woman smiling setting up accounts payable

How to Set Up an Effective Accounts Payable System for Small Business

Richard Darcy

Picture this: it’s Friday afternoon and you suddenly realise a crucial supplier hasn’t been paid. Now you have to dig through emails, notes, and your bank feed to figure out what went wrong. If this sounds familiar, you’re not alone. Many small business owners struggle with managing accounts payable (AP), especially when relying on manual processes or basic spreadsheets. Late payments and lost invoices can damage supplier relationships and trigger ATO penalties.

Setting up an effective accounts payable system is achievable, even for a small business with limited resources. In this article, you’ll learn the five pillars of AP management, how to improve cash flow visibility, and stay compliant with Australian tax rules.

The Five Pillars of AP Management

the five pillas of accounts payable management

1 - Invoice Receipt & Verification

  • Invoices can arrive via email, paper, or supplier portals, so set up a consistent method for capturing them.
  • Use digital systems where possible to track invoices automatically and reduce errors or misplaced paperwork.
  • Verification should include:
    - Checking supplier details and ABN
    - Confirming amounts and correct GST coding
    - Matching invoices to purchase orders or delivery receipts when applicable

2 - Approval Workflows

  • Define exactly who approves invoices before payment is released.
  • Use multi-level approvals for large or unusual expenses.

3 - Payment Processing

  • Decide which payment methods you’ll use for (eg. EFT, cheque, or credit card)
  • Establish a consistent payment run schedule such as weekly, fortnightly, or monthly.

4 - Record Keeping & Documentation

  • The ATO requires financial records to be kept for seven years.
  • Use digital filing to store invoices, payment confirmations, and supporting documents.
  • Apply a consistent naming structure and organise files by supplier, category, or month for easy retrieval.

5 - Reconciliation & Reporting

  • Regularly reconcile payments against invoices to ensure nothing is missed or duplicated.
  • Generate AP aging reports to track outstanding bills and prioritise payments.

How to Set Up Your Accounts Payable System: 8 Steps

Step 1: Document Your Current Process

  • Audit how invoices are currently received (email, paper, portal).
  • Review payment methods and schedules.
  • Note recurring pain points like missing invoices or manual errors to find room for improvement.

Step 2: Establish a Chart of Accounts

  • Set up expense categories suited to your business structure (sole trader, PTY LTD).
  • Include correct GST codes for each category.
  • Align everything with ATO requirements to make BAS preparation easier.

Step 3: Create Supplier Management Procedures

  • Onboard suppliers using a standard information form.
  • Maintain updated vendor files, including ABN verification.
  • Record preferred payment methods and agreed payment terms.

Step 4: Design Your Approval Workflow

  • Define approval thresholds (e.g., invoices over $500 need manager approval).
  • Create an approval matrix showing who signs off on which invoices.
  • Ensure everyone understands their role in the sign-off process.

Step 5: Set Up Invoice Processing Procedures

  • Decide on accepted invoice receiving methods (email, portal, paper).
  • Standardise data entry to maintain accuracy and consistency.
  • Use three-way matching (PO, receipt, invoice) for larger purchases.

Step 6: Establish Payment Terms & Schedule

  • Negotiate consistent payment terms with suppliers (such as 14 or 30 days).
  • Create a regular payment run calendar to avoid last-minute rush.
  • Take early-payment discounts where cash flow allows.

Step 7: Implement Payment Procedures

  • Set up secure payment methods in your banking or accounting system.
  • Reconcile bank accounts regularly to catch issues early.
  • Require dual approval for high-value or sensitive payments.

Step 8: Create Reporting & Review Processes

  • Complete monthly reconciliations for accuracy.
  • Track key AP KPIs such as Days Payable Outstanding (DPO).
  • Review your AP workflow regularly to identify improvements.

Manual vs. Automated: Selecting Your AP Tools

When to Use Spreadsheets

For very small businesses processing fewer than 20 invoices per month, spreadsheets can be a simple and cost-effective solution. While they can be error-prone and don’t scale well as your business grows, they’re easy to set up and customise in the beginning phase of your business. You can even find free AP templates to get you started.

