How To Guide: Justifying an AP Automation Project

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 average cost to process a single supplier invoice is $15.00 dollars or more per invoice.
• AP Automation has reduced costs with many organizations by 50% and some cases as much as 80%.
• Invoice routing and approval times are reduced 80 – 90% which results in lower costs, less late fees and penalties.

*  Source: Aberdeen Group and PayStream Advisors Accounts Payable Report

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:

• Open incoming mail
• Manage email inbox and print sent via email
• Sort and stage invoices for processing
• Manually key invoices into accounting system
• Date stamp each invoice
• Write voucher number on invoices
• Match invoices to purchase order and/or receiver
• Research invoices that don’t match
• Apply variances to invoices
• Send invoices for approval
• Apply general ledger coding on invoices
• Sort & Stage in process invoices pending approval
• Follow up on invoices sent out for approval
• Generate month-end open liabilities close reports
• File invoices away each day or week
• Respond to vendor inquiries
• Research invoices for other departments
• Photocopy invoices for research
• Search for and reproduce invoices for annual audits
• Year-end shift of paper invoices from the file cabinets to archive boxes

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.

1. The average number of invoices with errors is approximately 3.6% (per IOFM).  
   Now, that number may not seem like a ton, but consider if you organization has $100MM in payables pumping through it over the course of the year.  If $3.6 MM was paid to the wrong vendor, or for the wrong invoice, or in the wrong amount...you get the picture.  The sum of these errors equals a total nightmare for reconciliation in the accounts payable process and unnecessary extra work to unscramble the eggs. 
   
   
2. The industries with the highest average cost to process an invoice are Non-Profit / Education at $16.78/invoice and Government at $15.86/invoice.  
   While this doesn’t really come as a surprise, it underscores the need for accounts payable process improvement across all manner of organizations.  With many corporate leaders having no actual clue to how much their inefficient invoice processing is costing them, it’s high time that they wise up to these AP process leaches and identify ways to make AP strategic and profitable (and no, that is not an oxymoron, it’s entirely possible). 
   
   
3. Nearly 62% of invoice processing costs are made up of staff labor (per APQC).  
   The real issue here is how much time is needed to advance an invoice in process.  This includes data entry, data validation (matching the data from the invoice against disparate information like vendor master, PO table, and receiving data), GL coding, and approving.  The bottom line is that the accounts payable process is very fat from a time consumption standpoint and needs to be leaned out if you have any hopes of dropping your processing costs and improving your AP process cycles.
   
   
4. For the average company, over 50% of eligible early payment discounts go uncaptured because of inability to process invoices and execute payment in a timely manner (per Aberdeen Research).  
   This means that significant opportunities to pad the bottom line are squandered, again because of a grotesque AP process.  Ironically, it’s our belief that, given the option, most CFO’s and Treasurer’s would likely want to capture discounts as they tend to be free monies to the payer, when done properly.  This again is a compelling reason to pursue automation
   
   
5. On average, only 32% of companies harness Accounts Payable process dashboards to monitor and optimize performance within their AP departments (per Aberdeen Research).
   This only serves to underscore just how in the dark most AP and finance leaders are.  When you consider that most sales and marketing executives have rich insights into their customer and prospect pipelines you can understand that there is a definite gulf between investment in top line revenue generation systems and bottom line, back office systems. This kind of thinking must be challenged, because AP automation need not be a financial boondoggle, but instead could be a transformative organizational profit center, that catalyzes further finance and operations improvements.
   
   

In addition to the costs saved there are a number of additional ROI and savings that are often overlooked.

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.
 
In Summary
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.
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