Why does accounts payable (AP) matter? It is simply the process where you get invoices for the supplies you have purchased, and all you need to do is check if it is correct and make the payment. It is not even the income aspect of a company, then why does it matter?
Absolutely wrong! Accounts payable impacts many aspects of your business, including the way your stakeholders and the market perceive you.
While it is true that accounts payable is the expense side of the accounting department of a company, it can play a vital role in the overall operations of the company. It can affect the quality of production, your market reputation, the terms that you get from financial institutions, audits, and much more.
There is another aspect of the accounts payable process that many companies do not consider, which is the cost of accounts payable.
What does the cost of accounts payable mean?
As you know, accounts payable has a role to play with every spend (planned or unplanned) that happens in a company. With planned and purchase order-based spending, the process starts with the purchase request and ends when the invoice is paid.
Each of the activities in between has a cost attached, a significant portion of which includes the cost of invoice processing.
When our customers at To-Increase, often approach us with their worries around the cost of processing invoices, we advise them to automate their accounts payable processes.
The factors that affect the cost of invoice processing
In this section, we will look at the various costs—direct and indirect—involved in invoice processing.
Often mistaken for the only cost involved in the accounts payable function, the cost of full-time employees does represent a substantial chunk of the total. When done manually, the accounts payable process would require the attention of the staff to open invoices, check the numbers, cross-verify the details with the purchase order and goods receipt, apply accounting codes, send for approval, or raise a dispute in case of discrepancies.
In most companies, there is a substantial number of invoices that come in from vendors and suppliers, depending on their business. While the cost of invoice distribution may not seem like a huge cost, it does add to the overall AP expenses.
Even though today, electronic media aids most of our personal communications, many companies still believe in paper copies of their invoices. This means that the AP department must retrieve, sort, open, check, code, and then send these invoices to different people and departments for approval.
Once the AP team has distributed the invoices, they will need to follow up for the approvals, then once they receive approvals, they make the payment, file the papers, and post the entries.
Each of these activities eats into the time of your staff, which, in turn, adds to the cost of the invoice process.
Approval and follow-up
In most cases, the AP team would have the authority to approve invoices for lesser amounts. However, with higher values, the approval process is set in such a way that more than one person must approve the payment to prevent fraudulent practices.
When the AP team sorts and distributes the invoices to different people for approval, it could so happen in many instances that the person may be traveling or not be available. Often AP teams spend much time following up with various people for approvals to ensure that they can make payments on time, which can become a cost factor.
Filing and storage
With accounts payable, the process never ends when the team makes the payment, the invoices have to be stored for future reference and audit purposes. This means that you have the further cost of filing and storing these invoices.
Since we are talking of paper invoices, the cost of filing and storage will be substantial.
Another aspect of the costs when it comes to accounts payable is that of accruals due to the need for the month-end closing of accounts. Often invoices may have been received but not paid due to lack of approval or invoices not received but a provision made in anticipation of making the payment.
However, many finance teams make an accrual provision for the month to come based on empirical data and some educated guesswork. However, in some cases, the actual payment required may be much higher than the accrual provision that has been made.
The result is short-term borrowings to pay the invoices resulting in higher interest rates, which is an additional cost that of manual accounts payable processes.
AP is a crucial function that can boost or hinder your financial health, depending on the way it is handled. Some of the opportunity costs that could occur due to manual AP processes include the strategic value that employees could add if they were not engaged in mundane, repetitive tasks.
Another cost that could affect the AP process is that of missed invoices and entries, the cost of duplicate tasks and payments, and more. Audit and statutory penalties due to poor AP handling could also be another opportunity cost.
Missing out on early payment discounts and better rates due to delays in the accounts payable process is another aspect that adds to the cost.
What’s the way forward?
When you look at all the costs of manual accounts payable processes, it is clear that you need to ease the process. Automating the accounts payable process can be an efficient way forward. However, when you are in the process of automating your accounts payable process, you need to do some due diligence before proceeding.
Below are some of the things you need to evaluate:
- Your current situation including the number of invoices processed, the type of purchases (expense and purchase order-based)
- The process for approvals and approval limits
- The procurement process and the number of steps involved
- The current method of managing contracts with vendors and suppliers
- The complete process that you follow for invoice payments starting from request to payment
- The current ERP-AP solution sync requirements and the extra IT support required
To-Increase has been helping customers automate their AP process with touchless invoice processing for the past two decades. Talk to our experts to learn how our AP automation solutions can help.