Accounts payable analysis is used to extract several types of information from the detailed accounts payable records. These analyses are as follows:
- Discounts taken. Examine the payment records to see if the company is taking all early payment discounts offered by suppliers. These discounts typically have a high effective interest rate, and so are well worth the effort.
- Late payment fees. See if the company is routinely incurring late payment fees. This situation most commonly arises when the business does not have sufficient cash to meet its payment obligations, but could also be due to process failures within the accounting department.
- Payable turnover. Divide total annual purchases by the average total payables balance to arrive at the payables turnover rate. Then divide the turnover rate into 365 days to determine the average number of days that the company is taking to pay its bills. If this days of payables figure is declining over time, the company is wasting a valuable source of cash. Possible resolutions are to ensure that the accounting staff does not pay invoices early, and that payment terms negotiated with suppliers are not excessively short.
- Duplicate payments. Research the records of earlier payments to see if any invoices were paid more than once. If so, this points toward a problem with identifying these invoices in the accounts payable system. A further step is to contact suppliers to obtain repayment of the duplicate payments.
- Compare to employee addresses. Compare supplier addresses to employee addresses. A match could indicate a fraud situation, or at least a related party purchase that may need to be disclosed to management.
Conduct these same analyses whenever the company acquires another business, to see if the payables situation at the acquiree can be improved upon. If so, this can create a synergy that can save money for the acquirer.
The payables manager can also discuss the results of this analysis with the purchasing manager. A possible goal to offer the purchasing manager is longer payment terms from suppliers. Doing so increases the working capital funds available to the business.
A key outcome of accounts payable analysis is to alter payables processes to reduce the risk that any flaws found can recur in the future. Doing so can improve overall corporate profitability by avoiding excess expenditures.