How to Calculate the ROI on Your Accounts Payable Automation Investment

Jun 3, 2020 9:45:00 AM

If you are a business owner or manager in today’s competitive environment, you must be aware of the conflicting demands placed on your funds. Not only do you have to stay on top of your industry and changes in technology, but you also need to consistently meet your customers’ demands at attractive prices.

In essence, you need to be smart and digitally savvy to ensure that not only do you curb your accounts payable-related expenses but also that you get the maximum returns.

Our customers often ask us how they can justify the investment in AP automation, which is essentially a non-revenue generating function of their company. We encourage them to use our To-Increase MediusFlow cost savings calculator to determine the savings they will get from accounts payable automation.

While there is no doubt that accounts payable is an expense or spend function of finance, it can be a tedious and long-drawn process if done manually, resulting in inefficiencies that have a profound impact.

The best way forward is to invest in an accounts payable automation solution that can help you speed up the process and ensure that you minimize errors. But that’s not all; AP automation software has many benefits to offer, which we will list out below so that you can calculate your ROI on AP automation software.

AP Automation ROI

Calculate the cost of not having accounts payable automation software in place

Accounts payable, often considered the poor cousin of other finance areas, is the process by which a company makes payments to various suppliers and vendors. In most companies, the process starts with an expense, which is either planned (purchase order–based) or ad hoc (without a purchase order).

Once the service or product is delivered, the vendor or supplier presents the invoice for payment, it goes through the approval process, after which it goes for payment. The flow that leads to the final payment can differ based on the type of purchase and the process that the company follows.

Given below are the direct costs of not automating your accounts payable process:

The direct costs of not automating accounts payable software

  • Organizing invoices

When you have a manual account payable process, you will need to open envelopes, emails, and other means of communication to gain access to an invoice. Then you have to segregate and stack them together so that you can send them forth so that the next level can be processed, which would be checking, approval, explanation, and finally, the payment.

Most companies would need to allot a substantial portion of their finance team resources to ensure that they organize invoices in the right manner.

  • Checking invoices

As we had mentioned earlier, invoices can be traced back to the purchase order and goods receipt when they follow the procurement process or can be an unplanned purchase, which can be traced back to the approval.

The method of checking if the invoice amount and quantity is as agreed upon and whether it is within the approved limits can be a long-drawn one.

  • Transmitting for approval

Once you have worked on organizing and checking invoices, you need to send it to the approver along with the relevant details like the purchase order details, the context of the purchase, the goods receipt, etc.

Providing these details can help speed up the process of approvals. In case the invoice is sent back with the need for more information, then that is another task that will be added to this process.

  • Follow-up

In many cases, once you send the invoice for approval, you will need to keep following up with the approver to ensure that they go through the invoice and approve it on time. If not done on time, this can result in misses that can have a cascading effect on the way you serve your customers.

For instance, any delay in payment for a product component will delay future deliveries, which in turn will affect production, and thereby delay the product delivery to the customer.

  • Making the payment and filing invoices

Once the approvals are in place, it is time to check all the details one final time and make the payment. Filing and storing invoices follow the payment step. You will find that this step not only has its own cost attached but is also essential for audit purposes.

  • Cost of employees

All the processes described above have employee salary costs attached to them. You need to not only consider the employees that directly work with accounts payable but also factor in the cost of the approvers’ time.

  • Scanning, printing, and other overhead costs

Since we are talking about a manual system, there will be additional charges that include the digitization of paper invoices, printing of virtual invoices, the cost of filing systems, and additional overhead costs. The overhead costs could consist of space, people, and other miscellaneous expenses.

The indirect costs of not automating accounts payable

Apart from the direct costs, your business can also suffer other negative impacts due to a manual accounts payable system in place. Some of these are financial, but others, while not financially tangible, can impact many vital aspects.

  • Loss of market reputation

The quality of supplies and services you get as well as the prices at which you get it will be based on your reputation in the market. One of the factors that influence your market reputation is timely payments.

