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Accounts payable automation, or AP automation, is the use of technology and software to automate the tasks and workflows involved in the accounts payable process. This process includes tasks such as receiving/processing invoices, data entry, approval, and payment.

AP automation aims to improve the efficiency, accuracy, and speed of the accounts payable process. It also reduces manual workload, the likelihood of fraud and costs for businesses.



How does AP automation work?

Accounts payable (AP) plays a crucial role in a business as it is responsible for managing and paying off the company's outstanding debts to suppliers and vendors. It is a critical component of the financial operations of a business and is closely tied to cash flow management. AP responsible for ensuring that bills and invoices are paid in a timely manner and that the company is not incurring late payment penalties or damaging its relationship with suppliers. This allows the business to maintain a positive relationship with its suppliers, manage its cash flow, budgeting and financial compliance.

The use of automation in AP helps in every step of the AP process. The first step in AP automation is the receipt and capture of invoices.

Invoices may be of various formats and received in a variety of ways, such as email, fax, or postal mail. The invoices are first scanned and digitized, allowing them to be easily stored, accessed, and processed electronically. Once the invoices are digitized, they can be automatically matched to purchase orders and routed for approval through an automated workflow.

The next step is data entry and validation. The AP automation software captures pertinent and user-defined data from the invoices and automatically populates fields in the company's financial system, reducing the need for manual data entry. This also helps to ensure the accuracy of the data, as the software can validate that the invoice matches the purchase order and that all required fields are filled.

The third step of AP automation is the approval process. Invoices are routed through an automated workflow for approval by the appropriate parties. This process can be configured to include different levels of approval, depending on the value of the invoice or the department it is associated with. The automated workflow makes it easy to track and monitor the approval process, ensuring that invoices are processed in a timely manner.

Once an invoice is approved, it is ready for payment. AP automation software can be integrated with the company's financial system to generate payment batches and schedule payments based on the company's payment terms. This can ensure that invoices are paid on time, reducing the risk of late fees and interest charges.

Finally, the entire process is tracked and reported. The software keeps track of all invoices, purchase orders, and payments, providing real-time visibility into the entire accounts payable process. This allows for easier monitoring and reporting, which can help with compliance, budgeting and forecasting.

Benefits of AP automation

The rise of digitalization has drastically changed the way customers and businesses interact, and has created a new platform for the exchange of ideas.  Automation is being seen as the only way toward improved services, and efficiency in financial processes. Additionally, businesses are increasingly turning to digital platforms for managing their financial assets, a trend that accelerated during the COVID-19 pandemic. As a result, the demand for digital payment solutions and faster invoice processing is driving the growth of the accounts payable automation market.

Some specific ways in which AP automation increases efficiency are:

  • Improve accuracy: By digitizing POs, invoices, and receipts, businesses can eliminate the need for manual filing of such documents, which in turn can reduce risks of loss and errors and enhance accessibility to data.
  • Invoice matching: AP automation software can automatically match invoices to purchase orders and receipts, thereby allowing better management of the procure-to-pay process. The automated matching process can ensure that an invoice corresponds to the corresponding purchase order and is only paid once. Additionally, the software can include a check to ensure that an invoice has not already been paid, avoiding double payments. The tracking function of the software allows users to receive alerts for duplicated invoices, this enables businesses to investigate and prevent duplicate or missed payments.
  • The integration of the AP automation software with a company's financial system can enable generation of payment batches and scheduled payments, which can in turn, help ensure that invoices are paid on time, reducing the risk of late fees and interest charges.
  • Streamlining approval: AP automation software can automatically route invoices to the appropriate individuals or teams for approval. This can save time and reduce the risk of errors by eliminating the need for manual routing. By enabling electronic approval of invoices, physical signatures or approval stamps can be eliminated. AP automation software can include built-in approval rules, such as payment limits, approval hierarchy or any other custom rules. This can help ensure that invoices are routed to the correct individuals and that the approval process is done according to the company's policies and standards. AP automation can also be configured to send email or other forms of digital notifications to the approvers, reminding them of the approval task, providing access to invoice details and allowing them to approve or reject the invoice with just a click.
  • Audit trails: AP automation software can provide an audit trail of all approval actions, including who approved the invoice, when they did it and if they were made any comments. This can be used for tracking and reporting purposes.
  • Compliance: By automating the invoice approval process, companies can ensure that all invoices are approved according to company policies and regulations, and that the process is compliant with any regulatory or legal requirements.
  • Scalability: AP automation allows for better scalability and can handle the workload as your business expands.By automating tasks, AP teams can reduce the number of people doing mundane tasks and free up human resources for strategic tasks associated with expansion. Furthermore, the real-time visibility into the business operations afforded by AP automation can help AP teams make better-informed decisions, identify areas for improvement, and scale their teams more effectively.
  • The ecological benefit: Automation can usher in a paperless office, which, beyond efficiency improvements to the establishment can serve society at large by reducing carbon footprint.

