Every AP team knows the drill—you get the delivery, things look good, and then it’s time to settle the bill. That’s where vendor payments come in. It may look like a simple process, but a lot can go wrong if the timing or tracking is off. What you require is a clear process with proper controls to manage vendor payments and avoid last-minute surprises.
In business accounting, a vendor payment refers to the money paid to these suppliers after receiving their goods or services. These payments are tracked under a company’s accounts payable, which is the record of what the business owes to others.
Now, to put this in a deeper perspective, imagine a business in event planning. It works with caterers, decorators, and sound technicians. Once the event is done, the company pays them—all these are examples of vendor payments.
If you run a business, paying your vendors on time is more than just a formality—it can directly affect your reputation, costs, and how smoothly everything works. Here’s how:
A significant majority of suppliers (90%) prefer instant payments, which leads to supplier satisfaction and potentially improved delivery performance.
Early payment to vendors means sending their payment before the expected date. Some suppliers often reduce the total bill slightly—usually by 1.5% to 2%—if they receive the payment ahead of schedule.
You might think one or two delayed payments won’t matter. But those minor delays often lead to penalty charges that quietly chip away at your profits over time.
Being known as a prompt payer builds trust—not just with current suppliers, but also with new vendors and partners.
5. Trusted vendors stay committed during crunch time
When vendors trust you, they stick around. This lowers the chances of delays or stock shortages, especially during high-demand seasons.
6. Organised payments bring cash flow clarity
Having a clear payment process helps you know exactly how much money is going out—and when.
Paying a vendor might sound straightforward, but it usually follows a few steps to keep things in order.
Step 1: To begin with, confirm that the invoice has been received from the vendor. If not, then follow up with them immediately.
Step 2: Next, verify the delivery of goods or services by using the Goods Receipt Note (GRN).
Step 3: After that, match the details across the Purchase Order (PO), Goods Receipt Note (GRN), and Invoice to confirm consistency in quantity, item, and price.
Step 4: Then, review the invoice for accuracy—check item names, amounts, taxes (GST, TDS), and payment terms.
Step 5: Once reviewed, enter the invoice into your ERP or Invoice Management System on the GST portal with all relevant details.
Step 6: Following this, route the invoice for internal approval from the required department or finance authority.
Step 7: When approved, make the payment by the due date. Deduct TDS if applicable, and update the payment reference (like UTR number) in the Invoice Management System or ERP under the invoice record.
Step 8: Finally, store or archive the invoice, PO, and GRN within the system for future reference.
Here are a few ways to do that:
1. Strengthen Vendor Relationships
Maintain regular communication and treat vendors fairly to encourage better service and smoother coordination.
2. Create and Maintain a Vendor Master
Store all vendor details—GST, bank info, payment terms—in a centralised system to ensure clean data and faster processing.
3. Set Up an Approval Matrix
Define thresholds (e.g., Rs 50,000) and route high-value invoices to designated approvers before payment.
4. Monitor Vendor Compliance
Track key metrics like delivery timelines, service levels, and pricing changes on a set schedule (monthly/quarterly).
5. Follow a Vendor Offboarding Checklist
On closure, settle payments, return assets, revoke access, and archive records to prevent audit issues or data clutter.
6. Automate When Scaling
Adopt a Vendor Management System (VMS) as vendor count grows to streamline onboarding, compliance, and payment cycles.
Here’s how businesses can bring clarity to their payment tracking.
Step 1: Start by reviewing pending vendor payments in your accounting system or an updated Excel sheet.
Step 2: Match each invoice with its corresponding payment proof, like a UTR or payment advice.
Step 3: Coordinate between the purchase and finance teams to ensure smooth payment processing.
Step 4: Review your recent bank transactions to ensure they went through. This is a simple way to catch missed or partial credits.
Step 5: Set up alerts or calendar reminders so you don’t forget to check on pending or upcoming payments. It helps avoid last-minute rushes and vendor follow-ups.
Step 6: Keep a note of repeated issues—like delays, mismatched details, or missing approvals. Spotting these early makes it easier to fix what's slowing things down.
The MSMED Act, 2006, talks about how small suppliers should be paid. RBI also shared two separate instructions—IECD/5/08.12.01/2000-01 dated October 16, 2000, and IECD.No.20/08.12.01/2002-03 dated May 30, 2003. Together, they simply say: pay on time and keep things clear between buyer and vendor.
Here’s a breakdown of the key policies businesses must follow:
Most businesses begin with spreadsheets to track vendor payments. But as transactions grow, so do delays, errors, and manual work. A better approach is to adopt digital payment solutions that streamline approvals, improve accuracy, and reduce back-and-forth.
Key features to look for include:
As your business grows, vendor payments get complex. Identify gaps in your current process and choose tools that manage data, taxes, and scale efficiently. Avoid chasing emails—build a clear, trackable system. For practical tips, read Clear’s guide on automating invoice workflows and streamlining payments.
I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more