Estimated reading time: 8 minutes
As your business strives to meets its goals, you may be taking a closer look at ways to operate more efficiently. You could continue using manual accounts payable (AP) systems, or shift to automated AP systems.
But which one will be most effective at achieving your business goals this year and beyond – and why?
We’re going to help you answer these important questions.
What are the differences between manual and automated accounts payable?
The differences between manual and automated AP are profound. Let’s start with this: manual processes use mostly paper such as checks, purchase orders, invoices.
Meanwhile, automated processes use a lot less paper to reduce mistakes that often pop up using scattered paper processes. This also helps to prevent fraudsters from stealing information from these paper documents.
Then there’s this difference: automated AP processes speed up invoice approvals and payments. More people get involved in various stages of manual process. That leads to higher costs and greater inefficiencies.
A third key contrast is that AP processes give finance pros faster and easier access to the invoice and payment information they need right at their fingertips. Manual processes tend to be more disorganized. That makes it more time-consuming for finance pros to find information they need.
Automated invoice processing includes all the steps from receiving an invoice to payment. The steps create a workflow. At the start the invoice arrives. Then optical character recognition technology scans the invoice data and electronically inserts it in an organized fashion into an online document. Then the process rolls along like this:
- invoices get matched to purchase orders (2-way matching) or also matched to sales receipts (3-way matching)
- if mistakes are caught, the invoice goes to a person to fix the problem
- if no mistakes are found, the invoice moves to the approval stage
- invoices for larger dollar amounts typically need CFO or CEO approvals; AP managers often can approve invoices of lower amounts
- once approved, the invoice amount gets posted to the general ledger in the accounting system
- and the payment gets sent to the vendor.
Payments occur at the last stage of the AP automation process. Automated Clearinghouse (ACH) ranks among the most widely used types of automated payments. These are bank-account-to-bank account transactions.
You’ll also probably heard of virtual credit card payments. These are one-time uses of a unique credit card number to buy something in a highly secure way. These special cards limit the amount of information sales merchants can access (just a number) as opposed to credit cards that includes a security code and expiration dates. Although linked to credit cards and bank accounts, they’re not like a normal credit card because they can only be used once.
Of course, you’re familiar with a third major payment type: paper checks. Some businesses still prefer to be paid by check. But they’re more likely to have mistakes and are more vulnerable to fraud.
Despite their shortcomings, they’re still widely used.
“What we’re seeing is the volume of digital transactions has grown exponentially, but the paper and documentation supporting it has equally grown in similar terms,” said Saxena, CEO of Docyt in an article for Pymnts.com. “Businesses are still receiving paper invoices, collecting paper receipts, and ultimately for compliance and audit purposes, these documents have to be managed…Even as more businesses migrate away from checks, paper remains prevalent.”
As a finance pro, you’re aware of the importance of careful reporting of finance transactions. It’s key to know, for instance, the amounts of invoices and what you paid for them and when, and who signed off on large checks. You may need this information quickly when auditors want to check your books for accuracy and regulatory compliance.
In finance there’s a long list of financial reports. We’re going to highlight a few for you that are especially important. Here we’ll also weave in valuable insights from Planergy.
Here’s the list:
- AP reports (cover one month or less) – verify bill payments and manage cashflow
- AP trial balance (end of every month) – similar to balancing a checkbook; this report makes sure payments have matching entries in the general ledger. “When there are payments that don’t have a matching entry or have an entry that doesn’t match correctly, it indicates that vendors may have been paid too much or too little, a payment was issued to the wrong vendor or no payment was issued,” notes Planergy.
- Invoice aging report – lists unpaid AP invoices. “Using this report, a business owner can find missed payments or determine when a payment is due, the number of days a payment is past due, and when it’s time to come in to resolve the issues causing invoices to be put on hold.”
- Reconciliation of accounts report – shows accounting activity related to payment vouchers for a specific time period. “If there are discrepancies between the general ledger and the open reconciliation report, it’s an indication of a mathematical error or missed payments to vendors.”
Document management makes sure you know the status of, and can find quickly, all the invoices and payments coming through your system.
Electronic document management helps you capture, index, organize, categorize and store online for easy access and distribution. To find invoice exceptions, for example, you’d want to put those in a separate electronic category than approved invoices. That way you’ll find them faster than sifting through the entire database.
