Imagine that you run a department like Accounts Payable. You hire more or less the right number of people. They focus on processing invoices. You pay suppliers more or less in time. From time to time minor issues occur, but your suppliers are happy in general.

Time later, the company, like any other business, goes through a bumpy period and sales are not as high as you were expecting. You keep the profits under control despite the downfall in revenue. Two people in Accounts Payable decide to leave the company because they found a job that better suits their needs. Fair enough, but you don’t replace them. Suppliers aren’t paid in time anymore. If there are missing invoices, you don’t worry. Costs will be accrued anyway. There is no need to do anything else. After a while, the profits and liquidity problems seem to worsen, and you decide to cut down more on expenses. You don’t extend the contracts of two employees in accounting. The figures look a bit better now. You think it will work. But problems keep growing and growing. Suppliers complain more and more. They start charging you with late payment penalties, or demand you to pay outstanding invoices before dispatching you more good or providing more services. Your credit score is sinking. You have more problems to borrow money to keep the business afloat.

Some time later, there is economic growth again. Inflation has stabilised. Sales recover enough to keep the business alive. However, the aftermath of the crisis period still remains. Suppliers don’t trust you the way they were. Also, to avoid having a lot of employees, you decide to hire less people despite the workload, and invest only in new systems to automise processes as much as you can. There are improvements, you stay with these changes and more or less manage to run the company.

I usually like using Accounts Payable in my examples, but it can be any other department, not only Accounting. It could be IT, Marketing, Procurement, Operations, etc, but as Accounting is my field of expertise, I focus on these issues instead.

Accounts Payable is a process that is often underestimated, but it is the first line of defense when it comes to cost and cash flow control. Some companies decide to hire just the right amount of people, even if they don’t have enough accounting knowledge to do the role, as they see the most important is to book and pay. This attitude is, in my view, risky and not correct.

Investing in a sound Accounts Payable process, or in its full extension, to the Purchase-to-Pay process, can help greatly mitigate the risk of costs spiraling out of control and serve as a starting point to stabilise a company, especially in difficult moments. Some of the issues I see in general are:

• Wrong coding of invoices or purchase orders: which makes analysis in profit or loss more complicated
• Wrong tax rates used: which raises the risk of not recovering paid VAT, tax inspections, and potential fines
• Not reconciled supplier accounts: this is my favourite one. Some suppliers are paid by direct debit, or via down payment or they refund us money for reasons such as returned goods. Everything is fine with the supplier now. However, leaving open positions poses a big risks. For example, it can distort the working capital ratio. You could accrue costs, of course, but in the end, you may end up paying twice for certain costs, losing sight of refunds or not recovering paid VAT, as mentioned before.

These problems are not limited to Accounts Payable. Accounts Receivable may suffer these issues, but in different ways. For examples, some works may not be billed to clients, which leads to loss in revenue, or customers may not pay in time and need to be sent reminders.

Investing in accounting can come in many forms, be it employees, software, and now these days implementing AI tools to make tasks easier to bear, reduce the chance of human error, and increase efficiency.

If this is managed correctly, the company will have better financial control of its operations, and have resources more under control. This way, it will be safer to invest in marketing, new products, and other areas of the business.