Cloud Accounting Software

    Dedicated AP Automation Tools

    Consider using dedicated AP automation tools if your invoice volume is high or you need multi-user approval workflows. When evaluating options, check that the software integrates seamlessly with your existing accounting system. Also, weigh the potential return on investment in terms of time saved and fewer errors to ensure it’s worth the cost for your business.

    Key Features to Look For:

    • Mobile capability
    • Automatic GST coding
    • Reporting dashboards
    • Multi-user access

    10 Best Practices for Managing Accounts Payable

    circled on the calendar to remember to pay
    1. Set standard payment days, such as every Friday, so you’re not constantly reacting to due dates. A consistent schedule keeps cash flow predictable and prevents last-minute scrambles.
    2. Take advantage of early payment discounts whenever your cash flow allows. Even small percentage savings can add up significantly over a year.
    3. Use purchase orders for larger expenses to keep commitments clear and avoid disputes later. A PO provides a written agreement before money is spent.
    4. Implement segregation of duties so no single person controls the entire payment process. This reduces the risk of errors and fraud.
    5. Reconcile supplier statements regularly to catch missing invoices, duplicate charges or unpaid bills before they create problems.
    6. Maintain clear communication with suppliers by confirming receipt of invoices and resolving queries quickly. Strong communication helps prevent misunderstandings and delays.
    7. Review and optimise your payment terms annually. As your business grows, you may be able to negotiate better terms or extended payment periods.
    8. Keep digital copies of all invoices to meet ATO record-keeping requirements and make retrieval easy during audits or reviews.
    9. Monitor your AP ageing report weekly to stay across upcoming due dates and spot potential cash flow issues early.
    10. Schedule regular process reviews to refine your system and keep it running efficiently as your business and invoice volume change.

    Troubleshooting Your Accounts Payable System

    Challenge 1: Lost or Missing Invoices


    Solution: Implement a digital receipt process where all invoices; email, portal, or paper; are scanned or uploaded to a central system immediately, ensuring nothing slips through the cracks.

    Challenge 2: Duplicate Payments


    Solution: Use a clear invoice numbering system and three-way matching (invoice, purchase order, delivery receipt) to catch duplicates before payments are approved.

    Challenge 3: Late Payment Fees


    Solution: Set up a payment calendar with reminders and automate recurring payments where possible to ensure invoices are paid on time.

    Challenge 4: Poor Supplier Relationships


    Solution: Maintain regular communication, provide clear payment timelines, and notify suppliers promptly of any delays or changes.

    Challenge 5: Month-End Reconciliation Issues


    Solution: Conduct weekly mini-reconciliations to keep your records up to date and catch discrepancies early, making the end-of-month process much smoother.

    Staying ATO Compliant with Your AP System

    • GST on supplier invoices must be correctly recorded
    • Keep financial records for seven years
    • Ensure tax invoices meet ATO requirements
    • Prepare BAS accurately and on time
    • If using contractors, comply with Single Touch Payroll reporting

    Helpful ATO Resources:

    ATO Small Business resource
    ATO-recommended record-keeping guidance and templates

    Next Steps

    Setting up an effective accounts payable system is achievable, even for small businesses managing their own finances. Just remember:

    • Streamline invoice receipt, approvals, and payments
    • Keep thorough records for ATO compliance
    • Use software or templates to reduce errors and save time
    • Review processes regularly to optimise cash flow

    Within a few months, you can transform a messy AP workflow into a system that runs smoothly, keeps suppliers happy, and supports your business growth. For templates, guides, and support, visit Darcy Bookkeeping Accounts Payable. If you need some extra help, send us an enquiry or call us on 1300 728 875.

    FAQs

    How do I create an accounting system for a small business?


    Start by documenting your current processes, setting up a chart of accounts, and implementing a workflow for invoices and payments.

    How do I structure an accounts payable department?


    Structure an accounts payable department by assigning clear responsibilities for receiving invoices, approving them, processing payments and maintaining records. Support these roles with documented workflows and strong internal controls to keep the process accurate and efficient.

    What is the best KPI for accounts payable?


    Days Payable Outstanding (DPO) is commonly used to track payment efficiency and cash flow impact.

    How can I make AP more efficient?


    Automate invoice capture, standardise approval workflows, set regular payment runs, and use reporting to monitor bottlenecks.

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