Accounts Payable Process Steps and Best Practices Explained

Published Thursday 8 January 2026

Table of contents

• What is accounts payable?
• Why it matters
• Accounts payable process steps
• Best practices for accounts payable
• How to automate accounts payable
• Streamline your accounts payable process
• FAQs on accounts payable process

Key takeaways

• Implement a centralized invoice management system using a dedicated email address and accounting software to automatically scan and track invoices, reducing processing time from 12 days to just 3 days with full automation.
• Establish a systematic approval process that includes three-way matching between purchase orders, delivery receipts, and invoices to prevent overpayments and catch billing errors before they become costly disputes.
• Schedule payments strategically by evaluating early payment discounts against your cost of holding cash and using cash flow forecasting to ensure sufficient funds are available on due dates.
• Maintain clear documentation throughout the entire accounts payable cycle, from initial orders to final payment records, to support tax compliance and strengthen supplier relationships through reliable payment execution.

What is accounts payable?

Accounts payable (AP) is the money your business owes to suppliers and vendors for goods or services already received. This systematic process protects your cash flow and supplier relationships.

The accounts payable process includes everything from placing orders to recording final payments. It's different from accounts receivable, which tracks money customers owe you.

Why it matters

A proper accounts payable process delivers measurable business benefits that protect your bottom line and reputation:

• Supplier relationship protection: On-time payments maintain good standing and often unlock early payment discounts
• Cash flow control: Scheduled payments prevent unexpected cash shortages and overdraft fees
• Credit score maintenance: Consistent payment history protects your business credit rating
• Time savings: Organised systems reduce administrative burden and missed payment stress

When managed through accounting software, it can stop you from running out of money.

Accounts payable process steps

Accounts payable starts when you order products or services and finishes when payments are made. Let's break it down.

1. Placing orders

Order placement establishes the foundation for smooth accounts payable processing. Clear communication prevents costly disputes later.

Essential steps to placing orders:

1. Verify order details: Confirm quantities, specifications, and delivery dates match your needs
2. Review budget impact: Ensure costs align with approved spending limits
3. Negotiate payment terms: Discuss due dates and early payment discounts upfront
4. Assign tracking numbers: Use purchase order (PO) numbers for easy invoice matching
5. Confirm invoice delivery: Provide correct email address or mailing details to avoid delays

2. Receiving invoices

Invoice organisation prevents missed payments and reduces processing time. A centralised system gives you complete visibility over what you owe.

Best practices for invoices:

• Use dedicated email: Create a specific address (like bills@yourcompany.com) for all invoices
• Enable automatic scanning: Accounting software like Xero reads emailed invoices and tracks due dates automatically
• Review immediately: Check each invoice upon receipt to catch errors while they're fresh
• Maintain digital copies: Electronic invoices are easier to search, store, and access during audits

3. Approving (or disputing) invoices

Invoice approval prevents overpayments and catches billing errors before they become disputes. Quick verification saves time and money.

Verification checklist:

• Match delivery details: Confirm goods or services were actually received as billed
• Verify pricing accuracy: Check rates match your original quote or contract terms
• Get stakeholder approval: Forward to project managers or partners if required by your process
• Address errors immediately: Contact suppliers within 48 hours to resolve discrepancies while details are fresh

4. Recording the amount owed

Recording invoices creates an accurate picture of your business obligations and supports tax compliance.

Recording steps:

1. Enter amount and due date: Log the payment obligation in your accounting system
2. Record claimable GST: Note any tax amounts you can reclaim on your return
3. Save digital copies: Scan paper invoices or save electronic versions for audit trails
4. Choose timing method: Accrual accounting records expenses immediately; cash accounting waits until payment

5. Scheduling payment

Payment scheduling balances cash flow management with supplier relationship benefits. Strategic timing maximises your financial position.

Scheduling strategy:

• Check cash availability: Ensure sufficient funds will be available on the due date
• Evaluate early payment discounts: Calculate if discounts exceed your cost of holding cash
• Use cash flow forecasting: Accounting software shows projected balances on payment dates, meeting a growing demand for real-time data that a reported 83% of professionals anticipate from clients.
• Communicate payment delays: Contact suppliers immediately if you can't meet deadlines
• Avoid high-interest credit: Use supplier payment plans rather than credit cards when possible

If you're not using software yet, start by downloading our free cash flow forecasting template.

