Accounts Payable Policy: What Is It & How to Create One 

Managing accounts payable (AP) policies is crucial for businesses to streamline  payment processes, maintain strong vendor relationships, and minimize financial risks.A well-structured policy ensures consistency and accountability in handling outstanding payments and debts.

The blog covers everything you need to know about AP policies, including their definition, importance, and how to create AP policies and procedures tailored to your business needs.

What Is Accounts Payable Policy?

An accounts payable policy is a set of guidelines that tell us how a company manages its AP processes: invoice processing, payment approvals, and financial record-keeping. These policies ensure that accounts payable processes are accurate, consistent, and timely, fostering better financial control and vendor relationships.

Each organization has the flexibility to create its accounts payable policy based on its unique operational requirements. For example, a manufacturing company may prioritize vendor payments to secure raw materials. At the same time, a service-based business might focus on timely payments to contractors. This flexibility empowers businesses to tailor their policies to their specific needs.

What is an accounts payable write-off policy?

An accounts payable write-off policy outlines the procedures for removing unpayable debts from financial records. These debts are written off only when all efforts to resolve them have been exhausted, ensuring accurate financial reporting and compliance with accounting standards.

Why Is It Important to Create an Accounts Payable Policy?

Creating a structured accounts payable policy is vital for achieving operational efficiency and minimizing errors. Here are the reasons why it matters:

1. Consistency in operations

Having clear rules for handling invoices, approvals, and payments helps everyone know what to do, reducing confusion and speeding up the process.

2. Enhanced financial control

An accounts payables policy with spending limits and approval steps ensures that everyone is accountable and keeps finances stable.

3. Fraud prevention

Using security measures like requiring two approvals for large payments helps protect against fraud.

4. Regulatory compliance

Following local laws and tax compliance rules helps avoid legal issues.

5. Strengthened vendor relationships

Paying vendors on time builds trust, which can lead to better deals or discounts.

6. Improved analytics

Keeping track of payments and expenses regularly helps make better decisions and improves cash flow planning.

What Does an Accounts Payable Policy Contain?

Each company designs its accounts payable policy to address its unique needs and operational requirements. While one approach may not suit every organization, a well-crafted policy can significantly enhance the company’s AP workflow by:

1. Purpose & scope

The AP policy and procedures must have clear and concise objectives mentioned. These objectives serve as a guiding light, outlining which department and teams it applies to and ensuring that everyone in the company understands its importance.

2. Roles & responsibilities

The payables policy of a company must have all the AP roles and responsibilities clearly defined, leaving no room for confusion when it comes to finding out who is responsible for the  accounts payable process. This clarity instills a sense of security and confidence in the team. This will help ensure accountability and reduce delays caused by uncertainties and miscommunications.

3. Approval hierarchies & spending limits

Accounts payable policies must mention to whom invoices should be sent for verification and who can approve them. This must be based on certain factors like invoice amount, category of invoice, etc. The policy must also mention spending limits for different roles to ensure accountability and control.

4. Payment terms

The company’s payables policy must clearly outline payment terms, such as how to deal with outstanding payments, payment deadlines, and expectations. This will help the company ensure that payments are delivered on time and avoid penalties.

5. Expense tracking

The company’s AP policy must also have proper outlines to track expenses accurately and provide an appropriate idea of the company’s cash flow.

6. Dispute resolution

The company’s AP policy must also have clear outlines on how to deal with disputes raised by vendors, verify their claims, and resolve discrepancies quickly. This is crucial to maintaining the vendor’s trust and avoiding delayed payments.

7. Write-off procedures

The company’s accounts payable policy must address the steps regarding uncollectible payments and accounts. This includes specifying criteria for deeming payments uncollectible, stating definitive write-off levels, etc. This will help companies to make sure that their book of records stays accurate and error-free.

8. Vendor communication and management

The company’s AP policy must also provide

• information on onboarding new vendors,
• resolving their payment queries and
• maintaining a strong relationship with them.

9. Regular policy updates and reviews

It must include guidelines on performing periodic policy reviews and updating them to align with business needs and requirements. This proactive approach ensures that the company is always in control of its AP processes.

What Are the Steps to Create Accounts Payable Policy & Procedures?

Creating an accounts payable policy and procedures document is a crucial responsibility for a company’s financial managers, accountants, and business owners. This document ensures compliance, fosters smooth financial operations, and reduces errors. So here is a comprehensive step-by-step explanation of how to make one and what it must include:

1. Outlining key sections

At first, it’s up to you to lay out clear outlines for the significant sections the AP policy will cover. This includes sections for roles and responsibilities, invoice handling, payment processes, etc. The AP policy must be written in a way that fits your company’s needs and requirements, and your expertise is crucial in this process.

2. Detailing invoice processing

Providing detailed and specified information regarding invoice processes, such as where the invoices are sent, performing three-way matching on the corresponding invoices, steps for handling invoice disputes, etc.

3. Defining payment policies

Payment timings must be specified for different aging buckets (e.g., Net 30, Net 45). It must also incorporate strategies for late payment charges and take advantage of early payment discounts.

The AP policy must also have guidelines regarding discrepancies, such as lost checks, failed electronic payments, etc.

4. Including a chart of accounts

AP policy must include a chart of accounts that has all the general ledger codes and responsibilities written in it. It must also have guidelines on recording month-end financial statements to ensure accurate financial reporting.

