Managing Accounts Payable (AP) isn’t just about paying bills on time; it’s a critical aspect of your financial operations that can directly impact cash flow, compliance, and even your company’s reputation. Without proper controls in place, your business could face severe consequences, including fraud, overpayments, and tax issues. Here are the top 10 AP controls that every business should have, and the hard truths about what can happen if you neglect them.
- Supplier Sourcing & Vetting
Control: Ensure thorough vetting of suppliers before onboarding. This includes confirming their legitimacy, financial stability, and business practices.
Consequence of Neglect: Failing to properly vet suppliers can lead to fraud, unreliable partnerships, and even legal repercussions. Engaging with disreputable suppliers could also result in financial losses or damage to your business reputation if services/products don’t meet expectations or if there’s a risk of being involved in illegal activity.
- Supplier Onboarding & Documentation
Control: Maintain proper documentation for every supplier. This includes contracts, payment terms, tax details (e.g., W-9 in the U.S. or TIN in Canada), and bank details for payments.
Consequence of Neglect: Without documented onboarding, you risk payment disputes, potential fraud (e.g., paying the wrong entity), and poor relationships with suppliers. This could also lead to penalties for non-compliance with tax authorities.
- Approval Workflow for Vendor Payments
Control: Establish a multi-step approval process for every payment. Require at least two levels of authorization before any payment is made.
Consequence of Neglect: Skipping this control can lead to unauthorized payments, errors, and potential fraud. It opens the door to insider threats and weakens your ability to catch discrepancies before they escalate.
- Payment Terms Review
Control: Regularly review and negotiate payment terms with suppliers to maximize cash flow while avoiding early payment penalties.
Consequence of Neglect: Failing to negotiate favorable payment terms means your company might overpay for goods or services, putting unnecessary strain on cash flow and possibly forfeiting early-payment discounts.
- Bank Account Setup & Authorization
Control: Ensure proper controls around bank account setups. Bank account information should only be added to your system by authorized personnel, and any changes should require approval from senior management.
Consequence of Neglect: If unauthorized individuals can alter or add bank account details, your business is at serious risk for fraud, such as payment redirection. This can lead to significant financial losses and damaged vendor relationships.
- Segregation of Duties
Control: Segregate duties between employees responsible for purchasing, payment approvals, and financial reporting. No individual should control all aspects of the transaction process.
Consequence of Neglect: Failing to segregate duties allows for manipulation of the system, increasing the risk of fraud, unauthorized payments, and errors. In a worst-case scenario, it could lead to financial misstatements or internal theft.
- Invoice Matching (3-Way Match)
Control: Use the 3-way match system to match purchase orders, invoices, and receiving reports before processing payments.
Consequence of Neglect: Not matching these documents opens the door to overpayments and paying for goods or services you didn’t actually receive. It also increases the risk of errors, disputes, and auditing issues.
- Timely Reconciliation of Accounts
Control: Perform monthly reconciliations between accounts payable ledgers and actual payments made. This ensures that the amounts owed match the amounts paid.
Consequence of Neglect: If you don’t reconcile regularly, it’s easy to miss duplicate payments, incorrect charges, or even fraud. This lack of control can lead to significant discrepancies in your financial reports and may even trigger tax or compliance issues down the line.
- Payment Method Control
Control: Establish clear rules for payment methods, ensuring that payments are made via secure and traceable means (e.g., ACH or checks) rather than cash or other non-secure methods.
Consequence of Neglect: Allowing payments through non-secure methods like cash or untraceable transactions opens up the possibility of fraud and inaccurate records. It also makes it difficult to prove the legitimacy of payments, which could be problematic during audits.
- Audit Trail & Documentation Retention
Control: Maintain a robust audit trail for every AP transaction, including approvals, receipts, and invoices. Retain these records for at least seven years for tax and compliance purposes.
Consequence of Neglect: If you fail to keep comprehensive documentation and audit trails, it can lead to significant issues during tax filings, audits, and compliance checks. Lack of transparency also leaves your company vulnerable to legal consequences and financial penalties.
Conclusion: Don’t Skip These Essential AP Controls
The consequences of not implementing strong Accounts Payable controls are severe, ranging from cash flow issues and fraud to compliance risks and tax penalties. By establishing and regularly reviewing these controls, your business will not only minimize its risks but also streamline its financial operations, ensure timely payments, and build stronger supplier relationships.
Implement these 10 essential AP controls to keep your financial operations running smoothly, and ensure your business stays ahead of the competition.
