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How AI redefines accounts payable and receivable processes

A small business owner using a laptop and tablet to manage AP and AR.
Portrait of guest author Kelly Moser, co-founder and editor at Home & Jet.
Kelly Moser Guest Author
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For many small business owners, accounts payable (AP) and accounts receivable (AR) are time-consuming and error-prone tasks.

Not only do these financial processes call for a keen eye for detail, but they also require a certain level of expertise. And the last thing you want is to miss a payment or leave money on the table.

Thankfully, advancements in artificial intelligence (AI) are changing the game. Now, these complex financial processes that are integral to running a business are simpler, more efficient, and less prone to error. Sounds idyllic, right?

In this article, we’ll reveal the magic behind artificial intelligence and how it helps streamline the tedious accounts payable and receivable processes.

What’s accounts payable?

Navigating the sea of financial jargon can feel overwhelming. But don’t let the term accounts payable throw you for a loop. It’s not as complex as it sounds. But it’s an essential metric on your financial statements.

So, what is it exactly? Simply put, AP represents all the money that your business owes its suppliers. In other words, accounts payable are a type of current liability that includes all the bills and invoices your business has received but not paid for yet, such as raw material purchases, utility payments, and services rendered.

When you receive an invoice that needs to be paid, that’s a new addition to your accounts payable. And what happens when you pay supplier invoices? You reduce your AP. 

Just remember, AP is all about the debts your business needs to pay, not the ones it needs to collect. Those would be accounts receivable, and we’ll touch on that in a minute.

The importance of accounts payable

So, why should you pay attention to accounts payable? Simple. How you manage your AP can profoundly impact your business’s financial health and reputation. Keeping a close eye on your accounts payable and payment terms is your secret weapon to better cash flow while keeping petty cash on hand.

A good AP process: 

  • Improves supplier relationships by sending payments on time or even ahead of time.
  • Avoids late payments that can incur penalties and litigation. 
  • Optimizes your cash flow.

With online tools like Melio, managing your AP becomes less of a struggle and more of a strategic process. How? Seeing all your outstanding payments in one place gives you a better picture of your short-term liabilities, leading to better financial decisions.

It also offers a choice of payment methods to fit your workflows and cash situation, without affecting your vendor. For example, you can choose to pay with a credit card when you need to defer the payment until your next billing cycle while your vendor gets an ACH bank transferACH bank transferACH is a type of electronic bank-to-bank transfer that goes through the Automated Clearing House network (hence its name). or a check in the mail, whichever they prefer. 

Plus, Melio integrates with your favorite accounting software, so you won’t have to re-enter your information into different platforms.

AI and accounts payable: streamline processes and save money

The traditional AP process is notoriously labor-intensive, with numerous steps, including invoice receipt, data entry, approval workflows, and payment. With no dedicated payables department, in most small businesses, all these tasks fall on the owner’s (your) shoulders.

Thankfully, AI can help streamline this payment process in several ways. For example, AI-powered software can automatically extract data from invoices, removing the need for manual accounting entries. In fact, Melio’s platform does exactly that when you upload a scanned invoice. 

Not only does this speed up invoice processing, but it also reduces the likelihood of human errors when manually typing in information. And we all know that errors can lead to unfortunate, costly mistakes.

The machine learning aspect of AI can also learn to identify patterns and flag anomalies, such as duplicate invoices or payments that exceed a certain threshold. The result? An additional layer of protection against fraudulent invoices.

If you have specific tasks in your AP process that can be made more efficient, consider hiring a software developer that can help you customize and integrate AI software into your workflow. There are plenty of sites to hire developers quickly and easily without the need to find a recruiter first.

What’s accounts receivable?

Now, let’s flip the coin. You’re on the other side of the business deal. You’ve provided the goods or services and are ready to receive ‌payment.

What do we call this? Accounts receivable. AR is composed of all the open invoices you issued to customers and clients that represent the money they owe you. 

These might include buyers of your products, clients for your services, or even tenants in your rental properties—essentially, anyone who owes you money for goods or services.

When you send an invoice, your accounts receivable balance increases. So, what happens when a customer settles their bill? You’ve guessed it—your AR decreases. 

Just keep in mind that AR represents the funds your business will collect, not the ones it needs to repay. As such, AR is listed as a current asset on your company’s balance sheet.

Why accounts receivable is so important

A significant part of your cash flow depends on receivables, namely on timely payments from customers. 

Properly managing your AR means you’re making sure you have a steady cash inflow to your business. Cash is king. You need it to keep your lights on, pay your employees, and invest in potential growth opportunities like launching a new product. Think of it as the fuel that keeps your business running. 

That said, it’s important to always put aside enough cash to cover at least two months of overhead expenses if you ever find yourself in a worst-case scenario.

Keep in mind that when handling accounts receivable, you’re often exposed to your customers’ sensitive information. This includes personal info as well as payment details. It’s your responsibility to protect this information by ensuring your database and email communications are secure. 

One way of doing so is by implementing the Domain-based Message Authentication, Reporting, and Conformance (DMARC) protocol, which plays a vital role in safeguarding sensitive financial information and maintaining the integrity of financial communications.

Another option is turning to digital payment solutions like Melio to manage your AR. This way, your customers’ payment details aren’t revealed and remain private and encrypted.

AI and accounts receivable: enhance efficiency and reduce bad debt

Just as it does for AP, AI can significantly improve the efficiency of your AR process.

By leveraging the power of AI and implementing a virtual development team, businesses can not only automate and streamline their accounts receivable processes but also enhance customer relationships and expedite the flow of cash.

Traditionally, the AR process involves manually generating and sending invoices, tracking payments, and following up on unpaid bills. These tasks can consume considerable time and resources, especially for small businesses.

That’s where AI-driven solutions come into play by reducing these manual processes. For instance, automated invoicing systems can:

  • Generate and send invoices without human intervention.
  • Track incoming payments and automatically update your books.
  • Send automatic reminders for late payments.

A 2021 survey found that a third of all businesses spend 51%-75% of their time following up on late payments. That’s mindblowing. 

With the help of AI, you can reduce these inefficiencies, increase your productivity, and get back to handling the aspects of the business you’re most passionate about. The result? More time to innovate and take your business to new heights.

Another area where AI shines bright is through predictive analytics. When you can predict customer payment behavior, you can better manage your cash flow.

How? Machine learning algorithms can analyze historical payment data to predict which customers are likely to pay late. This way, you can proactively manage these accounts and reduce the risk of bad debt.

Additionally, leveraging digital tools for bookkeeping allows you to maintain organized records, perform calculations, and generate insightful reports. 

You don’t necessarily have to pay big bucks for accounting software. Many small businesses, handle a lot of their bookkeeping on Excel. Utilizing built-in features like formulas and pivot tables, you can efficiently track and analyze your accounts receivable data, providing valuable insights for decision-making.

Use AI to streamline accounts payable and receivable

Weaving AI into AP and AR processes is a game-changer for the future of accounting. It can streamline these critical financial operations and allow you to focus on what you do best—growing your business.

Investing in automation, AI, and machine learning will keep your financial operations efficient and reliable, which in turn will help your small business succeed.

If you’re looking for a platform to help get you started with digitally managing AP and AR, try Melio. It comes with an easy-to-use interface and a host of features that’ll help streamline financial processes. Sign up to discover the difference Melio can make for your business.

Kelly Moser is the co-founder and editor at Home & Jet, a digital magazine for the modern era.

*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.