What are the time-saving benefits of an automated AP system?
You’ll gain several time saving benefits using an automated AP system. Right from the start you’ll spend less time entering invoice data because Optical Character Recognition technology will do that for you. There’ll be no more checking invoice paper against the purchase order to make sure all the data matches; automation will do that two-way matching for you.
You’ll spend less of your day chasing down business leaders to approve invoices. Your automated AP system will automatically remind them – and route different types of invoices to different leaders. You won’t have to do that anymore.
Conceptually, this is compelling. But let’s get into the numbers.
In a recent case study, AvidXchange found one of its customers, Island Hospitality, cut invoice processing times from an average of 18 days to three.
Consistent with this, Goldman Sachs recently estimated AP automation can drive 70-to-80-percent time-savings for small and medium-size businesses.
What are the cost-saving benefits of an automated AP system?
You’ll find many different estimates for the cost-saving benefits of an automated AP system. What’s not different about all of them is the savings are significant. It usually just depends on the use of the technology and type of application.
Let’s have a look at these numbers to give you a better sense of how much you can save:
What’s more, the industry average cost to manage a paper invoice is $5.83; using automation it’s only $1.50, according to the American Productivity and Quality Control Benchmarking Database.
“Automation simply reduces the cost per invoice from labor costs to the cost of printing checks,” notes Fidesic. “In addition, it will help you avoid late payment fees due to error and can also help you take advantage of early-pay discounts.”
How do I automate my AP system?
To automate your AP system, it’s best to take a methodical and step-by-step approach. Let’s look at the most important steps:
- Step 1: Figure out what an AP automated system can do to help your business grow and solve its biggest problems
- Step 2: Sell the idea to automate AP internally; get buy-in from business leaders and show them how this change will accelerate payments and reduce costs
- Step 3: Search for AP system software that excels at helping you grow fastest and solve your biggest problems and choose that one
- Step 4: Collaborate with software provider to implement and integrate the software with your accounting and enterprise resource planning system; start small and do trials before a full-scale switch-over
- Step 5: Start converting paper invoices into electronic format using Optical Character Recognition technology
- Step 6: Match invoices to purchase orders and sales receipts; if anything doesn’t match, get a person to identify the problems and fix them
- Step 7: If all information aligns, start the invoice approval process
- Step 8: Once approved, send payments and post the payment to your online accounting systems’ general ledger.
As you move through this process, keep two things in mind: first, you want to avoid doing any more data entry; and second, you should completely automate data coding. Both will do wonders for speeding up the process and freeing up your finance team to do more valuable work.
Getdivvy.com does a fine job pointing out why data entry should be a thing of the past and automating complex coding boosts productivity.
“Unlike the other stages of your AP process which are completed once the payment is sent, data entry is one automated step that can prove useful long after the invoice has been completed. By automating this data capture and then storing it in an accessible medium such as a smart spreadsheet, you can facilitate future analysis or investigation.”
Like data entry, general ledger coding takes lots of time. It helps you identify many different values for each invoices such as the vendor, amount and invoice category. But it needs to be automated.
How will an automated AP system impact my AP department?
An automated AP system’s impact on your AP department will likely be big. You’ll accelerate payments, reduce data entry and repetitive tasks, mitigate fraud, gain more visibility into payments and invoices, and gain more control of your finances including budgeting and auditing.
You’ll no longer have to manually capture data, match invoices to purchase orders and do general ledger coding. It’ll all be done by the AP system.
There’s more. You’ll be able to direct auditors faster to the information they need to see. You’ll budget for next year more accurately by checking the past year’s invoices and payments. Your team members will have more time do sharpen financial and analytical skills and make more informed decisions.
Brittney Lifsey, controller for the Maxwell Group, shares the impact her team has felt from automating their AP processes with AvidXchange.
What else should I know about automated AP systems?
You also might benefit from knowing these additional facts about automated AP systems:
- It doesn’t take long to make the change.
- You’ll be helped along the way with training.
- It’s not as big a learning curve as you might think; and once it’s set up you’ll benefit from the software’s ease of use and bottom-line benefits.
- And you’ll gain more control of your finances – not less.