In addition, AP automation offers an array of control measures that can be implemented to ensure the security of financial processes and prevent fraud. One way to do this is through setting limits on the approval of invoices, this can be set for specific individuals or groups within the organization. Additional steps such as additional approvals can also be put in place to further safeguard against fraudulent activity. The reporting and analytics feature provided by AP automation solutions also aid in increasing transparency and visibility throughout the process, which makes it easier to detect any suspicious or unusual activities, enabling timely action to be taken. These measures in combination can greatly reduce the risk of fraud and enhance the overall security of financial processes.

AP automation is useful in both B2B and B2C contexts as it can reduce expenses while enhancing the utilization of resources. Furthermore, the system's capacity to track and document all invoices, purchase orders, and payments enables real-time financial visibility, which can be of paramount importance for ensuring compliance and effectively planning budgets and forecasting.

Not surprisingly, the AP automation market is expected to increase substantially in the coming years. According to a survey by Data Bridge Market Research, the accounts payable automation market is projected to reach a value of USD 5,809.38 million by 2029, with a compound annual growth rate of 10.8% between 2022 and 2029.

Does AP automation software improve supplier relationships?

Efficient financial management is crucial for any business to operate effectively. AP automation provides the means to promptly and accurately process invoices, which in turn helps to strengthen supplier relationships by ensuring timely payments. By integrating with a company's financial system, AP automation can automatically generate payment batches and schedule payments based on the company's payment terms, which can enable compliance with agreed terms.

Most AP automation software include built-in communication tools, such as email or other forms of digital notifications (smart messaging etc.), that can keep suppliers informed about the status of their invoices and payments. This can help to improve communication and reduce misunderstandings and disputes, which can build trust between the business and its suppliers.

Automatic matching of invoices to purchase orders and receipts can prevent over- or underpayment to vendors, and thereby prevent disputes and miscommunication that may take time and effort to settle.

How much can a business save with Accounts Payable automation?

AP automation can bring cost savings to businesses by reducing labor costs and late fees. While the costs associated with traditional paper-based payments such as check stock, envelopes, and postage are easily identifiable, there are also costs associated with the time spent on manual tasks related to processing payments. For example, even a single document scanned by a salaried clerk earning $40,000 per year can take 5 minutes of their time and result in an estimated cost per document of over $2. These costs, when added up, can significantly impact the overall cost-effectiveness of the AP process. Additionally, with manual AP systems, team members often spend hours on tasks such as searching for lost or misplaced invoices, and answering inquiry calls.

According to a 2018 report by Goldman Sachs, B2Bs in North America spend $187bn annually on AP processing - and this estimate captures only direct processing and labor costs; in fact, labor accounts for over 90% of direct costs incurred. The costs of automated AP processing, according to the same report, are only 33% of manual costs.  This amounts to an annual spend of only $62bn, a whopping savings for the AP department.

Image reproduced without modification from here.

In addition to labor-related costs, lengthy processing cycles could potentially lead to late payments and late fees. Research indicates that poor payment practices can negatively impact supplier relationships, as many businesses are found to pay a significant portion of invoices late. For example, mid-sized businesses in the United States reported that they were on average owed $304,066 by customers who pay late. Additionally, a staggering 81% of these businesses reported that the severity of these late payments has increased since 2021. These late payments also put a significant strain on businesses, with mid-sized businesses in the US spending on average 14 hours per week pursuing overdue invoices.

Delays ultimately impact cash flow, forcing businesses to rely on their own reserves or take out loans in order to keep operations running. Both of these options come with the risk of long-term financial instability. All of this can be avoided with automated AP processing.

