As most finance teams know all too well, a manual accounts payable process can be tedious and error-prone. Working through piles of paper invoices, individually contacting relevant approvers and mailing checks is not only slow, it opens the company up to fraud and makes audits painful.
Accounts payable automation (AP automation) technology aims to provide a more efficient, expeditious and accurate way to handle this back-end financial process. By eliminating manual processes and stacks of paper, AP automation can improve your relationships with suppliers and partners while saving time and money, reduce days sales outstanding (DSO), thus improving cash flow.
Video: What Is AP Automation?
What Is Accounts Payable Automation (AP Automation)?
AP automation technology automates routine steps such as receiving invoices, coding, routing for approval, payment and reconciliation. You may come across the term “touchless” processing, which generally means that AP automation eliminates the need to manually input data at any stage, although approvers may still need to sign off on payments with a mouse click.
AP automation software typically also provides dashboards and analytic tools that that help you manage the AP process and diagnose problems. Because all accounts payable data is digitized and stored within a single system, it’s easier to search for and audit the information.
- AP automation streamlines financial operations, addressing inefficiencies like manual data entry and risk of human errors prevalent in traditional AP processes.
- Key components of AP automation include electronic invoicing and analytics, real-time insights, faster processing times, and fraud detection.
- Selecting the right AP automation solution requires considering factors like company size, vendor credibility, and potential for scalability, while acknowledging transitional challenges and future technological advancements.
Challenges with Manual Accounts Payable
Accounts payable (AP) is a critical function within any organization's finance department. It's like the engine room where bills get sorted, invoices are tracked, and due payments to vendors are organized. While the tried-and-true traditional methods have their merits, they come with a set of hiccups that can make things a bit cumbersome in our swift-paced business era.
Time-consuming manual data entry
Traditional AP practices rely on manual data entry, where staff members physically key in details from paper invoices into accounting systems. This isn't just time-consuming; it's a drain, especially when there's a mountain of invoices to tackle. Long hours of data entry can push back payment timelines, sometimes leading to late fees or ruffling feathers with suppliers.
Human error and financial discrepancies
Manual processes are susceptible to human error. This can be as simple as typos, miscalculations, or inputting the same invoice twice. Fixing these mistakes is more manual accounting work and can undermine trust with vendors. Over time, these errors can snowball, potentially leading to big financial losses, upset vendors, angry clients, and audit challenges.
Delays and inefficiencies
Without automation, the entire AP process – from invoice receipt to approval and payment – can be slow. It doesn't help when papers get misplaced or when someone's on vacation and an approval is pending. Delays can result in missed payment deadlines, incurring late fees or penalties. They can also mean missed early payment discounts.
Difficulty in tracking and managing invoices
Paper-based AP processes can lead to a lack of transparency in invoice management. Is it approved? Is it still waiting in someone's drawer? Has it been paid? This can lead to communication challenges within the organization and with vendors. It can also result in lost or misplaced invoices. A lack of an efficient tracking system can make month-end or year-end reconciliations tedious and time-consuming.
While traditional AP processes have worked for decades, the manual nature of AP isn’t keeping up with faster pace of modern businesses. AP automation streamlines operations, reduces errors, and improves transparency, ultimately resulting in significant time and cost savings.
How Does Accounts Payable Automation Work?
AP automation software converts your suppliers’ invoices into a standard digital format and then pushes them through a digital workflow that culminates with paying suppliers.
At the start of this process, AP automation uses optical character recognition (OCR) to extract information from invoices. Some products use machine learning to recognize patterns over time and improve accuracy; for example, they may suggest specific general ledger codes or approval routing based on past experience. By customizing rules for your business, such as acceptable variances or approval hierarchies, you may be able to eliminate the need for manual intervention for most invoices.
Here are the steps in the AP automation process:
- Invoice Capture with OCR and E-Invoicing: The initial phase of AP automation is about digitizing incoming invoices. This happens with Optical Character Recognition (OCR) technology, which scans, reads, and converts paper-based invoices into digital data. At the same time, e-invoicing systems enable vendors to directly submit their invoices electronically, bypassing the need for physical paper transactions.
- Matching and Verification: After capturing invoice data, the system automatically compares and matches invoices against corresponding purchase orders and delivery receipts. This ensures that the invoiced items and the agreed-upon purchase terms align perfectly. By automating this process, businesses can identify discrepancies or mismatches, ensuring that only accurate invoices move to the next stage.
- Approval Workflow: Based on predefined rules set by the organization, the AP automation system routes invoices to the relevant personnel or department for approval. This could be based on invoice amounts, vendors, or other criteria. Alerts and reminders can also be set up to expedite the approval process. This systematic approach ensures timely reviews, prevents invoices from being overlooked, and maintains a clear audit trail of all approval actions.
- Payment Execution: Once an invoice is approved, the AP automation system facilitates the payment process, including scheduling payments to optimize cash flow, selecting the preferred payment method, and executing the payment automatically or with minimal human intervention. By automating payments, businesses can ensure timely settlements, take advantage of early payment discounts, and maintain a positive relationship with vendors.
