This article comprises the second in a series of four that looks at the benefits of outsourcing the four financial functions of Accounts Payable, Accounts Receivable, Payroll, and Financial Planning and Analysis. Our first article, on accounts receivable, noted how outsourced personnel bring IT, financial, and customer service expertise to a growing firm that otherwise would have to discover that expertise on its own or hire a more expensive but still unnecessary full-time employee.

For the second article in our series, we will look at the complement to accounts receivable: accounts payable (AP). The main value-generating benefits of outsourcing, like bundled expertise, are the same, but they frequently manifest in different ways.

What are the roles of accounts payable?

Maintaining relationships with suppliers

Maintaining relationships with suppliers is just as important as with customers. Without suppliers, the customers will not receive their product. Suppliers might be physical parts suppliers, but they could also be service providers (electricity, internet) and entities like landlords and warehouse owners.

Ensuring invoices are paid in a timely manner

Accounts payable ensures all these entities are paid in a timely manner, and AP professionals communicate with the accounts receivable (AR) side to ensure payments can be made. They might assist in developing a payment policy to maximize cash flows. They will liaise with suppliers to uncover discounts or tactfully request extensions for due dates. They can also centralize a business’s incoming payment requests and be the professional face of payments for new suppliers, building trust with them from the very first transaction.

Conducting audits and reconciliations

Conversely, they can ensure suppliers remain honest by regularly conducting audits and reconciling any discrepancies. They will contact suppliers and diplomatically arrange rectification procedures for problems arising from missing goods or overpayments.

Why maintain an AP department?

Small business owners may question the necessity of maintaining an AP department. It seems simple enough: when the bills come in, pay and forget about them. In the smallest of companies, this may work fine. But as the company grows, the volume of invoices may become too large to handle. Missing payment due to poor invoice management is unacceptable and suppliers may not be forgiving.

Long-term survival of the business

But perhaps more importantly, audits must take place to ensure suppliers are not mistakenly or intentionally shortchanging the receiving company. The implications of AP on cash flow are also paramount, especially if the company also grants credit (i.e., has an accounts receivable function). Even if all customers pay the business immediately, keeping cash balances at healthy levels is vital to the long-term survival of the business.

Why outsource accounts payable? 

The same benefits for AR hold for AP: extensive experience is bundled with an outsourced professional, but at a lower cost than hiring a full-time in-house professional. The core employees are free to work on growing the business and improving the product while remaining confident the cash accounts won’t suddenly evaporate. They can also be confident the company is not being defrauded or will not unexpectedly lose a supplier due to unpaid bills.

Expertise provided by an outsourced accounts payable professional

Here are just a few areas where an outsourced AP professional can provide valuable knowledge:

Supplier Relationship Management

The AP professional knows how to avoid confrontations with suppliers but still obtain favorable treatment. Moreover, by maintaining a positive working relationship, AP professionals can uncover discounts suppliers may be willing to offer for early payments, and drawing on their experience, they know which types of suppliers and transactions might be eligible for those discounts.

If the company is struggling, AP professionals know how to persuade suppliers to extend deadlines – this requires tactful negotiation, which itself requires time and experience to hone. Outsourced accounts payable personnel can navigate the explicit and implicit nuances of negotiating late payments, designing a repayment plan acceptable to both parties.

Accounts payable might also help develop contingency plans in the event that a supplier demands immediate payment or cash flow is interrupted by unexpected costs, like equipment failure or spikes in prices from suppliers.

Inventory Management and Accounting

A further set of expertise is inventory and payment management. The AP professional will understand what is coming into the business and how much cash is going out to pay for it. One common technique for consistently and accurately performing this function is the three-way match, which compares the purchase order, the shipment receipt, and the supplier invoice to each other. Any discrepancies can be caught in the earliest stages and communicated to the supplier for rectification. Teaching and maintaining internal systems for this might be too complex for expanding businesses, especially if turnover and invoicing rates are high.

Financial Reporting

Working with AR, AP professionals can assist in creating financial reports and communicating the results. They also know how payments will affect cash flow, and they can balance the benefits of early payments with the cash flow needs of the company. They may also be able to forecast some future issues by analyzing the current and expected future payables.

As mentioned before in this series, companies in the grey zone between do-it-yourself and hiring full-time internal personnel are well served by outsourced professionals. These individuals bring a lot of expensive expertise as part of the package, providing value both in their actual roles and by educating current employees.

AP is integral to a healthy business

Companies that fail to implement AP early risk their supplier relations, customer relations (via late supply deliveries), and even bankruptcy if their cash flows do not match up. Software alone is only applicable to very small scale companies, and as the company expands, incorporating experienced supplier handling and precise expenditure tracking is best performed by a professional. However, in the growth stages, a full-time professional is unnecessary and potentially wasteful. This is the perfect gap for outsourced accounts payable personnel to fill.