Accounts Payable Automation – Benefits and Pitfalls

Beware the pitfalls of AP Automation

Where you work, have you automated Accounts Payable? I’d love to hear. Please tell me your experience in the comments below.

Accounts Payable (AP), in case you were unsure, is the process by which the business pays the companies which supply it with goods and services. The suppliers send in invoices which must be paid within the agreed credit terms. The Accounts Payable process ensures that all those invoices get logged, coded to the correct place(s) in the accounting system, and paid at the right time.

I did the AP Assistant job for a few weeks once. It was a small company, and the process was fully manual. So, it involves taking the pile of paper invoices and working through them one by one. I’d input the invoice details (supplier name, invoice date, description, amount, VAT, account codes, etc) into the accounting system, stamp the invoice, write the relevant codes in the boxes, and get it signed as valid by the relevant manager. Then I’d file the signed and posted ones in lever arch files.

What is Accounts Payable Automation?

Now having worked for much bigger companies, I realise there are lots of opportunities for an automated process. So, for those of you wanting to know what automation is possible, and whether it is real, here’s an outline of an automated process I’ve worked with in real life.

Invoices come in either physical form (less than 20%) or as pdfs attached to emails (more than 80%). If they arrive in an envelope someone puts them through the scanner, which generates electronic images and stores them. If they arrive by email, a program sifts through and copies the electronic invoices.

Invoices are then processed into the system: Optical Character Recognition (OCR) is used to automatically read the invoice details – supplier, description, amount, VAT, invoice number. The system doesn’t have to know where to find those details. It works it out for itself, by spotting labels and reading words.

Once the details are in the system, the supplier account is linked to the requisite P&L coding, the right cost centre, and a list of approvers. An email automatically goes out, including an image of the invoice, requesting the relevant approvers to approve or reject it. The next approver gets an email approval request as soon as the preceding approval has been given. And once the last approver has approved, the invoice is posted into the accounting system automatically.

Then when it’s time to pay the invoice, since it’s been approved, it gets picked up on one of the weekly payment runs.

If all goes well, the process from receipt of the invoice, through capture, recognition, and approval, through to posting, can be as little as about ten minutes. And the only time a person sees the invoice is when they are approving it as a valid expense. No one has to key data, or touch a physical piece of paper. You can see why it’s attractive as a piece of automation.

Remember the Costs

But if you’re just about to jump to put this on your Christmas list, there are also a few pitfalls to beware of, otherwise you may end up with something more painful and expensive than the manual process you had before! And I say this from my experience of having managed an implementation.

First, the cost savings from automation will be mainly in reducing people from the AP team. But don’t forget that automation itself comes with a cost. There will almost definitely be software licences if you have it installed on your premises, which means there will be both upfront licence fees and annual software maintenance fees. How much these are will depend on the software vendor’s licencing structure and pricing.

There will also be consultancy fees for someone to come and install and configure the system. They’ll also help you design the processes.

And then you mustn’t forget that you will need the new system to be supported. Would your IT team do this? Would they have the relevant skills and knowledge? If not, would you have to pay a specialist company to support the system?

All these things must be considered before you commit to the project. Wouldn’t it be a shame if you saved £50k a year in staff costs, only to spend £200k up front in licence fees and consultancy, and have to commit to £60k a year in software maintenance and system support!?

It’s Not Easy Straight Away

Second, the process, at least at the start, is not 100% automated. When you start off, the system may have to see each type of invoice several times for it to learn it. While it’s learning, you may have to have people just sitting there confirming whether the system has read each invoice correctly or not.

You need to be sure beforehand that you are going to get the levels of automation you need. And you need to plan for a few months of transition before things start to settle down.

It’s Very Good, But Not Perfect

Third, OCR is never 100% accurate. It’s very good, but it relies on the quality of the electronic images. Some may be blurred low resolution. Some systems have problems with pdfs that contain embedded fonts. Sometimes fonts lead to mix ups between characters – 1 or I, 5 or S, for example. Sometimes these things can be catered for to an extent with some ‘tuning’. But how easy is that tuning to do? Will you need to pay for more consultancy?

Fourth, don’t forget that there will always be errors. Even if the system did everything perfectly, there are still humans involved in configuration, coding, approving, etc. Sometimes they do things wrong. So, there has to be someone in the AP team who knows what to do, how to reload invoices, chase up when approvals are taking time, correct missing coding, etc.

It isn’t possible to reduce the AP function to literally nothing. Any business case that suggests that should be looked upon with a large degree of scepticism.

Accounts Payable Automation – Words of Advice

So, what final words of advice? Here are a few bullet points:

  1. Do an RFI or RFP (Request For Information / Proposals) process, using a clear and detailed set of requirements, and inviting a large number (more than 10) of providers/vendors to respond. Invite 3 or 4 that look promising to come and do a thorough demonstration.
  2. Especially if you don’t have a large AP function, consider outsourcing instead. This may well be more cost effective, as you won’t be adding in a new system overhead.
  3. Keep an open mind in process design. If you are considering mature automation solutions, their “out-of-the-box” processes are probably worth considering, and may be cheaper to implement.

And finally, going back to a point made earlier, always do a detailed and realistic business case (cost/benefit analysis). Be clear why you want automation. If it’s to reduce costs within Finance, then make sure you don’t end up just replacing staff costs with third party system support and maintenance costs.

 

I’m interested to compare notes, so please do tell me about your Accounts Payable experiences in the comments below. And please click one of the sharing buttons below to share this with anyone else who may be interested.

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Thanks.

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