptly. Document exceptions and resolutions for future reference and process improvement.
   • Tools: Exception management software, ERP systems.

Conclusion

Efficient management of A/R and collections is essential to maintaining healthy cash flow and ensuring the financial stability of your business. By implementing these specific steps in customer billing dispute resolution, credit card processing, collections, and cash application, you can optimize your processes, reduce DSO, and improve overall financial performance. The use of automation and proactive communication strategies enhances these processes, allowing your finance team to focus on more strategic activities.

References

1. Deloitte. “Accounts Receivable Management Survey.” 2021.
2. Credit Research Foundation. “Effective Dispute Management Strategies.” 2020.
3. National Retail Federation. “Best Practices in Credit Card Processing.” 2022.
4. Dun & Bradstreet. “The Impact of Proactive Collections on Business Cash Flow.” 2021.
5. Aberdeen Group. “The State of Cash Application: Achieving Excellence in AR Management.” 2020.