The Substantial Benefits of Automating Accounts Payable
September 26, 2018
The Accounts Payable function is a critical operation within any finance department, and any organization. Despite its undeniable importance, many organizations continue to neglect the vital role of Accounts Payable and operate a paper-based system. This opens the door for considerable problems, inefficiencies, and vulnerabilities to the organization.
The main objective of any AP department is to manage the process of validated validating liabilities and to prevent any disruption to the organization’s ability to conduct business. The AP process involves reviewing an enormous amount of detail; ensuring only legitimate and accurate amounts are entered into the accounting system. There is a direct correlation between the growth of a business and the volume of payables required to be processed. As this trend progresses, it becomes increasingly important that senior management dedicates time and resources to analyzing and monitoring transaction activity for abnormalities and efficiency opportunities.
As an organization grows and scales, paper-based AP systems become a serious problem. Important documents or invoices can easily become lost or stolen, creating a significant security risk for any business. Research by AvidXchange reports, “Lost invoices are the second biggest challenge that finance departments face during the AP process at 34%,” something that can be almost completely remedied with an automated AP system in place.
Traditionally, the AP department is a hub for paper documents. The days of maintaining physical copies of purchase orders, invoices, and supporting documentation needed to process a payment are waning as businesses adopt electronic systems capable of integrating with existing accounting processes. For businesses still stuck with paper, there are risks and challenges associated with maintaining paper-based recordkeeping. These risks include:
• Potential damage or loss of documents
• Greater danger of fraud and security issues
• Limited storage space
• Limited access to documentation
• Inefficient approval workflow
• Ineffective status tracking
An automated AP system is capable of addressing these problems, and it has the potential to decrease the amount of manual involvement, resolving common bottlenecks within AP departments. An automated AP system can also and create valuable sets of data that allow for the performance of analytics, . Automation resolved common bottlenecks in many AP departments and equips equipping management with valuable reporting tools to make better-informed business decisions.
Electronic Storage With Optical Character Recognition
There are a variety of electronic document management systems that are designed to help automate the AP function. These software solutions are aimed at improving workflow and resource management by storing, classifying, and controlling documents and images of paper-based information. Regardless of how the invoice is sent by the vendor (email, mail, or in person), all receipt types can be scanned, uploaded, and saved to a specific designated vendor location within the software, allowing for easy research and recall access.
Traditional paper invoices and support require manual record entry into an AP system. Depending on the size of an organization, a high number of invoices can result in a significant amount of time spent by staff entering invoices. Further, the manual entry of invoice information increases the risk of data entry errors. With a document management tool in place, businesses are able to take the automation design one step further by implementing the use of optical character recognition (OCR) technology.
OCR analyzes a document to auto-identify common data points in an invoice, such as vendor name, invoice amount, invoice date, invoice number, item name, quantity, etc. This eliminates the amount of time spent entering invoices into the AP system, and allows personnel to focus their efforts on other monitoring activities – producing greater employee efficiency and reducing the potential for error at the same time.
Workflow Work Queues
Once invoices are converted and stored electronically, thy can flow through an approval process determined by documented Accounts Payable policies. The workflow process automatically directs the invoice to one or more approvers to review and reconcile. Once invoices are approved, they can be auto-routed to a designated work queue managed by the AP department for payment and processing. The overall impact of this includes completing daily tasks efficiently, improved turnover time on days to pay, and increased productivity through less manual processes (entry, follow-up, emails).
Large boosts to efficiency and streamlined processes create an AP department that runs like a well-oiled machine, rather than one drowning in paper invoices and receipts. The automation of workflows not only reduces the potential for errors by removing manual processes, it also increases the security of the information. With less “hands” touching the sensitive information, it’s less likely to be lost or used fraudulently.
With streamlined automated processes to eliminate bottlenecks and improve efficiency, management can redeploy resources to valuable tasks like data analytics. Improved workflows and state-of-the-art technology enable an organizations to focus energy on reducing overall costs and improving operations. With automation comes the invaluable benefit of freeing up personnel for a greater analysis of the Accounts Payable function. This majorly helps the department with forecasting and setting expectations. Greater oversight allows for value added reporting to senior management.
Some of the most important analytics to consider tracking are:
• Top Vendor Analysis – Management should receive periodic reports to review current relationships with vendors based on total spend and number of invoices. Based on the results, management can assess contractual relationships and identify opportunities to negotiate discounts.
• Processing Efficiency Opportunities – The purpose of this analytic is to identify vendors with the highest transaction (invoice) volume. With this information, management can determine if the purchasing method for identified vendors should be modified to reduce processing costs (using e-invoicing, purchase cards). Further, the reporting should stratify the data to identify the largest segmentation of transactions and troubleshoot ways of reducing the frequency and volume of low dollar invoices.
• Duplicate Invoices – A scheduled, periodic analysis to identify duplicate invoice payments should highlight invoices submitted by a single vendor on more than one occasion for a duplicate amount. AP management can use these reports to recover erroneously paid duplicate transactions and strengthen internal control procedures to prevent inaccurate payment duplicated transactions in the future.
• Vendor Master File Analysis – The likelihood of erroneous, unauthorized, or duplicate payments increases when a business has a dated/non-current vendor master file. It is important to ensure the vendor master file is reviewed on a scheduled basis to identify inappropriate, duplicate, and inactive vendors for removal. Criteria to use when trying to identify vendors for removal should include: duplicate vendor name (including variations of name), vendor numbers, duplicate addresses (including variations), and similarities to employee names and addresses.
Most automated AP systems are compatible with other accounting systems already in use. These systems work together with technology already in place for faster more efficient processes and business functions. Adding and making advancements in optical character recognition, workflow queues, and tracking data analytics will only boost AP efficiency.
SC&H Group’s Risk Management practice can help organizations assess their AP processes to identify manual pain points and conduct AP audits to measure the effectiveness of internal controls. Additionally, SC&H can evaluate process design, , and alignment to with business needs, and identify opportunities for improvement.
It is important to remember that, as an organization grows, its risk profile changes too. That growth dictates that the processes employed for managing risk must evolve. Working with public and private organizations, SC&H Risk Management professionals provide a tailored, detailed, and practical approach to reducing risk, and can help any organization establish an efficient and highly functional strategy for Accounts Payable automation. If you’d like to speak with an expert from our Risk Management team, please reach out to us today.