What are vendor payments? Methods and workflow best practices

Managing your vendor payments well helps you control your outgoings better, so you can avoid last-minute payment scrambles and unplanned working capital shortfalls.

According to a QuickBooks survey, 43% of small business owners say cash flow is a problem for their business—one more reason to manage vendor payments strategically.

Find out how to create an accounts payable workflow that helps strengthen vendor relationships and improve cash flow. We’ll also explore common types of vendor payments to help you decide the most effective way to handle your bills.

Jump to:

• How does the vendor payment process work?
• Common vendor payment methods
• 5 steps to improve your accounts payable workflow
• Why vendor payment management matters for your business
• Challenges of the vendor payment process
• Choose the best payment setup for your business

How does the vendor payment process work?

Vendor payment processes help businesses pay their invoices on time while preserving working capital. They also reduce accounting errors and save time, and they keep your books accurate for greater internal control and audit compliance.

Here is a simple, six-step workflow you can implement to manage vendor payments effectively:

1. Receive the vendor invoice

Most issues start here because invoices go to the wrong person, or they lack key information like purchase order (PO) numbers. Set up a single email box or online portal for vendors to send their invoices to, and ask your staff to forward any stray invoices to a named person to avoid delays and duplicates.

2. Review and verify the invoice

Check that the invoice matches the product or service you ordered and received. Compare it with your PO and delivery records to spot invoices that have incorrect totals, the wrong items, or any missing documentation like receipts or timesheets.

3. Approve the invoice

Approvals create accountability in businesses. Without it, you risk paying for things you didn’t order, overpaying, or missing instances of fraud. Set up approval routing and role-based permissions (like a CEO, finance lead, or department head) so that only authorized people can approve spend.

4. Schedule the payment

Don’t just pay on the day you get the invoice or on the due date. Instead, schedule payments based on your cash flow forecast to avoid working capital shortfalls.

If you do want to pay early, pay vendors that offer discounts for early settlement first. Record each payment date in your accounting system to ensure your payables and forecast align with each other.

5. Send the payment

Keep proof of payments you make so you and your vendor can track them. Along with remittance details, it’s important to record the exact amount and date. You should also always include the invoice number so your supplier can match the payment to your account.

6. Record and reconcile

With the payment sent, record it in your accounting software and match it to your invoice. Then, reconcile with your bank or card statement to check that cleared transactions agree with your recorded payments. This helps to close out bills, avoid duplicate entries, and catch errors early.

Common vendor payment methods

Many banks and financial institutions offer multiple ways for clients to pay their suppliers, giving companies greater flexibility in how they manage their accounts payable process.

Here’s a quick overview of the most common, followed by a more detailed summary of the five major ways to pay:

Credit cards

Credit cards and charge cards are useful for paying recurring bills, covering emergency payments, and making online purchases. Many accounts now connect to your accounting software for real-time tracking and easy reconciliation.

Their key advantage is deferred payment. Charge cards come up with up to 56 days to repay, and credit cards allow installment payments. They also offer fraud protection and reward points. The main drawbacks are high fees, interest changes, and access that can be withdrawn at any time.

Checks

As a small business payment method, checks are still popular. They still make sense for companies that prefer traditional payment methods, as well as those working on legacy accounting systems.

The main drawback is speed - checks take days to clear. Wrong amounts and missing payee details can cause delays, and fraudsters can forge signatures.

Wire transfers

Wire transfers are best for urgent or high-value payments where speed matters, like a time-limited bulk inventory purchase. They’re also useful for paying vendors that don’t accept ACH or card payments.

Fees on wire transfers are typically much higher than those for other payment methods, like accepting credit cards. You also need to be precise when making a wire transfer to avoid rejected payments, and once sent, they’re hard to cancel or reverse.

ACH

Automatic Clearing House (ACH) payments are standard for both predictable, routine vendor payments and batch payments. ACH transfers cost less than wires and cards but can take up to three days to process. Some banks offer same-day ACH payments for an additional premium.

Many banks and third-party services, like QuickBooks Bill Pay, offer ACH transactions. With Bill Pay, you can automate recording and paying bills as part of a built-in Accounts Payable solution.

