Chances are you’ve heard of “accounts payable automation”. You’ve probably seen marketing materials or even done some homework to find out what this is all about. When you hear or read about AP automation the idea sounds magical, almost too good to be true! No more paper invoices to process! No more back and forth getting invoices approved! No more manual data entry into the ERP! All with a savings between 60 to 80 percent of costs! Sounds too good to be true, right? Wrong! And here’s why.
When it comes to AP Automation there are two types of savings towards justification, “hard dollar savings” and “soft dollar savings”. Justifying AP Automation encompasses both hard and soft savings which allows business to sustain long-term continued savings as opposed to one-time short term savings.
Hard Dollar Savings: relates to reducing the costs from the current cost to a new lessor amount or a change in process/technology/policy that directly reduces expenses, and process improvements. Hard dollar savings are generally easier to calculate and quantify.
Soft Dollar Savings: Soft savings relate to those areas that reduce costs through less labor, more efficiency, productivity increase, usable information, better compliance, better work environment, and other related areas. These types of soft savings are generally hard to calculate and quantify because there are so many variables and activities involved.
What many organizations fail to understand and do not realize or accomplish is how to continue sustainable improved cost savings through both hard and soft cost savings.
According to the trade associations like, Aberdeen Group, PayStream Advisors, IOFM and many other organizations who have studied accounts payable processing over the last several years have determined a few very important facts:
The best way to identify all of the potential costs is to create a “flow” or “map” of your current accounts payable process. This will help you to think through the entire process and identify areas of concern and bottlenecks which can be identified as areas of improvement and savings.
In determining your own hard and soft costs to process supplier invoices there are a few things to consider i.e. the tasks involved, how many people within the AP department that are involved in each task, the amount of time it takes to complete each task, are there any people outside of the AP department, what is their task, how much time is needed etc. Also include any monetary costs or penalties caused by tasks that are not completed on time or incorrectly, i.e., fines, penalties, late fees, overtime, temporary help, etc.
Typical tasks associated with processing supplier invoices:
These steps represent tasks that are accomplished typically within the AP department and don’t extend to others outside the department so it is important to consider and calculate those costs as well and how others are impacted, the amount of time involved, costs, etc.
For each task quantify the amount of time it takes, i.e. if it takes 1 person 20% of their time to open and sort the incoming invoices from the mail and they are being paid $45,000 annually then the cost to open and sort the mail is $9,000 dollars.
Task # of People % of Time Salary Total Cost
Open & Sort Mail 1 Person 20% $35,000 $7,000
If it takes 2 people 60% of their time to key invoices into the accounting system and they are being paid $45,000 annually, then the cost to manually enter invoices in to the accounting system is $54,000 dollars.
Task # of People % of Time Salary Total Cost
Manually Key Invoices 2 People 60% $35,000 $42,000
If it takes 1 person 40% of their time to file paid invoices into the paper filing system and they are being paid $35,000 annually, then the cost to manually file invoices away s $14,000 dollars.
Task # of People % of Time Salary Total Cost
File Paper Invoices 1 People 40% $35,000 $14,000
Without quantifying and calculating the entire accounts payable process from start to finish you can at least see that just by quantifying the three key areas of 1) opening mail and sorting invoices, 2) manually keying invoices into the accounting system and 3) filing away the paid invoices we’ve calculated an annual cost of $63,000.
Once you quantify and calculate all of the costs associated with the tasks of processing supplier invoices and also take into consideration the monetary costs caused as a result of inefficient, error-prone manual processes the annual cost to process supplier invoices RISES significantly and fast.
Here are 5 additional facts to help you in calculating your costs to process supplier invoices.
The ROI of Control: Though many in the AP industry feel they are giving up control by automating their AP process that just isn’t true. When you introduce these new found efficiencies into your AP department you’re not eliminating your role in the process. Rather, you are automating aspects of that process that unnecessarily consume large amounts of your time, cause errors and are simply inefficient. With AP automation, you are still in control of coding invoices, approving invoices and promoting them to the general ledger. You and your AP team will have greater visibility and insight into the entire AP process and with greater visibility means greater control.
The ROI of Time: Once the immediate savings are realized and the process is automated, you might wonder, “What’s next?” After all, you just saved your AP department a lot of work. What will they do with their new time? With their new time, many companies have transformed their AP department from an expense to a profit center by pursuing higher-level tasks, such as: early vendor payments, performing more analysis, spend control, working with vendors, electronic payment incentive programs, and rebate programs. They are now generating revenue for their company.
