How the Accounts Payable Process Works for US SMEs

For US SMEs, keeping track of accounts payable (AP) is a key part of maintaining financial stability. Without a structured process, businesses risk late fees, strained supplier relationships, and cash flow disruptions. That’s where accounting services play a crucial role, helping businesses manage payments efficiently, avoid errors, and stay compliant with financial obligations.

A well-organized AP process ensures that bills are paid on time, cash flow remains steady, and vendor relationships stay strong. This guide explains how accounts payable works, common challenges SMEs face, and best practices for improving efficiency.

Understanding Accounts Payable

What Is Accounts Payable?

Accounts payable (AP) refers to the money a business owes to suppliers for goods or services received on credit. These outstanding invoices are recorded as current liabilities on the company’s balance sheet and must be settled within a specified time frame.

Why Accounts Payable Matters for US SMEs

For small and medium-sized enterprises (SMEs), managing accounts payable effectively is critical for:

• Avoiding late fees and penalties – Timely payments prevent extra charges and protect business credit.
• Maintaining vendor relationships – Reliable payments build trust and may lead to better pricing or terms.
• Ensuring cash flow stability – A structured AP process helps businesses balance outgoing payments with incoming revenue.
• Improving financial accuracy – Proper tracking of accounts payable ensures financial records remain up to date.

Now, let’s break down the accounts payable process step by step.

The Accounts Payable Process: Step by Step

1. Issuing a Purchase Order (PO)

The process begins with a purchase order (PO)—a formal document sent to a supplier that outlines:

• The items or services requested
• Pricing, quantities, and payment terms
• Delivery expectations

Using POs ensures transparency and minimizes the risk of disputes.

2. Receiving Goods or Services

Once the supplier delivers the order, they issue an invoice containing:

• A description of the goods or services provided
• The total amount due
• Payment terms and deadlines

At this stage, businesses must confirm that the invoice accurately reflects what was ordered and received.

3. Invoice Verification and Approval

Before payment is processed, invoices go through a verification process to ensure accuracy. Many businesses use a two- or three-way matching system:

• Two-way matching: Compares the invoice with the purchase order.
• Three-way matching: Also includes a comparison with the goods receipt to confirm delivery.

Any discrepancies—such as incorrect pricing, missing items, or damaged goods—must be resolved before proceeding to payment.

4. Recording the Invoice

Once verified, the invoice is entered into the accounts payable ledger, updating financial records to reflect the new liability.

5. Payment Approval and Processing

The invoice then moves through an approval workflow, ensuring payments align with internal policies. The approval process varies but typically depends on factors such as invoice amount and department authorization levels.

Once approved, payments are scheduled based on vendor terms—such as Net 30 or Net 60—and businesses may take advantage of early payment discounts when possible.

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6. Payment Execution

Payments can be made through various methods, including:

• ACH transfers
• Wire transfers
• Business checks
• Credit card payments

After payment is processed, the business sends a remittance confirmation to the supplier.

7. Record Updates and Reconciliation

Once payment is made, the accounts payable ledger is updated to reflect the cleared liability. Businesses should conduct regular reconciliation to match bank statements with vendor invoices, ensuring that no payments are missed or duplicated.

Common Challenges in Accounts Payable for US SMEs

Managing accounts payable isn’t always easy. Many US SMEs face challenges such as:

• Manual processes – Relying on spreadsheets or paper invoices increases the risk of errors and inefficiencies.
• Cash flow constraints – Small businesses often struggle to balance outgoing payments with incoming revenue.
• Fraud risks – Without strong internal controls, businesses may be vulnerable to fraudulent invoices or unauthorized transactions.

To overcome these challenges, businesses can adopt best practices that improve efficiency and reduce risk.

Best Practices for Managing Accounts Payable Efficiently

Automate AP Processes

Using AP automation tools helps businesses eliminate manual data entry, speed up approvals, and reduce errors. Automation also allows for better tracking of invoices and payment deadlines.

Establish Approval Workflows

A structured approval process ensures that invoices are reviewed, validated, and authorized before payment, preventing unauthorized transactions and delays.

Negotiate Favorable Payment Terms

Building strong relationships with suppliers can lead to better payment terms, such as extended due dates or early payment discounts, helping businesses manage cash flow effectively.

Monitor Key Metrics

Tracking days payable outstanding (DPO) can help businesses optimize their payment timing and assess whether they are paying suppliers too early or too late.

Schedule Regular Reconciliation

Frequent bank and vendor statement reconciliation helps detect discrepancies early, preventing financial errors and fraud.

Summary

A well-structured accounts payable process is essential for US SMEs to maintain financial stability, optimize cash flow, and strengthen vendor relationships. By implementing best practices, such as automation, invoice matching, and approval workflows, businesses can streamline their AP operations, reduce errors, and improve efficiency.

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