Anyone running a business will most likely have a process of paying vendors for supplies and services.
It is a part of every business accounts payable process, where the department accepts invoices, verifies them, sends them for approval, and makes payments.
Though it seems straightforward, the process can get complicated when you miss a payment.
This comprehensive guide will help businesses to understand how to pay vendors.
Table of contents
What is an invoice payment?
When a business schedules payments for the goods and services it bought from a vendor, it is called invoice payment.
Paying vendors is essential to maintain good relations with them; otherwise, it can affect your business supply chain and goodwill. It gives an idea to the third parties that your business is going through a rough time.
What is the process of vendor payment?
Many small to medium-sized businesses in the UK owe several pounds to their vendors. It damages the business’s cash flow and affects its operations. Therefore, it is essential for every business, irrespective of size must take responsibility for paying their vendor invoices on time.
An accountant or the owner can carry out the vendor payment process for small to medium-sized businesses, whereas the accounts payable team does the job for large organisations.
Let’s understand the process of vendor payment.
1. Invoice data entry
You must double-check the data and look for inconsistencies whenever you receive an invoice. It usually comes as a soft copy or a hard copy. You need to enter the data into the accounts payable system or use platforms with invoice capture abilities to capture your invoice data from the scanned image automatically.
2. Invoice approval
The four main things you must observe in the invoice are:
● Due date
● List of goods and services
● VAT rate
However, a professional invoice has numerous other details to verify.
Once all your details are checked, it needs to be approved by the right people.
3. Payment authorisation
Before you pay the vendors, it must be authorised by a controller or CFO. One can do this manually, via email, or through AP automation.
The payment approver needs to review the invoice and supporting information and can either approve or reject payments.
4. Pay your vendors
It is the final step for most accounts payable teams to make vendor payments via check, virtual cards, or other payment methods like BACS.
How to make vendor payments on time?
Every business must put effort into paying their vendors on time and prioritising good communication.
It helps maintain a good relationship and establish trust with vendors who supply you with goods and services to operate your business smoothly.
Here are a few things you can do to make vendor payments on time:
1. Review invoices quickly when you receive them
You must review and save invoices in the accounts [payable module or your accounting system as soon as you receive them.
It avoids losing or misplacing your invoice and annoyingly delaying your vendor payments.
Pay close attention to the invoice due date, list of goods and services and the total cost on the invoice.
2. Set payment reminders
Setting payment reminders with automatic invoicing software can help you make payments on time. Additionally, you can save on late payment interest charges and fines.
3. Automate invoice payments
Automating your accounts payable workflow speeds up your invoice processing and ensures you pay accurately to vendors on time.
Plus, adopting activation practices in your business helps you to accept and store invoices in a more improved manner, reducing the chance of losing them.
4. Prefer ‘Pull’ payments over ‘Push’ payments
Most businesses choose ‘push’ payment options where the entire control is on the payer. They must make a manual bank transfer, card payment or check payment.
You need to push the payer to take action, and they may postpone the process by giving a reason.
However, if you adopt the ‘pull’ payment option, the payments are automatically transferred to the vendors once the payments are approved. It doesn’t depend on the payer, and there is no chance of late payments.
What are the advantages of automating vendor invoice payments?
Automation in any industry has simplified the workflow, saved time, and reduced manual errors in common. Businesses relying on manual processes must adopt automated solutions to improve efficiency.
Here are a few advantages of automating vendor invoice payments:
1. Save money
Processing electronic payments are less expensive than paper checks.
Furthermore, if you can operate AP software, you don’t need to hire an accountant for your small business to deal with vendor payments.
2. Saves time
Automation reduces the time taken to capture invoice data, code and manage approvals. It also reduces the repetitive work of your team and frees up time to spend on core business activities.
Manual data entry and calculations may have errors, but machines are never wrong. Plus, they help you store the invoice data reducing the risk of losing them during the approval process. When you pay your vendors accurately, you improve vendor-client relationships.
4. Enhanced security
When machines handle your invoices, there is less room for human intervention, reducing the risk of fraud, mishandling invoices, and other security issues.
Plus, any AP software has several layers of security that very few people can break. One can access the data only when they have permission from the admin.
5. Strengthen relationship
You can make accurate payments to all your vendors on time by automating your accounts payable process. It helps strengthen your relationship with the suppliers and develop a sense of trust in you.
These vendors will keep supplying you with goods and services when your relationship with them is good and you pay them on time.
Small businesses usually have few vendors, and the owner can manually handle the account payable process.
However, as the business and supplier list grows, there are several vendors, and you must hire a team of experts or outsource your task to a third party. But, you must pay the vendors on time.