What is Accounts Payable (AP) Automation?
In order to understand "Accounts Payable Automation" we first need to know and understand "Accounts Payable" and break this down to what that really means.
In short, "Accounts Payable", "Payables" or "AP" refers to an organizations short-term obligations owed to suppliers (also known as vendors) and or creditors which haven't been paid yet. These short-term obligations are generally purchases made for goods or services. The sum of the costs for goods and services (i.e. accounts payable) will appear on a company's balance sheet as liabilities.
Typically, a supplier also known as a vendor will submit an invoice for payment to the accounts payable department. The invoice will usually include payment terms and a due date when the invoice should be paid. Invoices that are not paid within the "terms" or by the due date may be subject to interest or penalties.
In short, "Accounts Payable", "Payables" or "AP" refers to an organizations short-term obligations owed to suppliers (also known as vendors) and or creditors which haven't been paid yet. These short-term obligations are generally purchases made for goods or services. The sum of the costs for goods and services (i.e. accounts payable) will appear on a company's balance sheet as liabilities.
Typically, a supplier also known as a vendor will submit an invoice for payment to the accounts payable department. The invoice will usually include payment terms and a due date when the invoice should be paid. Invoices that are not paid within the "terms" or by the due date may be subject to interest or penalties.
What is Accounts Payable?
In most companies the Accounts Payable Department is responsible for ensuring that all invoices are valid for the correct amount to be paid, as well as that the goods or services have been received. In order to make sure that the organization isn't paying for something they haven't received yet or that they are paying the incorrect price, invoices are sent to the "purchaser" for acknowledgement and signature that in fact the invoice is for the correct dollar amount and that the goods have been received.
Now let's consider for a moment that purchases of goods and services could be made by any authorized employee within an organization who has the ability to make or oversee purchases by staff. Let's say the office manager purchases $500 dollars' worth of office supplies, while the facilities manager orders window washing, snow removal or plumbing repairs. When the invoices arrive at the Accounts Payable Department that AP Staff need to print emailed invoices, open postal mail, review the invoices and determine who within the organization should review and approve the invoice before it can be paid. In addition to the review and approval process certain invoices need to be assigned to a "general ledger cost center" or "GL code".
A GL Code is an identifier assigned to a purchase that allows an organizations break down purchases into finer level of detail to make it easier to understand where money is being and spent and on what types of transactions.
Now let's consider for a moment that purchases of goods and services could be made by any authorized employee within an organization who has the ability to make or oversee purchases by staff. Let's say the office manager purchases $500 dollars' worth of office supplies, while the facilities manager orders window washing, snow removal or plumbing repairs. When the invoices arrive at the Accounts Payable Department that AP Staff need to print emailed invoices, open postal mail, review the invoices and determine who within the organization should review and approve the invoice before it can be paid. In addition to the review and approval process certain invoices need to be assigned to a "general ledger cost center" or "GL code".
A GL Code is an identifier assigned to a purchase that allows an organizations break down purchases into finer level of detail to make it easier to understand where money is being and spent and on what types of transactions.
There are generally two types of purchases made (or types of invoices) Purchase Order and Non-Purchase Order or Non-PO. The above scenario is referring to Non-PO invoice or purchase. A Purchase Order invoice will display on the invoice a PO number. A PO number is a pre-assigned or pre-authorized number assigned to the purchaser and supplier authorizing them to spend money. A "Purchase Order" is an official document used by an organization which give approval to a buyer with the intent of spending a pre-authorized dollar amount with a specific supplier. In order for the supplier's invoice to be paid they must list and reference the PO number on the invoice.
When PO invoices arrive at the Accounts Payable Department, the AP Staff will research the PO Number and compare the supplier invoice against the order information in the financial system (also known as an ERP System). If all information matches and is correct, then the invoice can be paid. If for some reason, there is a discrepancy between the invoice and the purchase order then the invoice cannot be paid and is now treated as an exception. Any invoices that do not match will require review and approval by procurement, or the originator of the purchase order or buyer. Once the exception invoices are resolved they can then be processed and paid to the supplier.
When PO invoices arrive at the Accounts Payable Department, the AP Staff will research the PO Number and compare the supplier invoice against the order information in the financial system (also known as an ERP System). If all information matches and is correct, then the invoice can be paid. If for some reason, there is a discrepancy between the invoice and the purchase order then the invoice cannot be paid and is now treated as an exception. Any invoices that do not match will require review and approval by procurement, or the originator of the purchase order or buyer. Once the exception invoices are resolved they can then be processed and paid to the supplier.