Often, manual accounts payable processes can lead to missed or delayed payments that can affect your reputation. This, in turn, will result in poor payment terms and, in some instances, quality suppliers refusing to work with your company.

  • Inadequate quality supplies and services

With manual accounts payable, you will find that suppliers are not ready to supply you with quality supplies due to the delays in payment. As a result, you will have to settle for the second-level quality of supplies that can affect the way your customers view your products and services.

  • Late payment charges and penalties

Consistent delays in payments can result in your suppliers and vendors levying late payment charges and penalties increasing your expenses. If not accounted for in your product costing, it can result in the eroding of your profit margins.

  • Improper cash flow planning

Poor accounts payable management can create situations where your payments are not paced adequately due to the logjam caused by processing and approval delays. As a result, you will see that several payments have to go at the same time resulting in bank charges for working capital.

What is the cost of investing in AP automation software?


The cost of accounts payable automation software

Accounts payable automation software, especially from an expert and experienced solution provider, is bound to have a  . In most instances, there is a cost per license per user. You can look at the various options before selecting the one that suits your current and future needs.

Scanning equipment

Since we are talking about accounts payable automation, invoices need to be converted to digital format for which you need compatible scanning equipment. Factor the cost of this into your ROI calculation for AP automation.

Additional IT support

When you add a new software into your existing ERP environment, there is bound to be a need for additional IT support. Factor in the cost of additional IT support as part of your ROI calculations.

System and process changes

With the automation of the AP process, there are going to be changes in the systems you have and the methods you follow. It would help if you quantified the changes and factored in the cost aspects involved in the change management.

What is the return on investment?

We have looked at the direct and indirect costs of not automating your accounts payable processes. Now, let us take a look at the return on investment.

  Investment

  Returns or benefits

  • Accounts payable automation software licenses
  • Scanning devices or software
  • Additional IT support
  • System and process changes
  • Touchless invoice processing
  • Quicker turnaround from purchase to payment processing
  • No need for follow-up for approvals as many AP automation solutions enable mobile access and usage aspect
  • Instant access to the status of payments
  • Faster and more accurate processing of payments, resulting in a better relationship with vendors and suppliers
  • Better rates and timely payment discounts
  • Improved cash flow planning due to the regulation of payments
  • Accurate and timely creation of audit trails
  • Improved staff morale due to elimination of mundane tasks
  • Increased focus on strategic rather than operational aspects of finance
  • Complete analysis of spending and expenses with ease
  • Establishment and evaluation of key performance indicators based on industry benchmarks
The way forward to your accounts payable processes

Now that we have deep-dived into the return on investment from automating your accounts payable processes, it is time to take the next step towards AP automation. But before you start, here are some of the steps that you need to consider:

  • Analyze what your current processes are for procurement, purchase, and accounts payable
  • Consider the needs of your finance department not only for accounts payable but also for audit and statutory requirements
  • Talk to your IT and accounts teams to determine the ERP syncing and operational requirements
  • Carry out due diligence on the software providers that will meet your requirements
  • Shortlist the list of software solution providers for your accounts payable needs and discuss the terms, prices, and other details
  • Put together an evaluation and implementation team from the IT and accounts payable teams

Implement, configure, and enjoy the benefits of accounts payable automation with the right solution.

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About Author
Michele Chapman

Michele Chapman

Product Manager Finance Michele brings her 15+ of experience in government contracting and materials management to To-Increase as a product manager. During her career, she has held positions in supply chain for a government contracting company and for one of the largest providers of supply chain transportation solutions in the U.S. More recently, she was a principal consultant at a recognized software vendor for the government contracting market.
Michele holds a B.A. in French and International Studies from West Virginia University, an M.A. in French from George Mason University, and an M.B.A. and a Certificate in Supply Chain Management from the College of Business at East Carolina University.

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