Making money is the primary goal of any company—but earning is only half the battle. The other half is reducing expenditures that eat revenue. While overhead spending of up to 35% of annual revenue may be considered normal, this percentage is only relevant in relation to net profit. If you’re only looking at 5% profit after all is said and done, you need to rethink your spending strategy.
One of the first areas to look? Identify the inefficiencies in your process. No matter how much money your teams bring in, you can’t outrun a process that’s creating cash leaks.
Accounts payable (AP) is one of the best areas to start improvements. Traditional AP departments limp along with expensive challenges such as invoice exceptions, data entry errors, ineffective fraud prevention, lost cash, inefficient data storage, and slow processing.
Companies are turning to automated accounts payable procedures to eliminate redundancies and improve organizational efficiency. As of 2019, the AP automation market was worth $1.9 billion—and at a compound annual growth rate (CAGR) of 11%, the sector is projected to reach a valuation of $3.1 billion by 2024.
Demand for controlled user access, which helps reduce payment-related fraud, is one of the primary catalysts for this growth. However, the sector faces challenges such as a lack of awareness of AP process automation and digital literacy skills. As digital literacy and awareness of AP automation increase, the growth will only continue.
In this article, we will look at some key aspects of the AP process:
- How the traditional accounts payable process works
- What an automated accounts payable process looks like
- The benefits of accounts payable automation
What is the accounts payable process?
Business operations are based on the flow of expenditure and revenue within a company. Accounts payable procedures manage the expenditure and purchasing side of things. Their primary function is to ensure company expenses are paid.
The AP process involves capturing data on invoices for all invoice formats (digital and paper), ensuring invoices are coded with the correct accounts and costs, matching the invoices to purchase orders, and processing the payments.
The manual nature of the traditional accounts payment approach increases the risk of human errors, redundancies, and time wasted. With inefficient processes, the procure-to-pay (P2P) cycle can take up to three months.
The consequences of inefficient accounts payable
Disorganization in the accounts payable process can lead to many negative business impacts:
- Fines and late charges
- Vendor relationship challenges
- Employee burnout and turnover
- Supply chain and distribution delays
- Manufacturing and shipping disruptions
- Credit and funding issues
- Cash flow fluctuations
There are also other challenges with manual accounts payable processes:
- Expense reporting and tracking
- Susceptibility to risk and third-party fraud
- Increased spending on AP team wages
- Lack of data visibility
- Communication delays
- Payment exceptions
What does an automated AP process do?
An accounts payable team is responsible for collecting invoices, confirming three-way matching, and conveying payment. Due to the number of stakeholders involved, cycle times for purchasing and payment are usually long and riddled with challenges.
An automated accounts payable process eliminates the bottlenecks. Through automation, your accounts payable department benefits from increased efficiency and accuracy, cost savings, and reduced exception rates.
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7 Major benefits of automating your AP process
Change can be hard, but it’s necessary. In a volatile economic landscape, enhancing efficiency in your accounts payable procedure plays a crucial role in your potential growth.
Here are seven key areas where AP automation improves the process:
1. Time savings
Time is money, yet nearly two-thirds of companies are throwing away AP budgets with manual processes. Automated processes make it possible to do more repetitive tasks with fewer AP staff hours. Many tasks can be converted into touchless processes through automation:
- Scanning vendor invoice headers and line-item data using optical character recognition (OCR)
- Routing purchases orders and payables through predetermined business processes
- Handling three-way matching with no human involvement
2. Streamlined invoice processing
Approximately 3.6% of all invoices entered manually have errors or discrepancies. Through automation, your purchasing department can set internal controls that make its AP processes streamlined and accurate, requiring minimal oversight. This increased efficiency comes with several key benefits:
- Virtually no human errors
- Ease of budgeting, sending and receiving reports, and auditing and preparing financial statements
- Reduced risk of overpaid, miscoded, duplicate, or late payments
- Automatic exceptions flagging for invoice approval, review, and reconciliation
3. Greater operational control
With the traditional AP process, it’s easy to lose track of invoices due to miscoded documents or misplaced paperwork. With such limited operational control, business owners end up paying late fees for missing or delayed invoice payments.
Accounts payable software solutions eliminate these challenges in a few ways:
Automation: Creating automated workflows for accounts payable procedures eliminates invoice exception risks. Since everything takes place in the system, losing invoices becomes a thing of the past. The platform handles invoices in the order your team uploads them. The time saved through automation can instead be directed toward other activities that increase organizational efficiency.
Exception handling: With the process improvement that comes with automation, resolving errors in vendor payments is easy and fast. If there is a problem with a particular invoice, the system will automatically flag and reroute it to the appropriate person immediately.
Risk avoidance: Fraud is one of the primary risks of manual payment processes. Identifying fraudulent invoices is an elusive task, as is rectifying them once an incident occurs. A manual system makes it difficult to conduct thorough audits. In an automated accounting system, all the necessary invoice data is in one place. Unverified or suspect payments are easier to identify and investigate.
4. Discounts on early payments
Delays in the accounts payable approval process lead to supplier fines. Conversely, timely payments result in discounts. While 42% of respondents to a recent study cited early payment discounts as a top priority, achieving this objective with a manual process is nearly impossible.
An automated AP process streamlines invoice processing, allowing you to take full advantage of early payment discounts.
5. Integration solutions
Operational efficiency is improved when your procurement function integrates with your larger tech stack. Through integration, accounting can share data with other vital systems such as financial planning and analysis (FP&A) tools, enterprise resource planning (ERP) systems, and other internal databases.
6. Increased productivity
Talent plays a significant role in the success of a company. Organizations look beyond credentials to pursue innovative personnel with leadership qualities that can help steer the business forward.
In building a modern procurement team, creating an environment that maximizes each member’s potential is essential. AP automation solutions remove redundant processes so team members can focus on core business functions to increase revenue.
7. Improved vendor relationships
Delays in the processing and payment cycle lead to difficulties with supplier relationships. An automated accounts payable process improves supplier relationships in several ways:
- Helping you adhere to payment schedules and supplier payment terms
- Enabling invoicing through email, electronic delivery, or paper
- Automating renewals and enabling lifecycle evaluations
Next steps to automating your accounts payable process
An automated AP process benefits you and your suppliers. The AP process is fast and accurate when teams use automated accounting software, saving time and avoiding potential losses from fraud or duplicate payments. For your suppliers, efficiency eliminates delays for accounts receivable. Automation ensures strong, long-term relationships with your most important suppliers.
To learn more about using best-in-class accounts payable automation software to increase operational efficiency, download our Operational Efficiency Handbook.