Every business needs an efficient way of managing its cash flow. If done manually, your business finances can be prone to mistakes and errors. Lack of control in the accounting system can also negatively affect your liquidity. As a result, you may have insufficient funds for day-to-day operations or working capital for future investments.
To mitigate these risks, businesses should consider using an efficient accounts payable (AP) automation solution. Automation helps you implement efficient financial controls and reporting.
This blog discusses what accounts payable means and how you can automate the process.
What Is Accounts Payable?
Accounts payable is defined as any company’s current liabilities or expenses. These are the amounts owed by your business and fall into three major categories:
- Business travel expenses: Airline tickets, car rentals, and hotel reservations are the major traveling expenses handled by the accounts payable team.
- Vendor/supplier payments: Vendor payments can either be pre-approved or approved after completing the transaction. These can be payments for goods and services, including raw materials, power, or leasing costs.
- Internal payments: Internal payments are business expenses, also called petty cash, used for reasonably small transactions such as office supplies or lunch meetings.
Your accounts payable team should work to reduce and control costs by finding opportunities to save money. One way is to take advantage of early payment discounts offered by vendors. On the same note, keep track of payment due dates to avoid costly late payment fees. Late payments can also increase processing costs and harm vendor relationships.
That’s especially true for SMEs and businesses in a niche market that relies on manual AP tools and ERPs. Relationships with suppliers in these markets are essential. Due to the limited number of companies offering custom goods and services, you cannot afford conflict.
What Is the Accounts Payable Process?
The accounts payable process involves the management of short-term debts. It works to ascertain the accuracy of outbound payments. It also works to ensure that B2B payments are made in a timely fashion.
Employees in charge of the financial business processes will typically follow the below steps.
- Create Purchase Order (PO): The business decides to make a purchase and creates an internal purchase order (PO).
- Record PO: The accounts payable department collects and records the PO, specifying the purchase details. These include the order quantities, the services to be rendered, and delivery dates.
- Create Receiving Receipt: The receiving business compares the PO with the deliverables to confirm quality and quantity.
- Receive Vendor Invoice: This document specifies the deliverables' cost, quantity, and total price.
- Review and Match Invoice: Most accounts payables perform a three-way match of the original PO, vendor invoice, and receiving report. That’s to make sure they match the final payment.
- Approve Invoice: Employees involved in purchasing goods and services must approve the invoice before payment.
- Capture Invoice: This step involves recording the expense in the company’s general ledger (GL). You will need to manually enter vendor details, deliverable items, prices, and the GL codes.
- Invoice Payment: The accounts department closes the procurement to payment pipeline. They do this by making electronic payments or mailing checks.
Businesses with many payable accounts face the risk of fraud and erroneous payments. This overload also causes delays in the receipt to payment processing time. The AP department also performs constant document management by continuously sorting these paper invoices. As a business owner, learning how to create and send invoices is a necessary skill that can help to keep accurate track of your spending and investments on your business.
So how do you avoid these problems with accounts payables? One word, automation.
What Is Accounts Payable Automation (AP Automation)?
According to a McKinsey Global Survey, 31% of businesses use a fully automated AP process in at least one business function. That means the majority of companies still use manual methods.
However, with the rise in remote work, the number of on-site offices is dwindling, and with it, physical accounting departments. AP automation allows companies to use a digital invoicing system to enhance and streamline the procure-to-pay cycle.
Let’s look at how to automate accounts payable to boost the modernization of your financial system and ensure business continuity.
How to Automate Accounts Payable
Automating accounts payable can be done at any stage of the above process. The main aim is to reduce the amount of paperwork involved and provide access to the relevant stakeholders.
Here are six ways to automate the accounts payable process in more detail:
1. E-invoicing
The first step in the AP payment process is receiving and recording supplier invoices. A tiny mistake at this point in the workflow will snowball into significant issues further down the line.
To reduce the amount of manual work involved, use e-invoicing as a replacement for collating and submitting paper invoices. Here, employees simply download a receipt scanner app on their mobile phones. The software uses optical character recognition (OCR) technology to convert paper documents into a digital format.
