Turn leaders into business spend automation champions
Businesses need to manage Accounts payable (AP) efficiently to optimise costs, improve cash flow and build valuable supplier relationships. AP and finance managers are aware of the benefits that automation brings. According to a PWC survey on critical CFO priorities, transforming business processes such as AP remains high on the CFO agenda.
But before an automated AP invoicing project can hit the ground running, AP practitioners need to secure buy-in from the executive team. A significant hurdle to automation that AP departments face is, the belief that current manual and semi-automated processes are working well. And if it is not broken why fix it?
Some businesses may have implemented existing ERP and accounting systems which creates a status-quo mindset, as many executives are weary of taking on projects that need integration with current ERP systems.
Existing systems have built-in spend management modules that appear to address the same needs as a complete AP platform. Many of these systems, however, are used by accounting professionals and not rolled out to business decision-makers and suppliers. As a result, many AP-related processes continue to be managed manually. Further, the systems lack the flexibility to tailor AP workflows, have poor risk mitigation controls such as supplier classification and vetting, and do not incorporate instant credit and discounting into the payables workflow.
AP automation champions need to articulate the full range of benefits gained from a long-term business spend transformational process to secure C-suite support. Executive decision-makers are likely to respond positively to any new solution that can enable the business to:
- optimise costs
- maximize working capital
- improve agility
- mitigate risk
To persuade key decision-makers, AP departments need to measure critical costs and performance indicators (KPIs) and build a convincing business case that demonstrates the bottom line and the top-line benefits that can be achieved.
Capture hard dollar savings
The invoice processing time and the cost is the number one indicator to measure the efficiency of the payables process. Essentially, this is contingent on the current makeup of accounts payable, the state of approval workflows, and the current invoice throughput levels that the business processes.
As the business expands, and invoice throughput volumes grow, manual or semi-automated processes create added overheads. The total number of invoices paid (for a set period) divided by all the costs incurred to pay them (for that same period) will provide businesses with the cost per invoice. This metric, along with other accounts payable metrics, provides an accurate measure of a business’s AP efficiency. This is a function of:
Invoice processing costs
The cost per invoice of automated processing is significantly less than manual processing. By incorporating automation into accounts payable software, businesses can save their staff many hours of manual data entry work such as invoice data entry, invoice coding and approval, and the verification and matching of invoices enabling them to efficiently use their skills and abilities to support strategic business activities.
To accurately measure this cost, businesses need to map all employees involved throughout an invoice’s journey – direct and indirect – accounts payable employees, including invoice processors, customer managers, and supervisors. On determining the number of employees, AP practitioners need to calculate an hourly personnel rate and time spent on processing invoices.
Invoice processing time
Businesses need to measure the average time it takes to approve invoices and benchmark these processes against industry standards. The data included in the assessment will include time spent on:
- generating the purchase order
- receiving the invoice from the vendor
- approval time for the payment to be sent to the vendor.
- generating the payment for the invoice and sending it through approval.
- releasing the funds for payment.
- managing any exceptions in the process including erroneous and late payments
Exception handling costs
A high number of exceptions escalate the cost and the time of processing supplier payments. If invoices are matched to the wrong purchase order or are recorded incorrectly, it consumes employee time and effort in investigating and fixing the error. AP practitioners can calculate the costs in terms
of the total number of exceptions and total person-hours, including supervisors and senior management costs, in addressing exception-related issues.
Manual invoice processing creates added reconciliation overheads. AP automation makes the reconciliation process faster, accurate, and more efficient. By enabling system-to-system communication between AP and Accounting/ERP systems businesses can cut delays, errors and time spent on exception handling.
Late payments fee
According to industry studies, less than 20% of businesses pay all their invoices on time, as they rely on manual and semi-automated invoice processes. Businesses need to track the number of payments that are late, as well as any penalties and late payment fees incurred on account of delays. AP automation tools with proactive alerts on pending invoices can speed up payment cycles and avoid paying late fees and penalties.
The costs incurred on bank charges and credit card fees. These fees can be evaluated by pulling a report of all transactions, payment instruments used and associated fees for a 30-day period.
Businesses need to factor paper, envelopes, stamps, check stock, printer ink, and printer maintenance costs.
