Proactive vs. Reactive Accounts Payable: Understanding the Difference
The odyssey that every invoice must travel, from the time of receipt to payment, has kept accounts payable teams on their heels for as long as businesses have been paying vendors.
Tasks required to process and pay invoices have traditionally been painfully manual, including keying invoice data into an accounting system, emailing/handing off invoices for approvals, and mailing paper checks.
At one point in time, there was no other way to get the bills paid. But those days are gone; or at least they should be. Businesses like PayPal and Venmo revolutionized P2P payments with disruptive technology that drastically simplified the nature of exchanging money. In the same way, B2B payments have been disrupted by accounts payable automation technology that streamlines the end-to-end vendor payment process, improving operational efficiency by 60%.
Yet still, with less than a quarter of businesses adopting this technology, it’s difficult to comprehend why accounts payable teams hold on to the manual processes that from an outsiders view would seen outdated. The truth is that this insistence is tied to the mindsets that are associated with proactive and reactive accounts payable.
What is reactive accounts payable?
In processes that involve juggling dozens of deadlines, it’s easy for reacting to and meeting those deadlines to become the key barometer for success.
Accounts Payable is an example of a process that involves juggling copious amounts of deadlines, with the average AP team receiving one hundred invoices every month – each with its own deadline, payment terms, and approval trail to travel down.
When it comes to challenges outside of getting invoices paid, it’s easy for AP teams to adopt the mindset of “we’ll cross that bridge when we get to it.”
If a vendor relationship deteriorates, AP teams will step in and scramble to fix it. If cash flow dries up, AP teams need to find a way to negotiate an extended average payable period. If an audit requires documentation scattered across a business, an AP team needs to work to retroactively clean up the paperwork and get organized.
The issue with accounts payable teams sliding into the reactive mindset that meeting deadlines is the crucial metric to track, and everything else getting managed as needed, is the amount of economic upside that gets left on the table.
What is proactive accounts payable?
Accounts payable is uniquely positioned to provide unique competitive advantages across entire organizations when executed proactively. Examples of these benefits include:
- Increased level of service from vendors
- Improved command over short-term cash flow
- Seamless company-wide audits
A team with the main objective of paying the bills on time barely has the capacity to think about these things, and wonder how these things could ever eventually become a part of their strategy.
Proactive accounts payable processes eliminate unnecessary human intervention across the end-to-end process, ultimately reducing the amount of time required to simply pay the bills.
With the extra time gained by optimizing invoice processing, proactive accounts payable teams have time to:
- Key in on deadlines for early / on-time invoice payments, and ensure no deadlines are missed
- Determine which invoices are better to pay immediately to reap the benefits of early-pay discounts, and which are better to pay later to reap the benefits of an extended line of credit
- Strategize which vendors are best to pay with credit cards, and which would be better to pay with check or ACH
- Preserve full audit trails of every invoice approval and payment for easy future access
By wiping out the arduous and time-consuming work that has been associated with processing and paying invoices for decades, businesses can shift their focus onto vendor payment priorities that will ultimately move their businesses forward, rather than simply maintaining the status quo.
Becoming a proactive accounts payable team
There are multiple measures that can be taken to streamline your accounts payable process and start taking a more proactive approach.
1. Centralize your invoice processing operations
Paying the same invoice twice can be among the most costly mistakes an accounts payable team can make when it comes to time. Time is wasted while processing the redundant payment, and time is wasted yet again when you have to dedicate even more time to re-balance your books and reconcile with your vendor to set up a credit.
However, this is an easy mistake to make, especially with businesses processing invoices across different locations. Establishing one central location to process and pay every invoice will drastically reduce the number of times these costly mistake happen, and save you a lot of time.
2. Capture invoices in small doses
Long sessions of manual data entry naturally make you more prone to mistakes. Although it is tempting to put off the process of recording invoice data to a future point in time when you can tackle all invoices at once, this practice will increase both the number of mistakes and resources required for reconciling them.
Capturing your invoices in small doses limits errors, and the amount of time you spend correcting them.
3. Automate the entire invoice-to-pay process
Investing in an accounts payable automation solution improves accounts payable efficiency by 60%. However, a key to maximizing your investment in automation is choosing a solution that automates the entire invoice-to-pay process, and not just an individual component within that process.
MineralTree Invoice-to-Pay builds both of best practices discussed above, and more, into your accounts payable process. By integrating with your corporate bank account and common accounting systems, it fits seamlessly into the way your business is currently operating.