This reduces the risk of misplaced invoices and gives account payable professionals easy access to the expense data.
2. Streamline The Approval Process
Invoices can become held up within the approval workflows and cause bottlenecks. Without business visibility, you have no idea where or why the invoice is stuck in an approval queue.
You and your employees can see the invoice status on an online dashboard by automating the approval process. People in the expense approval process are notified of what action is required, reducing processing time.
Once an approver receives an expense report, they can perform one of four actions.
- Approve expense: When approvers are satisfied with the validity of the expense report, they simply approve it.
- Edit expense report: Approvers can edit the report and should be ready to explain their edits for future auditing purposes.
- Return expense report: Approvers can send back the expense report. This is accompanied by a request for clarification or more information.
- Reject expense: If the approver suspects a fraudulent or an incorrectly filed report, they can reject the expense.
This automated approval process will let you track who approved an item and when it was approved. Ultimately, automation will result in increased credibility and cloud backup guard against lost files.
3. Remove Manual Data Entry
AP data helps identify areas of overspending and opportunities for profit-making. In addition, it provides insights into the performance of different departments and ROI on various projects. Typically, the accounting team manually inputs data, but this process has inherent risks as human beings are prone to error.
OCR technology within an accounts payable automation software allows for efficient document digitization. This removes manual data entry, and the cloud-based technology stores it for easy access.
As soon as you decrease manual work, you also reduce processing times and costs.
Additionally, you also minimize the risk of errors that could result in inaccurate audits or analyses. Automation is a way to lower personnel costs as the system can process large invoice volumes without additional staff.
4. Create Compliance Guidelines
Business expense policies are essential for the finance department and the business as a whole. However, with a lack of oversight, there is a higher potential for non-compliance with documented business policies and financial and legal regulations.
The use of AP automation software helps confirm IRS tax compliance and industry regulatory compliance. Automation technology also improves the chances of fraud detection and reduces erroneous transactions.
You probably have comprehensive internal policies as a document that all employees can refer to. The problem is that approvers must constantly check if payment requests comply with the guidelines.
To counter this issue, consult department heads to convert the policies into simple statements. Then, input them as rules in the automation software that will flag expenses that violate your policies and reject approval.
5. Automate Coding And Classification
General ledger coding is essential to AP and involves classifying all company expenses. Unfortunately, it is also one of the most complex tasks in the AP department and is prone to numerous human errors.
For larger businesses, the high number of GL codes increases the risk of mistakes that can go unnoticed until it's time for an audit. Automated coding and classification use AP to categorize and code invoices according to specific values that include:
- Amount
- Vendor
- Department
- Country
- Invoice category
- Product line
- Accounts unit
The accounts payable automation solution uses OCR to apply pre-set codes that follow existing categories and identification metrics. That takes over the menial tasks involved in the coding and classification of invoices to make them more precise and accurate.
FYI, Fyle can automatically code all data around expenses including projects, categories, locations, and other custom fields to your accounting software according to your GL.
6. Automate The Match And Verification Process
Remember the manual three-way match from earlier? The AP team will no longer have to do this matching process manually. Instead, OCR technology scans invoices and supporting documents such as the PO and receiving receipts.
The automation system then matches total amounts, keywords, and categories. It guarantees that you have received what you pay for and helps identify inconsistencies in quantities or prices.
Automation software stores approved documents in one place, and you can reduce the time spent tracking them down. In addition, by automating your three-way match process, you will save money, avoid human error and maintain positive vendor relationships.
Automate your accounts payable, and you ensure a smooth and error-free process.
Suggested Reads:
Why Should You Automate Accounts Payable?
According to Goldman Sachs, small to medium-sized businesses pay an average of $16-$22 to process invoices manually. With AP automation solutions, however, companies can reduce these costs by up to 70%.
AP automation gives your finance team complete control over corporate spending and reduces overhead costs. In addition to cost reduction, digitizing these back-end processes can increase retention, improve customer satisfaction, and enhance the overall customer experience.
