Rethinking Your Payables Process: The Key to Enhancing Your Accounting Department

The payables process at your Public Housing Authority can be overwhelming considering the amount checks being processed each year. When reviewing what is being recorded in the general ledger, the majority of the expenditures are from payables. Additionally, there is also activity from payroll and journal entries with miscellaneous activity coming from tenants accounts receivable, fixed assets and inventory. Once the payables process becomes inefficient, the accounting department can become inefficient and create problems in other areas. If the majority of the expenditures are recorded incorrectly, it will require a tremendous amount of account analysis to research the errors and make correcting entries – which is why the payables process is so critical. This affects monthly and annual reporting and can impact subsidy and financial ratios for the Public Housing Assessment System (PHAS). Rethinking your payables process and following the below steps can set your organization up for success.

Step One: Let’s begin with the basics

The PHA will procure a good or service. The good or service will be delivered. The PHA will receive an invoice. The invoice is routed to get approval(s), and then the invoice is paid. Seems simple, right? But, since a PHA can have several federal funds, the PHA must determine if a cost is eligible and allocate it in accordance with their cost allocation plan. For a cost to be eligible for a federal program, it must meet the following five standards.

  • Is the cost allowed? The cost must be in compliance with laws, regulation and guidance.
  • Is the cost documented? There must be proper documentation for approvals and payment for procured costs.
  • Is the cost equitable? The cost must be true, equitable and maintain compliance with the cost allocation plan.
  • Is the cost necessary? The cost must be necessary, meaning it meets a programmatic purpose of the federal award (LIPH, HCV, etc).
  • The service or goods must be procured at reasonable cost.

Step Two: Invoice Submission

Once the service or goods have been delivered, the vendor will have to submit an invoice for payment. BDO recommends that all invoices be submitted to an email address at the PHA such as, [email protected]. There may be some exceptions for certain vendors, such as utility companies, but the PHA should maintain a strict adherence to this policy and incorporate in all contracts with limited exceptions for vendors. Even current vendors should be required to submit invoices to an email address, if they aren’t already doing so. 

The PHA should enforce this policy by asking the vendors to resubmit their invoices using the email address and inform vendor know that if the invoice is not submitted correctly, it will be paid late or considered not received for payment. The invoice must also include a purchase order number - this is very important. Many software systems link the purchase order with a specific account in the general ledger to record the expenditure. Alternatively, the purchase order number corresponds with a distribution table to allocate the cost to various funds and accounts in the general ledger. 

Step Three: Invoice Approval

Since the invoice is being received electronically, with a purchase order number, it can be automatically routed to the approvers electronically in their software. There is no paper being printed and no putting invoices in employees’ mailboxes waiting for approvals until they are back in the office. Employees can approve and automatically route invoices for approval using their software system, regardless of where the employee may be working that day. Once the invoice approvals are completed, the invoices automatically flow to the accounts payable module for payment.

Step Four: Payment Processing 

Typically, PHAs exert a tremendous amount of effort for little return on efficiency in this area. Some PHAs pay vendors weekly, twice a week or every other week. BDO’s recommendation is for the PHA to pay vendors on the 1st and 15th of each month, which will accomplish two objectives: 

  • Reduce the time it takes to complete bank reconciliations 
  • Enable better cash management

Bank reconciliations are an important internal control process to maintain the integrity of cash and it should be as efficient as possible. With checks being disbursed on the 1st and 15th, or as close as possible to these days, the majority of the checks clear the bank, reducing the chance of inherent risks of errors and expediting the bank reconciliation process. The next step is to notify vendors of the payment scheduled, indicating check cut off dates, so vendors have a clear understanding of when invoices need to be received to process their payments timely. There is an understanding that there will be intermittent check runs as needed for special checks and maybe an additional check run at fiscal year-end towards the end of the month to maximize the Accounts Payable ratio of the MASS. 

In lieu of using paper checks, an alternate method to pay vendors and HAP would be Automated Clearing House (ACH) payments or electronic check payments. These transactions clear the bank immediately, making the bank reconciliation process much more efficient, providing real-time cash balances at the bank. Try to transfer as many vendors, including Section 8 landlords, to ACH. ACH payments will reduce productivity costs from printing checks, stuffing envelopes, check signatures and reducing costs for postage.  New policies and procedures will be used to implement ACH payments, but immediate results will be had. 

Step Five: Train on New Processes

The final step of the process is to educate the staff and vendors on the new disbursement timeline. This will require internal training and external communication/training to the vendors. Maintaining compliance with internal invoice processing cut-off dates is not easy. Be prepared to enforce the process because it is new and different. Limit exceptions as much as possible. 

Transforming the accounting department will require hard work and follow-through at all levels, but the return on the investment will be clear, leading to increased productivity and reduced costs.