AP automation can help improve supplier relationships by providing more efficient tracking and payment of invoices, leading to an improved "on-time" record with suppliers. This can help foster stronger relationships with them, which can help consolidate vendors into a smaller number of strategic suppliers, which has been shown to have fiscal benefits.

The financial benefits of having strategic suppliers. Image reproduced from here without modification.

According to a survey conducted by McKinsey of over 100 large companies across various industries, those that collaborate closely with strategic suppliers exhibit higher growth, greater profitability, and lower operating costs compared to their rivals. By fostering long-lasting partnerships through close collaboration, companies can also consolidate their supplier base and realize cost savings through leveraged spending and economies of scale.

Finally, AP automation offers more payment options beyond traditional paper checks such as ACH and virtual card, which are considered more secure and financially beneficial for the business, while also catering to the preferences of suppliers, all of which would contribute to fiscal benefits.

How much does AP software typically cost?

The cost of AP software can vary depending on the vendor, the features included in the software, and the size of the business. Some AP software providers offer subscription-based pricing, charging a monthly or annual fee, while others may have a one-time purchase cost. Some providers also offer tiered pricing options based on the size of the business or the number of users.

The amount to invest in purchasing AP automation software is often tied to the number of invoices processed per month. Software solutions that include the whole gamut of AP automation, including front-end invoice processing, auto-matching, approval workflows, and archival require extensive operational systems such as OCR, bi-directional integration, business intelligence, workflow, audit trail, and storage).

The simplest case of AP automation is the scan-and-archive approach, which as name suggests simply converts all documents into a digital format for archival purposes. While it helps with archival and retrieval, it does little to improve automation and may even add extra steps to the process. This method can be implemented for a few hundred dollars on a small scale, but an electronic document management system can cost between $10,000 and $100,000.

A higher model of AP automation would include front-end invoice processing, auto-matching, approval workflows, and archival. The systems needed for this approach are complex and are useful for businesses that process 10,000 or more invoice transactions every month. The cost of this model could range from $100,000 to $500,000, with additional software license fees and personnel support costs.

Cloud-based AP automation is similar to the above model but requires less infrastructure investments because storage is at a cloud, which eliminates the need for storage hardware. Implementation fees are typically based on the number of invoices processed per month, making it a favorable option for some businesses. For businesses processing over 10,000 invoice transactions per month, implementation fees can range from $20,000 to $35,000, and transactional costs can range from $0.65 to $0.95 per invoice.

The most advanced AP automation includes features such as electronic payments like ACH, EFT, wire transfer, and virtual cards.  These types of solutions are increasingly being used in B2B operations and provide a more secure method of payment.  

Many providers also offer customized pricing, depending on the specific needs of the business. It's important to evaluate the features that are needed for your business and then choose a provider accordingly.

Does AP automation work with other accounting systems?

AP automation systems can work with other accounting systems; many systems have various integration options, such as API or middleware, to provide seamless data transfer between the different systems. This way, AP automation software can retrieve data such as invoices and purchase orders from other accounting systems, process them and then update the information in the external accounting platform. With the integration, businesses can take advantage of the AP automation software's features and automation capabilities, while still using the accounting software that they are comfortable with.

The Nanonets' platform, for example, can be integrated with other accounting systems, such as QuickBooks and Sage, allowing businesses to take advantage of the automation and reporting capabilities of the platform, while still using the accounting software that they are comfortable with.

Takeaway

The automation of the Accounts Payable operations streamlines the process of handling invoices, payments and other financial transactions, thus enabling businesses to improve their efficiency, reduce costs, and increase accuracy. AP automation aids like Nanonets runs on AI and enables creation of AP workflows that can automatically gather files and documents from various sources, such as email, scanned documents, digital files/images, cloud storage, and ERP systems. Apart from smart capture, good AP automation tools can also match and reconcile expenses, manage all expense workflows, from creating expense reports to obtaining manager approvals, and seamlessly integrate the monthly accounting close process with any ERP, accounting software, or business tool desired.

AP automation software such as Nanonets can assist AP teams in significantly reducing costs by 80% for businesses, significantly increasing the speed of processing invoices by 10 times and optimizing AP days, eliminating inaccuracies caused by manual checks and verifications, identifying and intelligently handling exceptions and routing them to the appropriate individual, and identifying and eliminating fraud, theft, double payments, and other inefficiencies.