Implementation of Internal Controls for Efficient AP Process

• Reading Time: 7 Minutes
• Published: August 30, 2022
• Last Updated: February 14, 2025

Cash is the lifeblood of any organisation. Any small or large business needs good cash flow to manage finances. The accounting functions that greatly affect cash outflows and inflows are accounts payable and accounts receivable, respectively. Therefore, both accounts receivable and accounts payable processes must be managed efficiently to ensure correct and timely cash flow.

Let us learn in-depth about the accounts payable (AP) process, and one can have an efficient process in place. A well-managed accounts payable process provides a clear picture of the company’s overall financial health. Not only big businesses but also start-ups and small organisations are highly benefitted from a clear AP system. Since nothing is more annoying than paying overdue fines or dealing with dissatisfied suppliers, a good AP system becomes essential.

WHAT IS ACCOUNTS PAYABLE?

Accounts payable refers to all the money the business owes to third parties like vendors and suppliers. Inefficient management of accounts payable could lead to negative consequences. In order to avoid such situations, businesses need to understand the concept of accounts payable. It represents the obligation of an organisation to pay off a short-term debt to its suppliers or creditors. Therefore, an efficient AP process would help maintain good vendor/supplier relationships. In addition, it enhances the credit reputation of the organisation and opens doors for more opportunities. Outsourcing accounts payable services can also ensure an efficient AP process.

Why give importance to accounts payable?

The success of any organisation highly depends upon the cash flows. A company must manage cash inflows and outflows to ensure equilibrium. The accounts payable process directly affects cash flow, so it becomes important to handle it efficiently. In addition, it strengthens relations with suppliers, which allows businesses to get good discounts, good negotiable terms with suppliers, etc. A disorganised accounts payable process can cause damage to the brand or reputation of the business. The vendors or suppliers may be unwilling to work with the organisation, and the supply chain will suffer. As a result, business owners may face financial and reputational damages in the long run.

What is meant by internal controls in AP?

The accounts payables of an organisation are all about cash outflows. This is why the mismanagement of AP can increase the chances of errors, fraud, and improper payments. The accounts payable department uses certain procedures to mitigate such risks. Such standardised operating procedures are known as internal controls. The internal controls diminish the chances of manual errors and fraudulent activities and ensure regulatory compliance. Besides, such controls are implied to streamline operations and organise the labour force. Along with internal controls, business owners can reap maximum benefit by outsourcing the accounts payable services.

Internal controls serve as mechanisms, rules, and procedures implemented to ensure the integrity of financial and accounting information, foster accountability, and prevent fraud. Though businesses may have different controls to facilitate the accounts payable process, the 3 common types of AP internal controls are listed below:

• Obligation to pay controls- In this, the businesses can verify the accuracy of invoices and make sure that they are paying for items that they actually receive. The obligation to pay controls includes purchase order approval, invoice approval, two-way or three-way matching, and audit for duplicacy.
• Data entry controls- This step starts after identifying an invoice that needs to be paid. The particular information is transferred into the AP system of the organisation. Generally, the data entry controls are of two types- recording invoice before approval and recording invoice after approval.
• Payment controls- The organisations can build internal controls for the payments of invoices. The payment controls keep a check on fraud and potential errors related to invoice payments. In order to ensure to build strong payment controls, businesses should consider two things- separation of responsibilities and efficient processes to manage checks.

Each organisation can have different internal controls in the accounts payable process. However, all businesses strive to improve overall efficiency and identify areas for development. There can be several reasons to highlight the importance of internal controls in the AP process. Let us understand some benefits of internal controls which bring efficiency to the AP process:

• Better accuracy- The internal controls allow businesses to attain a higher level of accuracy. An increased level of accuracy will enhance the AP process and eliminates any sort of errors. Especially with digitising the accounts payable process and using automated systems, business owners can ensure increased accuracy.
• Mitigates risks- The creation of internal procedures creates more control because an extra pair of eyes catches errors and minimises risks. In addition, the sharing of responsibility with multiple sources decreases the chances of risk of fraud, improper payments, mishandling of information, etc.
• Sharing of accountability- The appropriate internal controls in the accounts payable process distribute responsibilities and segregate the duties of the individuals. In this way, an organisation does not burden one or two people for the entire financial system or structure.
• Minimisation of frauds- Each and every organisation is vulnerable to fraudulent activities or misuse of confidential information. Both internal and external threats are harmful to businesses. An effective system of internal control eliminates such frauds and prepares businesses for any such eventuality.
• Enhanced supplier relationships- A streamlined process of AP internal controls makes sure that all the vendors are paid by the due date. It allows businesses to maintain cordial relations with suppliers, leading to early payments, benefits, or discounts. As a result, an organisation can satisfy the suppliers and grab opportunities of saving costs.
• Stronger confidence- A business that follows and works on internal controls gains confidence about its financials. Not just the owners, the stakeholders and other third parties also view such an organisation as a stronger investment. By implementing AP internal controls, businesses can build a good financial image in the market.
• Auditing- An organised internal control system facilitates auditing of the business processes. The better the internal controls in the accounts payable process, the better the auditing process.
• Achievement of operational objectives- With the help of internal controls, businesses can achieve operational goals like effectiveness, efficiency, accurate and reliable financial reports, and compliance according to the applicable laws and regulations.

Final words

AP internal controls offer limitless advantages to businesses. A streamlined system in the AP process increases the overall efficiency of an organisation. However, it increases the workload for the employees, which is why automating is a better option. Automation can help to streamline workflows and enhance AP efficiency. Automating accounts payable ensures a secure, efficient, and insightful AP process. Businesses can become relieved from such undue stress by outsourcing their accounts payable services. The experts make use of the right AP software and offer a greater level of control and transparency. The accounts payable services are taken care of by the experts, and the owners can focus on building their businesses. We at Whiz Consulting can help streamline and improve your business’s AP process. Our experts will manage the AP process, whereas you can focus on core business activities.

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