- Reconciliation and Reporting: After payment execution, the system carries out an automated reconciliation process which matches payment transactions with bank statements to verify that amounts and beneficiaries align. AP automation tools also generate detailed reports on metrics like spending patterns, vendor performances, and potential cost-saving opportunities. This automated reconciliation eliminates manual cross-checking, reduces errors, and provides financial teams with data-driven insights to inform strategic decisions.
In essence, AP automation offers a seamless, integrated, and systematic approach to managing the entire invoice-to-payment cycle.
Why Automate Accounts Payable?
There are many reasons to automate AP. Some involve a tangible and rapid return on investment. By digitizing AP and reducing the need for manual effort, AP automation can drive down your processing costs. It can also help you scale AP more easily as your business grows by reducing the need to hire more people.
AP automation also provides tools that can help you manage payments and cash flow more tightly. By making the payment process faster and smoother, AP automation can also increase your ability to capture supplier payment discounts.
Top Accounts Payable Tasks to Automate
The AP tasks likely to benefit the most from automation are those where you can cut processing time or increase accuracy, both of which save money. Compared with manual processing, AP automation can greatly improve the following steps:
- Data entry. Automating data capture of all source documents is faster and less prone to error than entering data manually.
- Invoice matching. Invoices can be automatically matched to supporting documents, like purchase orders and receiving documents (three-way matching). This automatic matching is faster and more accurate than manual matching, especially for businesses that otherwise might have to match documents stored at different locations.
- Coding invoices. You can establish rules that automatically set the correct general ledger code for each invoice, eliminating the time and inconsistencies inherent in manual coding.
- Approval routing. Electronic routing to all the necessary approvers is faster than manually sending documents to each of them, and it also provides better tracking throughout the workflow.
- Payment scheduling and execution. Manual payment processes can lead to delays and potential errors. Automation ensures timely and accurate payments, taking advantage of early payment discounts and avoiding late fees.
- Vendor management. An automated vendor management system can maintain up-to-date vendor details, track communication, and ensure compliance with contract terms, leading to stronger vendor relationships.
- Expense reporting and reimbursement. Automated expense solutions can capture receipts, categorize expenses, and route them for approval, ensuring timely and accurate employee reimbursements.
- Fraud detection. Advanced algorithms can monitor transactions and flag suspicious activities, providing an additional layer of security against potential AP fraud.
- Reconciliation. Automation tools can reconcile bank statements with recorded payments, identifying any discrepancies and ensuring the books are always accurate.
- Tax compliance and reporting. Automated solutions can calculate tax liabilities, ensure proper documentation, and generate required AP reports, reducing the risk of non-compliance penalties.
- Analytics and reporting. Organizations can gain deeper insights into their AP processes, identifying bottlenecks, spending trends, and opportunities for further optimization.
How to Automate Accounts Payable
Companies generally apply AP automation software by implementing AP software, either in a software-as-a-service model, where the application is hosted in the cloud, or on premises, for companies that prefer to host and manage their own systems.
Once a system is in place, finance staff as well as approvers need to be trained, and it’s worth spending time to configure rules so you can automate as many steps as possible. And while the AP process is pretty standard, companies may have some unique requirements that you will want to make sure the solution can accommodate those workflows. This will provide the most return on investment.
What are the Benefits of AP Automation
In the fast-moving finance and operations landscape, AP automation is an important tool that helps businesses stay ahead of the competition. These advantages not only streamline operations but also provide strategic leverage in financial management. AP automation can also provide benefits across the entire organization:
- Enhanced Efficiency: AP Automation leads to expedited invoice processing and significantly curtails manual interventions, optimizing the workflow. This translates to faster approval cycles, timely payments, and resource allocation to more value-added tasks, thereby boosting overall productivity. In addition, staff can be redeployed for higher value tasks, such as analyzing payments data, instead of spending their time on manual data entry.
- Improved Financial Accuracy: The automation system minimizes the likelihood of human errors, ensuring a higher level of consistency and reliability in financial data management. Accurate data underpins sound financial decision-making, ensures compliance, and fosters trust with stakeholders, including vendors and auditors. Paying promptly and predictably may enhance your reputation and help you in future negotiations with suppliers.
- Tangible Cost Savings: The integration of automated processes translates to tangible savings by reducing overhead costs associated with manual invoice handling, error rectifications, and delayed payments. There’s less need to store paper and pay postage and delivery costs. In a competitive business environment, operational savings can be reallocated to growth initiatives or other critical business functions.
- Improved Financial Visibility: AP automation offers a consolidated view of the entire payable process in real-time, providing a transparent overview of financial obligations and transactions. Such transparency empowers financial leaders with actionable insights, enabling proactive decision-making and strategic planning.
- Enhanced Fraud Prevention: The automation system is equipped with advanced features that continuously monitor transactions, flagging anomalies or suspicious patterns for review. Audits and compliance efforts are easier. Built-in security and accountability features can flag suspicious activity, helping to detect fraud. By proactively identifying potential threats, organizations can safeguard their assets, maintain financial integrity, and enhance security protocols.
