Payments

Plugging the Leaks in Your Accounts Payable Process

If your company is still processing vendor invoices manually, you are leaking cash out of your organization. In fact, it is surprising how much money even a small company can lose when you add up the cost of late fees, lost discounts, fraudulent bills/payments, and an extended payables cycle. Add to that the cost of staff time spent handling paper documentation, the physical movement of paper invoices through the approval process, and the storage costs of maintaining paper files, and the case for automating the AP workflow almost makes itself. In fact, time and money are the two most common pressures that drive companies to automate the AP department[1]. The traditional paper-based process presents lots of opportunity for improving workflow and reducing costs:

High Transaction Volume and Variety: Today’s payables department receives invoices in a variety of formats including faxes, email attachments, EDI or XML supplier invoices, and more. In addition to the cost of storage, maintaining paper trails and finding relevant documents take a heavy toll on AP resource time.

Inconsistent Capture of Data: With so many different formats, identifying the right data to enter for your financial system becomes a game of 20 questions. Is this one of our approved vendors? Where’s the invoice number? Do we have a PO? Are there detailed line items? How do we pay this vendor – ACH? Check? Are there discounts for early payment? What are the late payment penalties? Who needs to approve this?

Manual Tracking of Approvals: Once an invoice leaves the AP department, its journey to approval becomes yet another exercise in tracking. A manual process gives little or no visibility into where an invoice is in the payment and approval cycle – is it stuck in an inbox somewhere? Someone’s briefcase? Tracking the invoices that the AP department receives directly is work enough but what about invoices that come in through a field office or an employee other than the payables clerk? The risk of languishing (or lost) invoices increases exponentially with each point of receipt and each step in the approval journey, especially in businesses with multiple locations.

Lack of Business Insight and Visibility: In addition to ensuring the bills get paid, the AP department is expected to reduce costs, comply with regulatory agencies, and improve performance. Because payables is a critical source of data for budgeting, planning, and cash forecasting, problems in the process can create gaps in what the AP department can report, in real-time, to executives. Lack of visibility also introduces the risk of understating expenses and overstating income at month end. Visibility like this is nearly impossible to achieve in a manual workflow.

Plugging the Leaks in Your Accounts Payable Process

Unfortunately, many companies are still suffering without an automated payables process, despite studies by independent analysis groups that prove its worth. A report by the Institute of Finance and Management (IOFM)[2] showed that only 16.9% of survey respondents had a fully automated accounts payable solution in place. Automation presents significant benefits in cost savings and improved efficiency. If you’re still using manual methods in your AP department, here are six reasons why you should look seriously at an end-to-end Accounts Payable solution.

1. Reduce transaction costs: From receipt to approval, the measurable benefits of automating the AP process can be captured in three key indicators: the time to process each invoice, the cost of processing, and the rate of discount capture. Sample results for organizations with and without fully automated AP solutions[3] are presented below:

 

Invoice Processing Time (Days)

Invoice Processing Cost (USD)

Early Payment Discount Capture Rate (%)

Best in Class (Top 20% of aggregate performance scorers)

4.1 days

$3.34

90%

Industry Average (Middle 50% of aggregate performance scorers)

6.1 days

$6.29

47%

Laggards (Bottom 30% of aggregate performance scorers)

16.3 days

$16.67

18%

 

     

2. Improve quality across entire cycle: From initial receipt, data capture and entry through payment, the manual AP procedure offers lots of opportunities for mistakes. Discrepancy resolution in AP is costly – in dollars, productivity, cash flow, and more subtly, in the reputation of the organization. A simple duplicate payment error, for example, may require as many as ten steps – start to finish – to investigate, find supporting documentation, take corrective action, manage the vendor relationship, and deal with the impact of the delay on the rest of the organization. Aside from the cost impact of payment delays or over-payments, the labor cost can be considerable. Automation dramatically reduces the instance of errors in AP processing, giving you real-time invoice status and triggering alerts that escalate issues or problems before others outside the department notify you. With increased visibility and control over the entire process from receipt, data capture, ERP entry, to payment, an automated workflow positions your AP department for straight-through, error-free processing.

3. Eliminate Cash Leaks from Late Fees and Lost Discounts: Aberdeen Group reports that as many as 22% of suppliers offer early payment or dynamic discount terms to buyers. Yet, according to their 2013 AP Automation[4] survey, companies who have not implemented an automated solution capture less than 20% of these discounts. A similar study by the Institute of Financial Operations in 2013[5] reported 42.5% of respondents realized less than 10% of early payment discounts. Late payments, too, are a primary source of cash leaks from late fees. Often overlooked, however, is the contribution late payments make to vendor dissatisfaction. Automation reduces the likelihood lost discounts and late fees and keeps vendors happy by ensuring that invoices are paid accurately and on time.

4. Improve Focus: With an automated solution handling the day-to-day and on-time invoice payment process, AP staff is available to isolate and manage high-value invoices, allowing them to focus on activities that will impact cash management,

5. Immediate Access to Approvals: An automated workflow for approvals delivers invoice data electronically to approvers through a variety of methods – emails, alerts, and reminders. Approvers have immediate access to relevant information to make an informed decision on approval. Approval workflow offers insight into where an invoice is in the approval process, so you can easily spot stalled or delayed approvals that might otherwise result in financial risks or lost discount opportunities.

6. Improve Audit Controls: Companies with strong audit controls experience a much lower rate of exceptions in transaction processing and meeting compliance regulations and policies. In fact, an Aberdeen Group study[6] found that best-in-class organizations, with automated AP processes in place, experienced 85% fewer exceptions in compliance and transactions processing than those with no solution in place.

invoicing

The Not-So-Obvious Benefits

We’ve talked about the obvious benefits, but there are other, more intangible ways to gain efficiencies by automating the AP process. For instance, automation presents new opportunities for collaboration, both inter-departmental and with outside suppliers. Many automation solutions provide portals for your staff and your vendors to participate in the process, delivering up-to-date status information on invoices and payments. And speaking of payments, an automated solution lends itself to electronic payment processing, further reducing the cost per transaction by eliminating paper checks. As your business evolves, through mergers, growth, or acquisitions, an automated system responds far more quickly to operational changes, accommodating distributed functions, multiple locations, and increased transaction volume. Finally, the elimination of low-value work through automation leaves AP personnel free to staff services that represent a higher value to the business.

Don’t Use Duct Tape to Stop the Leaks

While it’s a great all-purpose solution for a quick fix, a DIY approach to patching the leaks in your manual AP process is about as useful as duct tape on a leaky pipe. It might work temporarily, and partially, but it doesn’t capitalize on all the potential value of an automated solution. A successful end-to-end AP automation solution not only stops the cash leaks, but increases visibility, speeds processing, and offers direct control of the entire workflow. It also transforms the role of your AP department from an exception and problem handling cost center to a company’s watchdog for policy and regulatory compliance, quality assurance, and financial analysis.

[1]Source:   2011 AP Automation Study, International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), National Association of Payables & Purchasing (NAPP), and The Association for Work Process Improvement (TAWPI).[2]Source:   IOFM-AP Cloud Study 2013, Institute of Finance and Management [3] Source:  2013 e-Payables: Payment Automation for Operational Excellence Survey, The Aberdeen Group [4] Source:  2013 From the Shadows to the Forefront:  AP Automation and the Strategic Vision, The Aberdeen Group [5] Source: 2013 AP Automation Study, The Institute of Financial Operations [6] Source:  2009 The CFOs View of Accounts Payable:  Cash is King, The Aberdeen Group

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