Most businesses depend on their vendors for the supply of goods and services on credit. Such credit when received is a liability for the company in its balance sheet and is known as Accounts Payable (AP). As the business grows for an organisation, the need to source more goods and services on credit proportionately increases. This leads to the accumulation of invoices received from creditors, which need to be paid on time at the end of the credit period agreed between the vendors and the company. Though accounts payable is a back-end operation which does not directly contribute to the growth of the business, a lack of focus in AP will:

• Increase the liability of the business
• Adversely affect the growth and reputation of an organisation

The finance department of an organisation is responsible for its accounts payable operations. However, smaller companies may not have adequate manpower to look after the accounts payable operations exclusively. Yet the importance of accounts payable cannot be underestimated. When faced with such a dilemma, companies have the alternate choice of engaging third-party Accounts Payable Outsourcing service providers. 

The following advantages make accounts payable (AP) outsourcing a lucrative option for many organisations:

• Cost reduction: When companies decide to manage their AP operations through in-house resources, additional manpower needs to be engaged. The process of recruitment is not only time-consuming but expensive as well. Despite the time and cost borne by the company, there is no guarantee that the company will be able to identify and recruit a knowledgeable and skilled candidate. Moreover, engagement of exclusive in-house resources would increase the fixed operational cost of a company in terms of additional salary and other employment benefits that will have to be paid to the staff. By engaging third-party accounts payable outsourcing service providers, companies can avoid higher fixed costs besides recruitment costs and pay only for the services they seek from the third-party service providers.

• Process Automation: Third-party accounts payable service providers use technologically advanced and updated software for managing their clients’ AP operations. Moreover, the software has a shelf life and its license needs to be periodically renewed. The use of technology helps to streamline accounts payable functions efficiently in the shortest possible time. By using outsourced AP service providers, companies get access to software tools for managing accounts payable operations without making any investment to purchase the same.

• Eliminates Errors and Mistakes: For availing of products and services from vendor companies, most organisations issue purchase orders (PO) to their vendors. These purchase orders stipulate the credit period within which the company needs to pay their vendors. However, companies do also take products and services from their vendors directly thereby eliminating the need for PO. Manually keeping a track of all the AP invoices received against PO and those without any PO is a complex task. Matching the invoices with their respective purchase orders is a slow and unproductive process that tends to overwhelm in-house company staff managing AP functions. Before processing any invoice, companies need to:
  • Double-check whether they have received the products and services from their vendors
  • Seek confirmation from the user department
  • Check calculations in the invoice
  • Make note of the credit period against each invoice

As invoices keep piling up, manual handling enhances the chances of errors and omissions, along with increasing the possibility of misplacement of payable invoices. 

Cross-checking is also required to eliminate the chances of duplication of payments. This increases the processing cost of payable invoices considerably. Outsourcing accounts payable functions to service providers lead to business growth and profitability by: 

• Increasing the productivity of their in-house staff
• Allowing them to focus on critical functions 

Moreover, shifting from manual process to automated process eliminates the chances of mistakes and errors which also adversely affect the profitability of the company. 

• Availability of Experts: All third-party service providers have Accounts Payable Specialist, on their payrolls for servicing their clients. These specialists are skilled and efficient and have a thorough knowledge of the applicable statutory rules and regulations for ensuring compliance. 

For example, the rate of taxes that should be deducted at source while making payment against accounts payable invoices would differ based on:

• The vendor from whom the goods and services are procured 
• On the nature of products and services taken by the company 

Any wrong deduction of taxes at source and failure to deposit the same with the government on time may result in an additional outflow of money in the form of penalties and interest besides any legal complications that the company may have to face.

• Maintain good relationship with vendors: Third-party AP service providers help to automate the Accounts Payable Process for their clients efficiently and thereby ensure that vendors receive their payment as per the agreed terms. A company needs to maintain good relations with all its vendors, particularly when it is riding the growth wave. 

• Efficient and Secure Record-Keeping: Most AP service providers use the cloud to store client data. This secures the data further thereby keeping it safe from thefts and breaches of data. Additionally, cloud storage coupled with AP process automation helps to retrieve real-time information easily thereby enabling faster reconciliation and quick generation of AP reports for financial planning and analysis by the management.

The benefits and advantages highlighted above clearly show why AP process outsourcing is the obvious choice for most companies looking for business growth and success.