All about Vendor Payments

By Annapoorna


Updated on: Sep 20th, 2022


5 min read

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Vendor payments, also called supplier payments, forms an integral part of accounts payable management. It is one of the most common money transactions for any business and, therefore, must be well-managed. This article explores the definition of vendor payments, the process and solutions.

Definition of vendor payments and importance

Making vendor payments is the final action in the procure-to-pay or purchase-to-pay cycle of an organisation. Vendor payments are defined as paying external suppliers or vendors of a business to purchase goods, services, or both, by establishing a feasible process and system that suits the organisation.

It begins with a business concern placing an order to purchase goods or services from an external vendor, supplier, or provider. It creates a purchase order for the vendor. Once it receives the goods or services ordered, the business will get an invoice from the vendor. In the final step, the business makes a payment towards this invoice, termed a vendor payment. 

Prompt and systematic management of vendor payments will ensure a stable relationship with the suppliers or vendors. It also ensures that the business can clear all its liabilities before the invoice due dates approach, without facing the risk of interest or late payment penalties. It essentially fosters a strategic partnership with a pool of vendors, promoting business growth in the long run.

Vendor payment management becomes crucial where the organisation operates in the following conditions, to mention a few.

  • Vendor payments in different currencies
  • A vast number of vendors to handle
  • Varying credit period lengths to track
  • Multiple branches and units from which payments are made, needing cash flow management,
  • Sale and purchase transactions with the same vendor, needing offsetting of liabilities,
  • Need for timely payments to ensure compliance with the MSME Act and GST laws.

Process of vendor payments explained

Vendor payments may be processed by the accounts payable team in a large entity. Likewise, it may be carried out by a small number of people in a medium-sized business or by the accountant or the owner in a small business or professional concern.

The following are the steps involved in the vendor payment process-

Step 1: Collect the invoice from the vendor or supplier if the vendor is yet to send it.

Step 2: Verify the completeness and accuracy of the purchase invoice received. Check for the approval of the vendor’s authorised signatory.

Step 3: Account for the invoice on the ERP or accounting system by making the necessary journal entry. Also, understand, calculate and account for any taxes such as TDS under the income tax law and any input tax credit (ITC) under GST, where it applies.

Step 4: Deposit TDS with the government within the due dates defined by the Income Tax Rules in the required form, where it applies. Also, conduct reconciliation of GSTR-2A and GSTR-2B with the purchase register at regular intervals. Follow up with vendors if they have not uploaded the invoices on which you can claim ITC and nudge them to report them in their GSTR-1. Report such ITC in the GSTR-3B return filed, either monthly or quarterly, as applicable.  

Step 5: On or before the invoice due date, take the approval of the authorised signatory of your business concern to initiate or make the invoice payment. 

Step 6: Make the vendor payment, net of the TDS deducted and record it in the books of accounts using a payment voucher. Pay using the mode agreed upon beforehand between the vendor and your business concern. It can be UPI, bank transfers, e-wallets, e-commerce payment gateways, mobile payments, cash, etc. Also, collect the receipt from the vendor and record it in the books of accounts upon successful payment.

Note that you can automate several steps mentioned above using a cloud-based vendor payment system, sometimes built into your ERP as well.

Solutions to effectively manage vendor payments

Most businesses use spreadsheets for calculating TDS at the time of vendor payment. But now, with companies undergoing a digital transformation, there is more dependency on innovative, tech-based solutions to simplify business operations. 

The benefits of tech-based solutions for vendor payment management are as follows-

  • Allows automation of approvals within the timelines
  • Ensures audit-ready data by keeping a digital trail
  • Simplifies bill payments with less manual intervention
  • Provides a smooth tracking of cash flows for your organisation

First of all, a company must learn about the solution’s workflow, its pros and cons before adopting and implementing it. It needs the teams to look into the existing vendor payment process, gaps and to solve them. The time and cost involved in vendor payment processing must be studied.

Some businesses are heavily dependent on modes other than digital payments. The business owner must be apprised of the benefits of digital payments, the risks involved and ways to ensure a smooth payment channel before the decision is made.

After that, choose a solution that has scalable features and which precisely meets the business criteria. It must allow workflow automation and should provide audit trails. If you have a deep pocket, go for integrated solutions. Integration ensures non-duplication of invoices and payment entries. Involve the teams that will be affected by the change in the setup process.

With the vendor payment system put to use, you can notice drastic changes in the team’s productivity and efficiency. Tax and vendor management becomes more effortless and error-free. 

Maintain and update the master data of vendors, tax identification numbers, bank account data for payments, contact information, and credit periods allowed as per contracts. It enables the automation of most tasks given in the vendor payment process.

About the Author

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


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