In most organizations the accounts payable process is a very tedious and manual process which is based on paper invoices or scanning and emailing supplier invoices to approvers for review, approval and GL coding. Let's consider for a moment that in a small office of ten people or so this is a manageable process, but now let's think about an organization with hundreds or possibly thousands of employees spread between different locations and across a widespread geography. You can easily see how the process of obtaining approvals of supplier invoices can quickly become a challenge for an AP Staff.
One of the final steps in the Accounts Payable process is entering each and every supplier invoice inro the financial (ERP System) for vouchering, posting or payment processing. The manual keying or entry of each invoice is incredibly time-consuming and error prone. This portion of the accounts payable process can take up anywhere from 60 percent to 80 percent of the AP Staff's time each day. This is an enormous amount of time each day to a non-value-added task that is wasting valuable time and costing organizations in money.
We should also keep in mind that the AP Department's responsibilities go far beyond invoice approvals. The AP Staff are also answering phone calls and email inquiries, filing away all of the paper invoices and supporting documentation. They are generating reports and statistics related to spending and cash flow as well as assisting in the monthly, quarterly and annual financial close. They are satisfying the requests of auditors and dealing with sales and use tax.
Lastly, when invoices are not paid on time and suppliers are not happy it is very easy to blame the accounts payable department.
We should also keep in mind that the AP Department's responsibilities go far beyond invoice approvals. The AP Staff are also answering phone calls and email inquiries, filing away all of the paper invoices and supporting documentation. They are generating reports and statistics related to spending and cash flow as well as assisting in the monthly, quarterly and annual financial close. They are satisfying the requests of auditors and dealing with sales and use tax.
Lastly, when invoices are not paid on time and suppliers are not happy it is very easy to blame the accounts payable department.
Why is Accounts Payable Automation Important?
Now that we have a basic understanding of "Accounts Payable" and some of the tasks associated with processing supplier invoices through to payment, let's consider for a moment that many of these repetitive tasks could be streamlined using automated processes that accomplish the same result without the need to people to intervene in the process.
With "Accounts Payable Automation" suppliers submit invoices and bills as they do today, however the invoices now go electronically into a system right from the start. Then based on the pre-defined business rules if an invoice requires review and approval, the invoice is systematically routed via automated workflow to the correct approver. The approver receives and automatic alert and can review and approve the invoice from any computer or device any time of day.
If an invoice contains a PO Number, then the Accounts Payable Automation system will systematically perform the matching process and if the invoice and PO passes and matches the pricing and based on the predefined business rules then those matched invoices will seamlessly flow to the financial system without the need for manual intervention.
With an efficient Accounts Payable Automation system an organization should expect to only intervene with invoice exceptions. The invoice exceptions are those invoices that fall outside of the standard business rules. A good rule of thumb is that invoice exceptions should be less than 20 percent of the total invoice count, with 10 percent or less exceptions being a highly efficient process.
If an invoice contains a PO Number, then the Accounts Payable Automation system will systematically perform the matching process and if the invoice and PO passes and matches the pricing and based on the predefined business rules then those matched invoices will seamlessly flow to the financial system without the need for manual intervention.
With an efficient Accounts Payable Automation system an organization should expect to only intervene with invoice exceptions. The invoice exceptions are those invoices that fall outside of the standard business rules. A good rule of thumb is that invoice exceptions should be less than 20 percent of the total invoice count, with 10 percent or less exceptions being a highly efficient process.
What are the Results of AP Automation?
- Scanning supplier invoices completely eliminates the paper invoices
- AP Staff no longer need to print out all of the emailed invoices
- Invoices that require review, approval and GL coding are routed electronically via the accounts payable workflow.
- Automatic PO matching systematically performs the 3-way match as well as deals with taxes, freights and variances
- Invoices with exceptions are processed within the AP Automation system and managed by the AP Staff
- Invoices that are approved, matched and authorized for payment, are seamlessly transferred to the ERP system via integration
- Keying and manual data entry is eliminated
- Duplicate invoices and payments are prevented
- The risk of fraud is reduced
- The AP Staff have complete visibility and control
- The AP process is operating between 80-90 percent touchless
- Costs are reduced, time and energy is saved
- AP Staffing issues are solved
- Life is good
For more information regarding Accounts Payable Automation or ways to streamline the accounts payable process please consider attending one of our informational webinars or contact us directly to talk.