Accounts Payable Cycle: What is the Full Cycle Accounts Payable Process?

A full cycle accounts payable process is a complete cycle that an accounts payable department goes through, from searching, buying something to making the final payment. This article details the flow of the full accounts payable cycle and how technology helps automate and optimise this process.

Also, read about upstream and downstream processes in accounts payable and how to achieve optimal procure-to-pay performance.

Meaning of Full-cycle Accounts Payable Process

An Accounts Payable Cycle, especially a full cycle accounts payable process encompasses a complete procure to pay (P2P) process. A Full Accounts Payable Cycle process includes multiple areas. These include Identification of goods required, creating purchase orders, material and service requisition, capturing invoice data, invoice coding with correct account and cost centre, matching invoices against purchase orders, processing and posting for payments, among other activities.

It is a coordinated and integrated action of sourcing or obtaining raw material, consumables, services and assets from external suppliers to the business and paying them for the goods/services received. It involves several steps, right from the time of vendor identification to invoice approval and vendor payment. Invoice to Pay (I2P) is a part of the P2P process that starts from the stage of receiving the purchase invoices. It involves the production, procurement and accounts payable teams.

Accounts Payable Cycle Flowchart

The accounts payable flowchart is shown below:

Accounts Payable Cycle Steps

The following steps give a general idea how the accounts payable cycle works in organisations across India. 

Step 1: Identification of requisite goods 

At this stage, the production team should evaluate the requirement of various goods or materials needed for a manufacturing activity. Accordingly, this team must raise a request with the purchase team. 

Step 2: Procurement process and purchase requisition

In this step, the purchase team will find suppliers or vendors after seeing that no existing orders for the requested materials are placed. Thereafter, the team takes a purchase approval from the production team. Many factors play a role in determining the choice of supplier such as locality, credit policies, price, ease of transportation, past connections of the company with the vendors, existing contract, etc. 

Step 3: Create PO and acceptance

While you begin vendor selection, a formal document is sent known as request for proposal for getting quotations from the potential suppliers.

Thereafter, the company reviews the quotation it receives and begins price negotiation with the suppliers. There are multiple factors involved here such as discounts, delivery, quality of products, freight charges, and insurance terms. Upon fixing the price or value of transaction, the company can raise a Purchase Order (PO) on the finalised vendor or supplier. The PO contains the company’s requirements and the timelines for delivering the products or services. This PO is in turn accepted by the particular supplier via email or post.

Step 4: Delivery of service or goods

The vendor must keep the goods ready for shipping or delivery within the deadlines. They should also keep the teams informed about the order progress with regular notifications. They must use valid documents providing the description of goods, quantity, delivery date, location, etc. on delivery challans

After that, the inspection begins, which includes both quantity and quality checks. The purchase team reconciles the goods received notes or delivery challan with the details in the purchase order.

Step 5: Invoice processing

Upon inspection, if the goods are fit, the purchasing team forwards the approval to the Accounts Payable (AP) team to begin the payments process. The AP team records the supplier invoice containing all the specifications about the payment such as the amount due, due date, discount, GSTIN, etc.

Step 6: Releasing vendor payments 

After conducting all the necessary checks, the AP team begins processing payments to the vendor partially or fully as per the contractual and company norms. Modes can be either cheque, cash, bank transfers, UPI, demand drafts, credit card, foreign remittance, or payment in kind.

Step 7: Reconciliations

After ensuring the payments are made, the AP team must conduct regular reconciliations of the vendor accounts to see if the payments are processed within the due dates to avoid any penalties or interest charges.

Flow of Full-Cycle Accounts Payable

In accounts payable, the procure-to-pay process involves two processes — upstream and downstream. Upstream activities involve requisitioning and vendor selection, and downstream activities include invoice management and payment processing.

(1) Upstream: Upstream process involves procurement. It includes identifying vendors who can supply the required goods or services. It also manages the RFP (Request for Proposal) and RFQ (Request for Quote) processes. An RFQ is sent when you already know the goods/service, and you just want to know the price. An RFP is sent when you want more clarification regarding factors other than the price before making any decision. During this phase, the company conducts strategic sourcing and contract negotiations and streamlines the supply chain. It also builds strong relationships with its suppliers by creating mutually beneficial contracts.

