A Practical Accounts Payable Process for Small Business

Here are the five steps, with the control that belongs at each:

1. Receive. Route every invoice to one shared inbox or intake tool, so nothing sits in an individual's email. Control: log each invoice on arrival.
2. Code. Assign the expense account, department and project. Control: someone other than the approver reviews unusual codes.
3. Approve. The budget owner confirms the goods or services were received and the price is right. Control: approval limits by dollar amount.
4. Pay. Schedule the payment for the due date, by ACH, card or check. Control: the payer can't be the person who set up the vendor.
5. Reconcile. Match payments to the bank statement and the AP subledger at month-end. Control: review the aged payables list for stale or duplicate items.

Write the process on one page and name an owner for each step. In a two-person finance team, one person can do steps 1, 2 and 5 while an owner or manager handles 3 and 4.

Payment fraud commonly starts with a change to a vendor's bank details. Your best protection is a vendor setup routine:

• Collect a W-9 and signed payment details from every new vendor before the first payment.
• Verify bank details by calling a number you already have on file, not one in the email that asked for the change.
• Require a second person to approve any change to a vendor's remit-to or bank information.
• Review the vendor list every quarter and deactivate anyone you haven't paid in a year.
• Track which vendors will need a 1099, and ask your CPA how the reporting threshold applies to you.

Separating who can add a vendor from who can release a payment is the single control that matters most in a small team.

Base limits on how much a mistake would hurt, not on titles. For example, you might let a budget owner approve up to a low threshold, require the finance lead for the next band and send anything above that to the founder or a second signer. The thresholds are yours to set, but write them down and apply them to every invoice, including the ones from friendly vendors.

For bigger purchases, add a purchase order before the invoice arrives, then match the invoice against the order and the receiving record. The three-way match guide explains how that works and when it's worth the effort.

One trap: splitting a large invoice into several smaller ones to stay under a limit. Look for the pattern in your aged payables report, and make it an explicit violation of policy.

Pay on the due date, not on the day the invoice arrives, unless you have a reason. Paying early costs you cash you could use elsewhere, and paying late damages vendor relationships and can trigger fees.

The exception is an early-payment discount. For example, terms of 2/10 net 30 give a two percent discount if you pay within 10 days instead of 30. If you pay 20 days early to save two percent, that works out to an annualized return of roughly 37 percent, well above what most bank accounts or loans cost. Before taking a discount, check that you have the cash and that early payment doesn't put payroll at risk; the working capital calculator helps you see the effect on your cycle.

Choose the payment method with the same care. ACH is usually cheapest, cards can extend float when you have a corporate card program, and checks are slowest and easiest to misplace. Corporate card and spend platforms such as Ramp or Brex can also handle approvals and coding at the point of purchase; compare them in Brex vs Ramp vs Navan and see AP-focused options in BILL vs Tipalti vs Stampli.

These are the ones that make the month-end close painful:

• Invoices approved after month-end that belong to the prior month, which means you need an accrual for received-not-billed items.
• Duplicate payments, usually because the same invoice arrived by email and by mail.
• Vendor statements that don't match your ledger, a sign of missing invoices or unapplied credits.
• Expenses coded to a catch-all account, which hides where money is going.
• Payments released with no approval on file because someone was in a hurry.

A short weekly review of new invoices, upcoming payments and exceptions is more useful than a big monthly cleanup. Track a few numbers: how many invoices are past due, how many needed rework and how many days it takes to get from receipt to approval.