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Breaking Down the Cost-Saving Benefits of AP Automation

October 12, 2021
Three men looking at a laptop and discussing AP automation solutions

If you’re here, you’re likely a finance pro interested in cost savings for your business.

The good news? Automating your accounts payable (AP) processes can have a big impact on your bottom line. 

But how much can you save?

There are several ways to measure the cost savings of AP automation. These savings vary depending on how they’re calculated.

While the costs can vary, Goldman Sachs estimates total costs (processing and labor costs) for AP staff involved in manually processing a single invoice equaled $16.00 for medium-size businesses and $22.26 for small businesses. In an automated system, these numbers fell to $5.89 and $6.89, respectively, for roughly 60-70 percent in net savings.

Cost Savings of AP Automation

Cost savings tied to automated invoice processing

Why the cost savings? Let’s go deeper into the numbers to help you better understand the savings you can achieve.

In its research of 1,485 organizations, the American Productivity & Quality Center found “top performers” – the top 25 percent of businesses evaluated – spent an average of $2.07 per invoice. The lowest 25 percent spent nearly five times as much ($10). The key difference between the two groups was automation; top performers typically use it while lower performers don’t.

These cost differences are especially significant considering the more invoices you process the more money you can save.

Cost savings per invoice

In shifting from manual to automated AP, one of the best ways to measure your cost savings is to calculate the cost per invoice. It’s one of the most accurate and widely used measures of how much savings are possible.

Focused on that metric, the Institute of Finance & Management reports companies using limited or no automation spend, on average, $8.78 to process one invoice. If they use a high level of automation, it costs $1.77. And that’s before considering labor costs.

Companies using limited or no automation spend $8.78 to process one invoice
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Companies using high-level automation spend $1.77 to process one invoice
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Additional cost savings

As you assess how much you can save with AP automation, factor in the cost of labor, physical goods (paper checks, envelopes, stamps), transaction fees and credit card fees.

You’ll also want to know about various costs to complete AP invoicing tasks. Goldman Sachs breaks these down:

Labor costs are especially important

When calculating AP automation cost savings, pay especially close attention to labor costs. They’ll be one of your biggest expenses. This includes how long it takes employees to process invoices.

For a single employee, for instance, figure out their hourly pay rates and multiply by the number of hours they spend on invoice processing each month. And figure out how many people are involved and add up those costs.

Also, calculate your infrastructure costs, which include accounting software and ERP systems and fraud detection tools.

And don’t forget all the other hidden costs in processing an invoice. One of the most expensive is using paper-based regular “snail mail” to send invoices and payments.

Snail mail can lead to negative cash flow

If you’re relying on manual processes and traditional snail mail for sending invoices and processing payments, you’re spending time and money that could be leveraged elsewhere.

Challenging economic times or not, business owners often stress over managing their cash flow, and it’s for good reason. Without cash in hand at the end of the month, it’s tough to pay expenses, purchase supplies for new jobs or invest in growing the business.

Think about the time and effort it takes to invoice your customers, keep track of expected payments, follow up for payment, collect checks from the mail, reconcile them with invoices, and drive them to the bank for deposit. And, that’s just on the receivables side.

Goldman Sachs explains the pitfalls of slow processes for both buyers and suppliers:

  • Buyers often miss pre-payment discounts, rebates, or pay late fees because of time-consuming processes like snail mail.
  • Suppliers often do not receive snail mail payments until 30-60 days after sending an invoice, which makes it difficult for small businesses to manage cashflow and usually requires them to rely on a credit line that can carry heavy interest costs.

Going electronic with your AP and payments processes removes paper and stores important financial data in the cloud for easy access, from anywhere, at any time. It also offers faster payment options, like enhanced ACH and virtual cards, so payments simply land in your account after approval, without hassle, and remittance data is delivered electronically.

Calculating Cost Savings of AP Automation

To calculate your cost savings using AP automation, focus on the cost to process one invoice.

The total costs to process your company’s invoices in a given time period (usually a month) divided by the total number of invoices you processed a month equals your cost per invoice.

Include the labor costs of people processing the invoices, the technology used, payment processing fees, paper and mailing costs and any other costs you believe should be added.

Cost savings of AP automation in different industries

The cost savings you’ll achieve by automating AP vary by industry. To show this, a SSON report shared average costs per invoices in the advanced technologies, banking and healthcare and professional services industries:

IndustryAverage cost per manual invoiceAverage cost per automated invoice
Advanced technologies$11.83$6.18
Banking and healthcare$11.13$5.81
Professional services$11.30$5.90

Cost-saving tips

Knowing the savings associated with AP automation, what should your next steps be?

We have a few tips to get your business moving in this money-saving direction.

  1. It all starts with automation. You’ll help lower your invoice processing costs by using automated processes. Research AP automation software to see which ones fit best with your company’s specific needs. 
  2. Reduce use of paper checks. Checks are an unnecessary expense when it comes to processing invoices and paying vendors. A business check can cost in the range of $4 to $20, according to Bank of America.
  3. Decrease manual data entry. It costs your business a lot of time and money to manually enter invoice data. The quicker you stop doing that the faster you’ll save money on this process.
  4. Cut invoice and payment transaction fees. Evaluate each payment method and figure out which vendors accept the lowest-cost forms of payment.
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