AP automation is an indispensable tool for modern businesses aiming to enhance their financial operations. By integrating this system, organizations can reap both tangible and strategic benefits, positioning them for sustained success and growth.
How to Select AP Software
Accounts Payable (AP) automation software can have profound implications on an organization's operational efficiency and financial accuracy. As such, the selection process requires meticulous attention to ensure alignment with the organization's specific needs.
AP Automation Software Selection Steps
Selecting the right AP automation software for your business should include the following four steps:
- Planning. Put together a cross-functional team that can define your company’s goals for AP automation.
- Requirements gathering. Your AP department documents how your current accounts payable processing works and creates a list of requirements for an AP automation solution. At the end of this stage, you create a request for proposal (RFP) and send it to select vendors that meet the criteria. (See checklist below.)
- Vendor evaluation. You evaluate the proposals from vendors that answer your RFP, examining aspects of their proposed solutions, such as features, costs and implementation approach.
- Vendor selection. You delve deeper to find out exactly how well the most promising vendors meet your requirements; this may involve developing detailed discovery documents and requesting demos. Then, select your supplier.
AP Automation Software Requirements Checklist
Here's a structured approach to assist businesses in determining their requirements for AP automation software that best suits their needs:
- Understand Your Needs. Begin with a thorough assessment of your organization's AP processes, volume of transactions, and unique requirements. This will offer clarity on what features are essential for your operations.
- Scalability and Flexibility. Ensure that the software can adapt and scale according to the growth and evolving requirements of your organization. It should be flexible enough to accommodate both current and future business dynamics.
- Integration Capabilities. The AP software should seamlessly integrate with your existing Enterprise Resource Planning (ERP) systems, financial platforms, and other key business tools. This ensures a streamlined flow of data and prevents information silos.
- User-Friendliness. A user-friendly interface is crucial for efficient adoption by employees. A software that's intuitive reduces the learning curve and enhances productivity.
- Advanced Features. Look for advanced features like Optical Character Recognition (OCR) for invoice capture, machine learning algorithms for fraud detection, and robust reporting tools to provide valuable insights.
- Security and Compliance. Ensure that the software adheres to the highest security standards, safeguarding sensitive financial data. It should also assist in meeting regulatory and compliance requirements.
- Vendor Reputation and Reviews. Conduct thorough research on the vendor's track record, industry reputation, and customer reviews. A credible vendor not only provides robust software but also offers continuous support and AP updates.
- Cost Implications. Understand the total cost of ownership, including the initial setup, licensing fees, maintenance, and potential upgrade costs. Opt for a solution that offers a balance between cost and value.
- Support and Training. Ascertain the level of support the vendor provides, both during and post-implementation. Adequate training resources should be available to ensure effective utilization by your team.
- Customization Capabilities. Every organization has unique needs. The software should offer customization options to tailor its functionalities to align closely with specific operational requirements.
Selecting the right AP automation software requires a blend of introspection into organizational needs and a comprehensive evaluation of available solutions. By focusing on the above criteria, businesses can ensure they invest in a tool that provides lasting value and aids in achieving operational excellence.
Accounts Payable Automation With NetSuite
NetSuite’s Accounts Payable Solution helps businesses save time, improve control and increase productivity by automating invoice processing and payment. For example, the software can minimize the time and effort required to process invoices by eliminating manual entry and automatically calculating discounts. It automatically handles exception processing when there are mismatches between invoices and purchase orders. NetSuite also provides real-time insights into the entire accounts payable process to reduce the potential for lost bills or fraudulent invoice payments.
Accounts Payable Automation FAQs
What does AP automation solve?
AP automation addresses the inefficiencies in the traditional accounts payable processes. It eliminates time-consuming manual data entry, reducing the risk of human errors that can lead to financial discrepancies. By streamlining invoice processing and approvals, AP automation makes timely payments and keeps vendor relationship positive. AP automation systems enhance visibility into the AP cycle, facilitating better financial management and decision-making.
Why use AP automation?
AP automation reduces manual AP tasks, mitigating the risk of human-induced errors in invoice processing. It ensures timely payments, strengthens vendor relations, enhances AP transparency, and helps businesses make better financial decisions.
What should I consider for AP automation?
Evaluate the potential system's integration capabilities with existing technology to make sure data will flow from one to another. Consider the software's scalability as your business continues to grow. All AP automation software should have stringent security protocols to safeguard financial data. Finally, assessing the vendor's reputation, post-implementation support, and the potential return on investment will inform a well-rounded decision tailored to your organization's specific needs.
Will AP automation render certain accounting and bookkeeping jobs obsolete?
Rather than eliminating jobs, AP automation often reallocates human resources to more strategic, value-added tasks. While the nature of some roles might shift, the emphasis is on optimizing productivity and contribution.
Can AP automation handle multi-currency and international payments?
Many advanced AP automation solutions are equipped to handle multi-currency transactions and can facilitate international payments, accommodating the needs of global businesses.