Here are some more upstream activities in the accounts payable process:

• Purchase requisition
• Selecting vendors
• Creating a purchase order
• Negotiating with vendors
• Signing vendor contracts
• Setting up vendor accounts
• Maintaining vendor records
• Receiving the invoice
• Verifying the invoice

Upstream process management is an essential part of the full-cycle accounts payable process. It ensures that the terms, conditions, quantity and other important information mentioned on the PO is correct. It aims to improve supplier relationship management, generate more robust competitive performance, and improve profitability. Businesses can achieve this by establishing a framework for effective and value-focused procure-to-pay operations.

(2) Downstream: It involves processes that occur after the business purchases goods. This phase involves confirming goods receipt by the accounts payable department, tracking invoices to the relevant purchase orders, receiving authorisations for payments, etc. 

Here are some more downstream activities in the accounts payable process:

• Processing payments
• Communicating with vendor
• Vendor reconciliations
• Recording transactions
• Storing documents
• Reporting and analysing data
• Conducting audits and internal controls

Downstream processes in accounts payable present an opportunity to deepen and broaden vendor relationships. Businesses can achieve this by making prompt payments, handling invoices quickly, and integrating vendor data and policies with the buyer's procurement processes.

In both the flows, it is important to try to reduce human errors and increase efficiency with the final goal of achieving higher productivity and creating strong internal controls.

Accounts Payable Cycle Example

Let us assume that ABC Ltd is an automobile manufacturing company which buys its raw materials from XYZ Ltd. Thus, ABC Ltd has to maintain an accounts payable cycle to track the purchased inventory, credit periods and terms, the payment value, due date, etc. with regard to the goods and invoices received from XYZ Ltd.

The organisation has good market presence primarily due to its transparency with customer dealing, timely vendor payments and supply of quality products. Any discrepancies with clients are settled almost immediately boosting good credit terms and keeping a healthy cash flow.

How to Achieve Optimal Procure-To-Pay Performance?

The procure-to-pay process acts as a bridge that connects various departments and functions within an organisation. It also ensures seamless collaboration between departments, reduces manual intervention, minimises errors, enhances cash flow management, and promotes effective vendor management.

Here are some ways to successfully optimise your procure-to-pay process: 

• Focus on collaboration: In the past, procurement and accounts payable often operated in silos. However, by sharing information, strategising together, and working on process improvements, both departments can make the P2P process shorter and more efficient. 
• Leverage automation: Cloud-based solutions can help businesses automate tasks like creating and approving orders and matching and paying invoices. It can make the P2P process faster, reduce mistakes, and improve information sharing between teams. It also prevents unauthorised spending and lowers the risk of receiving fake invoices. 
• Centralised data management: Integrating all procurement functions into a centralised data management platform will grant real-time access to information, facilitate better decision-making, and improve forecasting. It also fosters transparency throughout the P2P process and establishes a foundation for conducting a strategic analysis. 

Advantages of Optimising Your Full Accounts Payable Cycle Workflows

Optimising full cycle accounts payable workflow focuses on streamlining the accounts payable workflow to complete more work efficiently and affordably. Here are some of the benefits of optimising your full cycle accounts payable workflows:

• Limiting manual handling of invoices cuts down the chances of human errors. It also reduces the chances of lost invoices or making double payments.
• Going paperless also significantly reduces the cost of processing a single invoice.
• Automated tracking of debits/credits leads to cleaner ledgers making them more accurate and verifiable.
• Eliminating data entry and creating automated workflows reduces the chances of manual errors.
• Pre-facto invoice validation will also ensure businesses are protected against booking incorrect/non-compliant or fraudulent invoices.
• Reduces the risk involved in the approval process by creating a digital paper trail at every stage of the procurement-to-pay process.

The overall benefit of optimisation is the creation of a more streamlined procure-to-pay process, which enables more savings, helps achieve higher efficiency and supports existing teams to perform better operations.

How Does Technology Help in Automating Full Accounts Payable Cycle Processes?

A full accounts payable cycle process involves a lot of data processing in various areas. Large organisations need to handle thousands of incoming invoices weekly. 

Investing in technology helps to automate tedious processes. New technologies help businesses to add more value to work, such as-

• Artificial intelligence-based technology helps in intelligent invoice automation and data extraction.
• Accounts payable automation helps capture invoice data automatically with configurable automated workflows and pre-built invoice validation logic.
• Purchase order automation helps your business keep itself well-stocked, avoiding any stock shortfalls caused by human error.

Further, leveraging technology for your business requires choosing an appropriate software vendor who can understand your demands and help in successfully automating the accounts payable processes. The vendor should suggest the right customised product basis understanding of your current pain points & challenges, incoming volumes to be processed, type of workflows to be configured, etc.