The basis for determining the best practice for using Shelby Financials Accounts Payable application may depend on the size of your staff and a few other factors. However, there are two primary rules that you should consider having in place. 1) Checks and balances involving more than one person for paying any invoice, along with proper separation of duties, and 2) whatever procedures you put in place should include reporting requirements. But, establishing best practices for AP may not be as simple as 1, 2. This post provides the following areas for your consideration. (NOTE: Separation of Duties will be covered in an additional blog post.)
- How do you start your day?
- Accounting method, Cash or Accrual?
- Use Financials’ Purchasing Management application?
- Need a process for credit card transactions approval?
How do you start your day?
This topic might sound a bit odd but stay with me because it is important. As a best practice, the person(s) charged with entering bills and invoices into the AP application should make the entries when the bills and invoices are received. So, when the mail comes, it is time to enter all received bills and invoices. Don’t forget to check your email during the entry time and add any bills and invoices received as well.
I know that some users collect all bills and invoices throughout the week, and enter them all on, say Monday morning. That probably is acceptable if you have a small staff and just a few entries each week. But, the point here is it is not a good idea to let the bills stack up without recording them in AP. As Bill Ballou, Shelby Training Manager, states, “Yes, keep a clean desk if you are keeping the books.”
Accounting Method: Accounts Payable allows cash basis or accrual basis accounting. You may want to check your current method and decide on the best approach. My take on Cash vs. Accrual follows:
- Cash Bases in Accounts Payable: If you choose to use cash bases AP entry, then the process is fairly simple. You enter bills and invoices into a batch, update the batch directly to be paid in the future and no journal entry is produced. When you are ready to pay bills and invoices, then select the detail lines you will be paying from the list of unpaid items and execute the transaction, which prints checks and/or creates an ACH file. It also updates General Ledger by affecting the bank account and the associated expense accounts.
- From my observations, this method of paying bills and invoices is used by organizations that only have a few items to pay per week/month, or by organizations that always pay all outstanding bills and invoices as soon as they are received.
- If you are using this method, then you want to make sure that your organization does not have a cash flow problem, plenty of money to pay all items as soon as they arrive. And, your work habits include always paying all items in a timely manner
- Cash bases accounting should not be used if the church is closely managing their cash flow. For example, your church uses a sweep account investment program, then you do not want to pay an item before it is due. Or, your church does not always have the funds to meet payroll and pay bills and invoices at the same time. In either of these cases, the best practice is to use the accrual method.
- Accrual Bases in Accounts Payable: If you choose to use accrual bases AP entry, the steps are about the same as in cash based with one addition. When a batch is updated, the program will create a journal entry that affects the payable liability account and makes a charge to the associated expense account. Then, when paying items the program reduces the payable liability account and posts against the bank account.
- From my observations, this method is used by organizations that need to manage their cash flow. The application allows users to produce a list of items needing payment by a given date, select all listed, then follow their in-house procedures to process selected payments.
- More importantly, using AP accrual settings provides better financial reporting. For example, those reading your Statement of Activity report will be able to see actual expenses charged to accounts prior to the items being paid. Using cash bases approach does not provide that information until the payment is processed. Likewise, those reading your Statement of Financial Position will always know the amount of outstanding, that is unpaid, bills and invoices.
- Using accrual accounting should make it easier to have transactions charged to the correct year at year-end.
- Stories: I just can not leave this section without sharing one of my many of stories. A few years ago we were contacted by the chairman of a church wanting to know what was wrong with Shelby software. Seems that all of the reports showed a good financial position, but the main Shelby user was complaining that it was hard to meet the payroll budget each pay period. I was assigned to investigate. So, while on site I started asking questions about their accounting procedure. I noticed that there were a few unopened envelopes on the desk and I ask what those were. As expected, they were new invoices. I just happened to ask, “Do you have any more invoices that are unpaid and not entered into Shelby?” She then produced a large stack of invoices from a bottom desk drawer. The oldest one was almost 1 year old. They probably would not have been in this situation had they been using proper accrual accounting procedures and entering all received bills and invoices in a timely manner.
Purchasing Management: The Purchasing Management application provides individuals who have rights the ability to enter a purchase request. That request then goes through an established approval path kicked off by an email to the first approver. The requester is notified by email when the request is either denied or approved. Once the item is purchased and received, then the Accounts Payable person can apply settings from the approved request to complete the entire process – request for payment.
- Approval Paths:
- Best practice in setting up approval paths is to not add a person to an approval path where that same person is also set as a requestor. In other words, an individual should not be able to both make a request and approve the same request. If you have that situation currently, then it should be corrected.
- Be sure that you have at least one individual who can approve all requests in the event that a final approver is out of touch and the purchase is necessary.
- Paying Approved Invoices:
- You should have an established procedure that verifies all invoices received match the approved purchase order, all invoiced items were received and in good order, and that the invoice is then approved for payment and escalated to the Accounts Payable person.
- The AP person should apply outstanding purchase orders to approved invoices during the payment process.
- The AP person should close completed purchase orders if the invoice fulfills the order request.
- The AP person should also attach a copy of the invoice to the AP entry. If your church’s procedure does not dictate electronic copies, then hard copies of the complete transaction should remain on file and easy to find.
- Periodic Review:
- The period budget status and the year-to-date budget status is displayed when making a request and when entering an AP invoice. The program encumbers funds for both outstanding approved purchases as well as paid items. Therefore, users should review all open purchase orders on a regular basis to verify old outstanding requests have been properly closed.
- At year-end review all old requests and close any that are no longer needed.
Credit Card Tracking: If your church issues credit cards for business expenses to employees, then the church needs to establish clear rules for using the card. The church also needs a procedure for verifying each credit card expense.
- Employees provided a church credit card should be told it is for church expenses only.
- If a church charge card is used for a personal purchase, then repayment of the amount should be required during the billing cycle of the purchase.
- Church employees should be required to provide receipts for all credit card purchases, along with a statement of the purpose of the expense.
- The AP person should review all receipts and enter the transaction into AP’s credit card section.
- The program does have a credit card statement import tool which creates invoice entries. While this approach makes it easier to get entries made, it does not replace the need for verification of the imported activity.