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Chapter 3
Accounts Payable

Best Practices

The accounts payable function is the most labor-intensive of all the accounting
functions and is therefore an excellent source of labor savings if the correct best
practices can be implemented. The basic process in most companies is to receive
three types of information from three sources—an invoice from the supplier, a pur-
chase order from the purchasing department, and a proof of receipt from the receiving
department. The accounts payable staff then matches all three documents to ensure
that a prospective payment is authorized and that the underlying goods have been
received, and then pays the bill. The process is labor-intensive partially because
there is such a large amount of matching to do, but also because the three docu-
ments almost never match. Either the purchase order quantities or prices do not
match what the supplier is charging, or else the amount received does not match the
quantities on the other two documents. Because of these inaccuracies, the amount
of labor required to issue a payment can be extraordinarily high.
The best practices in this chapter fall into a few main categories, most of them
designed to reduce the matching work. One category attempts to consolidate the
number of invoices arriving from suppliers, thereby shrinking the paperwork
from this source—typical best practices in this area are using procurement cards
and shrinking the number of suppliers. Another category tries to reduce or elimi-
nate the number of receiving documents. Typical best practices in this area are
substituting occasional audits for ongoing matching of receiving documents, as
well as directly entering receipts into the computer system. Finally, another cate-
gory reduces the number of purchase orders that must be matched. Typical best
practices in this area include using blanket purchase orders and automating three-
way matching. Other solutions to the matching problem involve going away from
the traditional matching process entirely, by using payments based solely on
proof of receipt. It is not possible to use all of these best practices together, since
some are mutually exclusive—one must be careful in choosing the correct best
practices.
Lastly, a number of best practices focus on the overall accounts payable
process, attempting to either shrink or automate the number of steps required
before a company issues payment to a supplier. Examples of best practices in this
area include using a signature stamp and switching to wire transfers.
The number of best practices in the accounts payable area indicates that this
function is ripe for improvements. However, some best practices require a large

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