Data storage costs
The cost of maintaining AP-related records, in-line with in-country compliance requirements, is another factor that businesses need to consider. By calculating total invoice processing costs AP professionals can underscore the need to improve AP functions for senior management staff. Measuring the cost of processing invoices will also highlight potential efficiency gains.
|Costs USD||Costs INR|
|1||Enter cost of processing a single paper invoice||US$5||INR 410|
|2||Enter cost of processing one invoice electronically via automated AP||US$1||INR 82|
|3||Savings per invoice processed (subtract row 2 from row 1)||US$4||INR 328|
|4||Enter the number of invoices your organization processes per year (Assuming 100 invoices per month)||1,200||1,200|
|5||Gross savings on invoicing processing (multiply row 3 by row 4)||US$4,800||INR 3,93,600|
|6||Enter per-user monthly subscription cost||US$3||INR 246|
|7||Enter the total number of users per month||10||10|
|8||Total annual subscription costs (multiply row 6 by row 7)||US$360||INR 29,520|
|9||Charge per invoice||US$ 0.1||INR 10|
|10||Total annual invoice charge (multiply row 4 by row 9)||US$120||INR 1200|
|11||Total costs (add rows 8 and 10)||US$480||INR 30,720|
|12||Total savings (subtract row 11 from row 5)||US$4,320||INR 362,880|
|Assumptions for a small and medium business headquartered in India
Improved cash flow and working capital management
Many businesses potentially leave money on the table due to a lack of automation. Rather than design a business case focused solely on efficiency gains, improved cash flow and working capital management is a powerful argument to engage the executive suite on AP digitalisation. AP practitioners need to consider the following:
Cash back from spend
AP automation providers such as Zaggle offer a wide range of corporate credit card products tightly coupled with its Accounts Payable platform. By incorporating credit cards into AP software, businesses can earn monies in the form of cashback and rebates. Due to the high value nature of business-to-business payments, these earnings can be substantive. For many businesses, depending on the volume and the value of payments, the earnings from cashback can offset the cost of the AP automation software.
Earnings from discounts
Generally, early payment discounts range between 1% and 5% of the total invoice value. Extended and slow invoice-to-pay cycles, however, cost the business money that can otherwise be claimed via discounts offered on early payments. To calculate earnings, businesses need to have a complete view of early payment offers. This will help arrive at potential cash that could be reclaimed from early payment discounts. By mapping the total volume and the dollar amount of discounts to the number of offers availed, businesses gain insight into achievable savings. A large volume of missed discounts underscores the need for an automation tool.
Improved time to insight for decisioning agility
Executive decision-makers in most companies struggle with lack of insight into their cash positions and with upcoming invoices and payments. They need visibility into cash outflows to monitor company spending, compliance with budgets, forecast working capital needs, and better structure payment timing and contract terms. Collating data from multiple sources and excel-based processes to analyse spending trends prolongs business decisioning cycles. The business case for AP automation must consider the time spent by finance teams to service business requests for a deeper analysis of payables. Granular insight into payables by commodity, supplier, business unit and employee can help business executives make faster business decisions.
Mitigate risk and strengthen compliance
Automating AP strengthens compliance and mitigates risk. As an example, effective vetting of suppliers and third parties is a critical aspect of compliance. Further businesses also reduce audit costs and ensure compliance with tax regulations including VAT and GST.
Mitigate supply chain risk
Timely payments and transparent AP processes strengthen supplier relationships. At a time of supply chain disruption, efficient AP processes help buyers mitigate the risk to an extent. Zaggle recommends AP practitioners conduct frequent dipstick surveys among priority suppliers to gauge satisfaction scores. Low supplier satisfaction scores are indicative of a need for change as the business may be vulnerable to supply chain risks and can be factored into the business case
Enforce budgetary compliance
Effective invoice-to-pay processes help businesses improve fiscal discipline. Real-time visibility into payables aids in proactively flagging out-of-budget business spends and strengthens enterprise-wide budgetary compliance.
AP automation can offer a range of benefits and savings for businesses, including:
- time and cost savings
- better working capital management
- enhanced agility
- built-in compliance
AP practitioners, while building a business case for AP automation adoption, need to map returns along cost, saving and efficiency parameters. The cost savings and rebate earnings, by themselves, make a compelling business case to prove that AP automation can pay for itself within a few months.
Zaggle Zoyer, a SaaS-based business spend management and embedded cards platform, simplifies invoice automation. Businesses can manage the complete workflow from requisitioning purchase orders, creating invoices, automating approvals, and making payments. The software paired with, Zaggle credit cards helps businesses address working capital shortfalls and earn on spend.
For a complete understanding of the ROI from AP automation that Zaggle can deliver, connect with an expert. Visit www.zagglezoyer.com to schedule a demonstration.