ROI in AP Automation – You're Getting More than You Think, and Here's How to Figure it out

22.03.2022

Topic: AP Automation | Digitalization

Implementing an accounts payable (AP) automation solution offers numerous benefits for your business and your employees. At the same time, it requires significant investment upfront for software implementation, training, licensing fees, consulting costs, and so on. So, you might be wondering how much value it really offers. To help you find an answer to this question, we examine the most common expenses and potential areas of savings and then evaluate the return on investment (ROI) of an AP automation solution.

What are the main cost drivers in AP?

Most costs incurred in accounts payable can be associated with a single expense: personnel. To employees working in the AP department, process automation can sound scary at first – they might assume a reduction in headcount will be inevitable. However, when businesses automate their AP processes, they often keep the same number of employees and reassign them to other, more value-added tasks. Indeed, through automation, the financial accounting department can be transformed from a cost center to a profit center. The paper-based back-office process can be transformed into a digital service center in which employees deliver business insights and monitor financial KPIs. With long-term performance ensured this way, the business is set on a path of cost-optimization. But what are the most important factors causing costs to increase in the accounts payable department?

Poor information management

The following is a typical situation in many offices: Just when you urgently need a certain piece of information, you can't find it anywhere. That’s not surprising when you don’t have a central database keeping track of the process – it’s difficult to monitor how documents have been exchanged between departments. Since employees have to compensate for a lacking efficiency and transparency along the invoice processing workflow, lead times lag.

Manual errors

When invoice data is transferred manually between paper and IT systems, repeated clerical errors are inevitable. In general, an error rate of one percent is assumed. If the number of invoices is high, this leads to a considerable amount of incorrect data in the ERP system.

Missed discounts

There are many companies that offer a discount on the amount invoiced, in exchange for faster payment. This is also known as dynamic discounting because the exact terms can be adapted dynamically to each supplier-customer relationship. Generally, it works as follows: the sooner a business can pay its invoice, the higher the chances of receiving a discount in exchange. If your employees are already at their limit and there’s no potential to increase the processing speed, many possible discounts go lost.

Low scalability

Having too much manual labor in key functions can limit a business in terms of its immediate growth potential. If your company is growing but your invoices are still being processed manually, you will need more employees to handle them. Since there’s always a lag in the employment process, you may not be able to scale quickly enough to cover the increased workload, and revenues may stagnate.

OCR technology delivers quick positive ROI

By automating processes in their AP department, businesses can reduce the above-mentioned cost factors. The most common solution that yields quick initial savings is optical character recognition (OCR) technology, which recognizes text in a digital image. OCR is an important step enabling companies to shift from manual data entry to electronic capture of invoice data.

Let’s look at an example: A company receiving 100,000 vendor invoices per year typically employs seven to ten analysts in its AP department. Some of these employees are responsible for entering incoming invoices into the ERP system. Let's assume that, per invoice, ten fields in the ERP system need to be filled. With 100,000 invoices per year, the total number amounts to one million fields. If the company were to implement an OCR solution with an average recognition rate of 70 percent, which is slightly below the market average, then 700,000 fields would be successfully recognized and filled without any human interaction. This represents important savings when it comes to data entry. But what about the downstream steps?

ROI increases with intelligent technologies

Assuming that the business already has OCR technology in place, let’s look at how the AP process can be enhanced through automation software that includes artificial intelligence (AI) components.

The aforementioned step of data capture aside, an essential task in the accounting department is preparing invoices for approval and forwarding them to employees. With intelligent software, this step can be highly optimized – to the point where, based on historical data, the system automatically suggests the employee who is responsible for the task. 

The subsequent step in the AP process involves checking and approving invoices. Here, too, technology enables faster processing by allowing digital document exchange and automatically verifying invoice data via a three-way match: An invoice is matched to the corresponding purchase order (PO) and goods receipt. If all three documents correspond to each other in terms of key data points, the invoice will be approved. If not, the system will automatically inform an AP clerk. 

The task of recording cost centers and GL accounts can also be optimized through AI: Once again, on an automatic basis, the software uses historical data to suggest the correct coding. With this AI-enabled support, employees are empowered to make decisions themselves rather than having to contact the AP department every time they have a question. Ultimately, this leads to more job satisfaction: Both the ability to add value to the company and its processes and a new level of autonomy enabled by the software are important job-enhancing factors.

In addition, intelligent archiving solutions can provide reliable long-term storage for all types of information – inbound invoices, documents from an ERP system, e-mails, purchase-related documents… the list goes on. Storing and retrieving documents in a digital archive is remarkably swift, rendering dragged-out searches for information a thing of the past. Instead, employees can search and access the data they need with just a few clicks.

Automation positively impacts cost structure in the long term 

Trading paper for digital interactions and automating work steps along the invoicing process can support companies in optimizing the cost structure of their financial accounting activities and brings about lasting changes to their business processes.

Faster overall processing speed, fewer errors, and queries in the AP department, the opportunity for dynamic discount offers, better scalability, and higher employee satisfaction are just some of the benefits of automated AP workflows. They highlight the fact that the initial investment for such software is quickly amortized. In other words, with all the cost savings gained, businesses that implement an AP automation solution quickly achieve a positive ROI.

If you’re interested in a more in-depth analysis and would like to calculate the ROI of AP automation for your own business, we offer this free ROI calculator.