The ROI of Scalability: As captivating as the aforementioned immediate savings are, one of the greatest returns found through automation occurs years down the road. As your company grows, as invoice volumes increase, you will be able to retain the same AP staff, handle more invoice volume WITHOUT the need to add more AP staff.
In a recent AP Department Benchmarks & Analysis survey conducted by the Institute of Finance & Management, only one-third of companies surveyed have implemented document capture and only 25 percent use some form of e-invoicing. This indicates that many companies are still tied up in manual paper processing. The same study notes that those companies that have implemented automation systems are twice as productive as those that haven’t.
Part of the reason a surprisingly large number of companies are still manually processing their AP transactions is they are often not aware of the factors that are sucking time from staff and costing the company money. One of the more costly elements of getting an invoice paid is the waiting involved in gathering all of the necessary approvals and associated paperwork. This workflow typically runs across multiple departments and requires the attention of busy decision-makers. By automating the AP workflow, most of the waiting periods are shortened as the system simplifies, automates, and secures approvals and decisions. But saving money and by saving time is just the start of the benefits of AP automation.
CFO Visibility and Margin Enhancement: Through the use of automation technology, the CFO gains a complete real-time view of the company’s financial condition. Liabilities are accrued as soon as the goods or services are received against a PO or a non-PO invoice is received; actual to budget is immediately updated, and above all, accurate cash requirements are known. In addition, this visibility allows for faster, more accurate audits, better enabling the company to meet internal control requirements.
However, the greatest benefit to the organization is the contribution to maintaining margin,which is the number one goal of CFOs according to CFO magazine.
AP can assist CFOs in maintaining or enhancing margins through two key programs:discount capture and spend analysis. In today’s tight markets and increased DPO many suppliers are willing to give discounts for faster payment. These discounts typically range from 1.5 to 3 percent, with 2 percent for payment within ten days being the most common.
Complete visibility into the transactions gives finance managers the information needed to do a complete spend analysis by commodity or service purchased, or by vendor. In addition, this visibility helps to expose the number of duplicate records that are in the vendor file. Duplicates come about for a number of reasons: the same vendor has been added with different names (e.g., GE, General Electric, GE Capital, etc.), and different sites, or duplicates come about through mergers of companies (e.g., HP and Compaq) Visibility also reveals opportunities, such as regional offices purchasing the same merchandise from the same supplier at locally negotiated, different prices.
These discoveries will often result in an overall reduction in costs of 10 percent or more. People often think discounts are available only to very largest companies, such as Wal-Mart or GE, but small businesses can benefit as well. For example, the author handles the accounting for his son’s small business. By consolidating the bulk of the direct material purchasing to a few selected vendors, the shop has reduced the cost of these purchases by more than 10 percent. Furthermore, the annual minimum expenditure required to qualify for these discounts range from only $6,000 to $20,000.
To see the real benefits of this, assume a company with sales of $250 million and a profit before tax of 10 percent, or $25 million, and a cost of goods sold (“COGS”) of 45 percent of revenue. If the company’s leverage of spend analysis results in a 10 percent reduction of cost on only 50 percent of COGS, it will have added $5.6 million to the bottom line, or a profit growth of 22 percent—a number to make any CFO proud. Operating expenses can be impacted in the same fashion.
However, to get the required return, the company must take care to ensure there is compliance with the buying guidelines and contracts to eliminate off-contract spend. One company thought its off-contract spent was 30 percent. Upon analysis, however, it turned out that it was 200 percent, a figure that ran into the hundreds of millions of dollars!
So, visibility through automation has the potential to add much more than process cost savings to the bottom line.
By centralizing AP, revising processes, introducing automation and reducing the cycle time from weeks to a few days, AP departments can give the CFO the increased productivity and information vital to meet his or her goals. Discount capture, spend analysis, and cost reduction are benefits that directly impact the margin needed by companies in this day and age, at the same time giving the C-suite the visibility and audit capabilities they need to confidently sign off on the effectiveness of financial controls and management certification of results.
For more information about AP Automation and the possibilities it holds for you and your AP team, visit our website at www.bluecreeksoftware.com for more information.
Vision360 Enterprise Accounts Payable Automation Solution by BlueCreek Software reduces time wasted chasing down paper invoices by automating invoice approvals, eliminating manual data entry, eliminating paper invoices and reducing processing costs.