Managing the vendor payable process is crucial for every organization. It helps to maintain good relationships with vendors and ensures the uninterrupted flow of goods and services.
To do this effectively, organizations need a strong foundation of internal controls.
Internal controls refer to the policies, procedures, and processes that an organization adopts to ensure ethical and compliant business operations while maintaining reliable and accurate financial statements.
The internal control team must have the authority to conduct audits and investigations of any area they consider necessary, report their findings and recommendations to senior management, and implement controls to reduce risks and enhance operations.
The following are some essential steps to establish a strong foundation by implementing intelligent internal controls in the vendor payable process:
1. Segregation of Duties:
To minimize the risk of fraudulent activities, the vendor payable process should be divided into separate and distinct duties.
For instance, one person handles vendor setup, another creates purchase orders, and a third person handles invoice processing and payment approval. Such division of responsibilities ensures that no single individual has complete control over the entire vendor payable process.
2. Vendor Onboarding Procedure:
Before setting up a vendor, the business should conduct thorough due diligence to verify its legitimacy.
This includes checking their business name, address, and tax identification number, as well as any legal or regulatory issues.
Additionally, the vendor’s contact information, terms of service, and necessary compliance certifications should be documented during the vendor setup process.
3. Purchase Order Process:
To make sure purchases are authorized and within budget, it is necessary to establish a formal purchase order process which must be approved by the relevant manager before any goods or services are received.
4. Invoice Processing and Payment Approval:
Once a vendor’s invoice is received, it should be matched against the purchase order to ensure that the goods or services were received as expected.
Once confirmed, the invoice should be approved for payment by the relevant manager.
5. Payment Execution:
Payments should be made only after proper approval has been obtained, and only to the vendor’s designated bank account.
The payment process should include verification of the vendor’s bank account information to prevent fraudulent activity.
Conclusion:
To be successful, organizations need to prioritize paying vendors smoothly and efficiently. They can achieve this by having strong internal controls in place, which reduce risks, improve compliance, and enhance efficiency.
When implementing new AP platforms, it is necessary to involve the internal control team. This ensures that appropriate business rules are in place, reducing risks, improving efficiency, and maintaining compliance.