A survey by Pymnts.com of 400 CFOs found that 86% believed automating financial systems has positively contributed to their business' success. Around 32.8% of them also stated that digitizing accounting processes was critical.
For the future-forward finance professional, the additional benefits of using artificial intelligence to create a digital workflow are worth the investment. Here are some of the advantages of implementing an automated AP system.
Save Time
Processing accounts payable is a repetitive task. Employees spend a lot of time performing routine work. Using AP automation software negates the need for paper processes during the source-to-pay process.
By implementing an AP automation system, you can make immediate payments according to the prescribed organizational procedures you have developed. The result is faster invoice approval. Employees interested in a specific invoice can collaborate and access it simultaneously. Everyone involved can then confirm or dispute the payments and explain any inconsistencies.
As well as an acceleration of end-to-end payments. It also allows you to get insight into business spending in real-time. The time-saving achieved by using cloud-based accounts payable eliminates employees’ payables workloads and will enable them to focus on value-added tasks and initiatives.
Reduce Errors
Around 88% of the spreadsheets businesses use to balance their accounts contain errors. That means the possibility of inaccuracies creeping into the accounts payable cycle is high. Mistakes such as duplicate payments or payments made to wrong accounts can go undetected and result in lost revenue.
By switching to digital AP tools, you reduce the margin of error and minimize human intervention. You can pre-populate vendor data and eliminate the need for manual intervention.
Accounts automation payable tools help to eliminate errors inherent in manual data entry. Ultimately, they can put an end to potential accounting risk.
Prevent Fraud
Accounts payable fraud is common. According to a 2023 AFP Report, over 65% of companies were victims of fraud attacks in 2022.
To avoid being one of these statistics, use automation to gain real-time visibility of the AP workflow. That gives the finance team efficient internal control and helps detect accounts payable fraud.
Fraudulent transactions can be tracked in the finance software. The tool will alert you of any suspicious activity such as:
- inflated charges,
- fraudulent payments,
- phishing scams,
- unapproved vendors, and
- duplicate payments.
You know where each invoice is within the pipeline with control over the electronic invoicing systems. As a result, you can hold individual employees accountable and reduce the risk of financial losses across the organization.
Suggested Reads:
How To Choose The Right AP Automation Software
Choosing the right AP automation software may seem daunting. Unfortunately, the wide range of products available does not make your job any easier. Start by finding a system that will integrate seamlessly with your current tools. It should also allow for scalability.
Before implementing automated AP software, here are some quick tips to guide you toward the right investment.
Evaluate Current Processes
Identify the problems your business faces during the manual accounts payable process. For example, ask employees what invoicing challenges they are experiencing, their pain points, and their ideal solutions.
Map out the tasks involved from the point you create a PO, right down to payment reconciliation. Look at the time taken and the number of people involved in the invoice approval workflow. That will help you fully understand the solutions accounts payable software will provide.
Compare Pricing
Choosing a cheaper automation platform may be tempting, but check for less obvious costs. For example, some plans do not allow you to use various payment methods, while others limit the number of electronic invoices you can process.
It would help if you also considered factors such as support, training, and upgrades that may incur additional costs.
Explore Additional Features
Once you know precisely what your organization needs to streamline the AP process, look for features that will make software usage more effective.
Does the platform offer dashboard customizations? For example, how easy is it for employees on all levels to adopt the platform? Is there controlled access and permissions for different users?
By answering these questions, you can invest in an easily adaptable system that fits within your company structure.
In Closing
Without the proper tools, your accounting department faces many challenges. As a consequence, your bottom line could be negatively affected.
Choosing the right software will allow your teams to work smarter and increase productivity. In addition, you will have cash flow visibility within your business, and delving into this new payments frontier will streamline your AP workflow.
It also results in increased employee satisfaction and allows you to attract and retain top accounting professionals. Even if you implement just some of the six strategies to automate your AP processes, your investment will increase operational efficiency in the long run.