Having accurate financial records is crucial not only to keep proper records of financial statements but also to stay compliant with local accounting laws.

5. Documenting proper tax information

Accounts payable policy must also include policies for maintaining compliance with local tax regulations, documenting exact procedures for filing and managing sales tax, VAT, etc.

Providing clear and definite steps for handling tax-related issues will help companies avoid penalties for non-compliance.

6. Maintaining internal controls and recordkeeping

The AP policy must include policies for record retention and maintenance of an audit trail to enhance security and prevent fraudulent practices. It must also have specific access control to ensure that only authorized personnel can access and view financial records.

7. Reporting financial transactions

A compelling accounts payable policy must also consist of robust AP reports depicting all the payments that are due soon, fees that have already been paid, overdue invoices, etc. This process of creating systematic documentation of financial transactions within the accounts payables policy is known as accounts payable reporting. 

8. Assign tasks and deadlines

AP policy must have guidelines mentioned on how to set up deadlines for relevant staff members and the delegation of responsibilities for each section of the policy. It must also have proper procedures to ensure compliance with internal policies and external regulations.

9. Finalize and distribute

Review the entire accounts payable policy one last time to ensure everything is up to the mark. If required, make final amendments to the AP policy and then distribute the same to all the respective members, either as a printed document or a softcopy.

Best Practices for Creating Accounts Payable Policy

Creating a compelling accounts payable policy ensures smooth financial operations and maintains strong vendor relationships. By adopting best practices, businesses can streamline payment processes, improve accuracy, and reduce risks. 

1. Removal of unnecessary steps

All unnecessary and redundant steps must be removed from the accounts payables policy to streamline AP processes and ensure that all the guidelines mentioned are clear and concise. The guidelines must be easy for the staff to follow without any confusion.

2. Focus on timely invoice management

AP policies should prioritize invoices based on due dates, payment terms, and vendor relationships to improve cash flow management. This will help the company to manage its cash flow better.

3. Protect your business from fraud

AP policies must have guidelines for conducting vendor reviews, ensuring no duplicate or fake vendor is listed in the AP system. On top of that, staff must also be trained to recognize suspicious activities, such as phishing attempts and irregular payment requests. 

4. Establish effective KPIs

AP policies also must have definite and trackable KPIs that mention the performance of the people involved in the processes and the effectiveness of the payables policy. This includes KPIs like Days Payable Outstanding (DPO), number of matched invoices, discount captured, etc.

5. Foster your bond with your suppliers and vendors

An effective AP policy should go beyond transactions to foster stronger supplier relationships. It must also include ways to foster and strengthen the company’s supplier relationship. This can be achieved by practicing open communication with vendors, resolving issues quickly, etc.

How Does an Accounts Payable Policy Work with Your AP Workflow?

A well-defined accounts payable policy is more than just a set of rules; it is a key component that optimizes the AP workflow. By aligning your policy with the specific needs of your AP process, you can enhance operational efficiency, accelerate turnaround times, and minimize errors. Here’s how these policies streamline the AP workflow:

1. Streamlining invoice receipts

Vendors send invoices directly to the AP department, which is responsible for processing and managing them. As outlined in the AP policy, the department ensures that invoices are routed to the correct channels for verification and approval.

2. Ensuring accurate verification with 3-way matching

AP policies facilitate a 3-way matching process, where invoices, remittances, and payment files are cross-checked. This ensures that the invoice amount, goods/services received, and purchase order align, helping prevent errors like duplication or overpayment.

3. Ensuring accurate tax calculations

Before making a payment, the AP department calculates applicable taxes and adjusts the invoice accordingly. The AP policy provides clear guidelines for this step, ensuring accuracy in tax management.

4. Faster approvals for timely payments

Invoices are sent for verification to designated approvers, such as the AP manager or CFO, as dictated by the AP policy. The policy specifies who can approve payments based on factors like invoice amount, expense category, and budget, thereby speeding up the approval process.

5. Making secure and on-time payments

Once approved, payments are made using the specified methods outlined in the AP policy (e.g., wire transfer, check, etc.), ensuring payments are secure and timely.

6. Maintaining accurate financial records

Finally, the transaction is recorded in the company’s financial records, as directed by the AP policy. Proper documentation ensures that the company can easily track expenses and review financial data in the future.

Conclusion

A well-written accounts payable policy is essential for efficient financial management. By setting clear guidelines for invoice and payment procedures, businesses can improve cash flow, reduce risks, and ensure compliance. Maintaining an effective accounts payable policy is the first step toward stronger financial control.

FAQs

1. What is an example of an accounts payable policy?

An example of an accounts payable policy could be a guideline requiring every invoice from vendors to undergo an accuracy review, followed by payment within 30 days of receipt. This ensures timely payments, fostering positive vendor relationships.

2. How does automation help with creating accounts payable policies and procedures?

Accounts payable automation streamlines the creation of policies and procedures by reducing manual tasks and minimizing errors. It ensures compliance with regulatory laws and provides real-time tracking with “easy-to-trace” audit trails. This enhances overall efficiency and accuracy in managing financial operations.

3. What are the mistakes to avoid while creating an accounts payable policy?

Mistakes to avoid include writing vague or generic procedural guidelines, excluding key departments, failing to update outdated policies, and neglecting compliance with local regulations. Using accounts payable automation software helps prevent these errors by enforcing consistency and ensuring compliance.