6. Executing payment

Payment execution completes the accounts payable cycle. Reliable systems prevent missed payments and late fees.

Payment execution methods:

• Automate recurring payments: Set up automatic transfers for regular suppliers
• Schedule payment sessions: Block dedicated time weekly for processing approved invoices
• Use software reminders: Enable notifications for upcoming due dates
• Verify payment completion: Confirm transfers processed successfully before marking invoices as paid

7. Recording payment

Payment recording finalises the accounts payable process and updates your financial records.

Final steps:

1. Record the payment: Enter transaction details in your accounting system
2. Update invoice status: Mark invoices as paid to remove from outstanding payables
3. Verify bank reconciliation: Confirm payment amounts match bank statement entries
4. Archive documentation: Store paid invoices for tax records and audit requirements

Best practices for accounts payable

A good accounts payable process helps you stay on top of bills and manage your cash flow. Here are a few tips to keep things running smoothly:

• Keep clear records: Make sure every purchase is properly documented, from the initial order to the final payment. This helps avoid confusion and makes tax time easier.
• Use a dedicated inbox: Have suppliers send all invoices to a single email address. This creates a central hub for your bills, so nothing gets lost in the shuffle.
• Review invoices promptly: Check every invoice as soon as it arrives to make sure the details are correct. The sooner you spot a mistake, the easier it is to fix.
• Communicate with suppliers: If you have a question about a bill or think you might miss a payment, let your supplier know. Open communication builds trust and protects your business relationships.
• Schedule payments wisely: Plan your payments to take advantage of early payment discounts without putting a strain on your cash flow.

How to automate accounts payable

Accounts payable automation eliminates manual data entry and reduces payment errors, with research showing the average cost to process an invoice drops from about $15 in a manual environment to just $3.50 with full automation.

Modern software handles routine tasks so you can focus on growing your business:

• Invoice scanning: Automatically reads emailed bills and extracts payment details
• Cash flow forecasting: Shows projected bank balances before and after scheduled payments
• Automated bookkeeping: Records transactions in your accounting ledger at the correct time
• Payment reminders: Alerts you to upcoming due dates and early payment discount opportunities

Learn more about Xero's accounts payable automation.

Streamline your accounts payable process

A smooth accounts payable process does more than just get bills paid. It protects your cash flow, strengthens supplier relationships, and gives you a clearer view of your business finances. By organising your workflow and using the right tools, you can turn a chore into a strategic advantage.

Ready to run your business, not your books? See how Xero makes it easy. Try Xero for free.

FAQs on accounts payable process

Here are some common questions about the accounts payable process.

What is three-way matching in accounts payable?

Three-way matching is a way to verify a supplier invoice before paying it. It involves checking the details on the purchase order, the goods receipt note (which confirms you received the items), and the final invoice. If all three documents match, you can be confident the bill is accurate.

How do you handle invoice disputes in the AP process?

If you find a mistake on an invoice, contact your supplier as soon as possible. Clearly explain the issue and provide any supporting documents. It's best to address disputes quickly while the details are still fresh for everyone. Don't pay the invoice until the issue is resolved and you receive a corrected bill.

When should a small business automate accounts payable?

Consider automating when you find yourself spending too much time on manual data entry, chasing approvals, or tracking due dates. If you're handling a growing number of invoices or struggling to pay bills on time, automation can save you time, reduce errors, and give you better control over your cash flow.

What are the most common accounts payable mistakes?

Common mistakes include making duplicate payments, paying incorrect amounts, missing early payment discounts, and entering data incorrectly. A frequent issue given that one 2012 survey found 62% of businesses manually keyed in invoice data from paper documents.

These errors can often be avoided by setting up a clear, organised process and using accounting software to help track and manage bills.

How does accounts payable affect cash flow?

Accounts payable directly impacts your cash flow by determining when money leaves your business. Managing it well means you can time payments to keep cash in your account for longer, avoid late fees, and take advantage of discounts. A clear view of your upcoming bills helps you forecast your cash position accurately.