Virtual cards

Virtual cards are single-use or limited-use credit cards. Developed for online use, they are a new way to manage your bills that provides better fraud protection because the vendor never sees the main card number. They're often linked to bank accounts or accounting platforms, making it easy to set spending limits, expiry dates, and category restrictions.

They also provide structured transaction data containing information on who made the payment, what it was for, and when it occurred, so it’s much easier to match payments back to the original invoice or expense entry.

5 steps to improve your accounts payable workflow

Improving your accounts payable (AP) workflow gives you more control over your business, reduces the risk of fraud and non-compliance, and keeps your vendor relationships strong.

Here are five ways to improve vendor payment processing in your business:

Step 1: Streamline your vendor onboarding process

Collect relevant vendor details upfront, like their banking info, W-9, remit-to details, billing contacts, and how they prefer to pay. This information will:

• Help you pay vendors on time without error
• Advise you of the payment method each vendor prefers
• Reduce back-and-forth time with vendor billing teams

Step 2: Centralize your payment management

Consolidate your invoices, approvals, and payment tracking into one system.

Vendor payment software reduces delays in invoice handling and payment processing, as well as improving visibility. It also makes reporting on outgoing cash, upcoming payments, and historical spend easier and more accurate.

Many cloud-based accounting software platforms, like QuickBooks, contain or can sync with vendor payment tools. This helps you keep consistent, compliant bookkeeping records without having to transfer data between different apps.

Step 3: Protect your business from AP fraud

AP fraud affects 79% of organizations, according to the Association for Finance Professionals. Reduce AP fraud risk by building these into your vendor payment processing system:

• Segregated duties: Set rules on who enters bills into your system, who approves expenditure, and who authorizes payment releases.
• Approval limits: When invoices are over a given amount, introduce extra reviews to make sure they’re reviewed by senior staff.
• Verification protocol: If a vendor notifies you of a bank account change or other payment details, get in touch with your contact to double-check the change independently.
• Red-flag review: Watch for duplicate invoices or vendors ramping up pressure on you to pay as quickly as possible.

Step 4: Negotiate clear payment terms upfront

When supplying a new vendor, negotiate the best payment terms for your organization on matters like due dates, early-pay discounts, milestones, and any late payment fees.

This is especially useful if you are a contractor or work on projects with multiple stages or variable timelines. These terms reduce the potential for future disputes and help improve your cash flow planning.

Step 5: Automate key parts of your AP workflow

Vendor payment automation is when you use software to schedule, approve, and send payments to suppliers.

Start by setting up recurring payments for regular bills, creating payment reminders to avoid late fees, and deciding who needs to approve what before funds leave your account. This approach results in fewer manual errors, less time spent chasing approvals, and faster month-end closes.

QuickBooks helps you automate many of these steps with built-in tools for bill capture, approvals, and payment scheduling. You can also sync vendor payments and automate recurring payments to improve accuracy and reduce manual entry.

Why vendor payment management matters for your business

Well-managed vendor payment processing helps you to run your day-to-day operations more smoothly. Your stock is more likely to arrive on time, the services you need won’t be interrupted, and you’ll stay on the good side of suppliers. This will also help you manage cash flow more predictably.

Other benefits of a well-managed vendor payment process include:

• Stronger vendor relationships: Paying your suppliers on time builds trust, avoids service disruptions, and can lead to better terms or priority service.
• Fewer supply chain hiccups: Smoother flows of cash through your supply chain mean fewer delays in deliveries, production, or project timelines.
• Better financial decisions: Keeping your AP accurate and current makes forecasting and budgeting easier.
• Less risk of fraud: Putting in place simple internal controls can catch suspicious activity like duplicate invoices earlier.

Challenges of the vendor payment process

Even in well-organized businesses, the vendor payment process can present a number of challenges, including:

Choose the best payment setup for your business

The more your business grows, the more important it is to have a streamlined vendor payment workflow. Using efficient payment methods can help you fine-tune the process, but the real game-changer is finding the right tool to handle your accounts payable process.

Manage your bills from approval to payment, all in one place, with QuickBooks accounting software.