The New Normal…How to Prepare your AP Department for the Next Unknown Event
As the country begins the slow process of reopening businesses, schools, and social activities, it’s a good time to reflect on the lessons learned over the past few months. As individuals, we learned to value time spent with loved ones and appreciate the ability to come and go as we please. And for businesses, many discovered gaps and inefficiencies in their current workflows that made working in a remote environment almost impossible.
This was especially true for finance departments, more specifically Accounts Payable (AP). Although many employees were told to work remotely during the pandemic, organizations quickly realized they didn’t have the processes in place to handle the manual, day-to-day AP tasks. Businesses were still receiving checks and invoices, and payments needing to be processed. With no alternative in place, AP Managers were forced to go into the office and take care of transactions to manage cash flow and pay vendors. This was not only inconvenient, but it was putting an employee’s health at risk. So, what changes can we make now in preparation for the next unknown?
One-way organizations can better prepare for the future is by implementing an automated payment solution, eliminating tedious, manual processes. Automated payment solutions give companies the ability to complete AP tasks from anywhere and provide finance departments with the tools and flexibility they need to work in a remote environment. In addition, an automated solution creates efficiencies within the organization, saving time and money.
In the United States, 64% of businesses still pay by check and the issuing and depositing of checks across the country costs businesses $26 billion annually. When you add in losses from check fraud which total roughly $18.7B annually, the numbers tell a clear story that something needs to change, and it needs to happen fast.
2. Getting Started
The thought of implementing a new solution can be daunting, especially during a time of crisis. However, automating AP from procurement to payment doesn’t have to be an arduous task.
In an article published by McKinsey & Company, A Roadmap for Digitizing Source to Pay, they broke down the level of effort to automate each AP function. An excerpt from the article:
Our analysis shows that, overall, 56 percent of the tasks associated with the source-to-pay process are fully or largely automatable using existing technologies. That’s a significant finding, suggesting that source-to-pay activities as a whole are more suitable for automation than is a typical US-based job.
Unsurprisingly, the automation opportunity is highest in the more transactional parts of the process: in placing and receiving orders, 88 percent of tasks can be automated, and the figure rises to 93 percent in payment processing. Moreover, even the strategic elements of source-to-pay show considerable automation potential. Our analysis shows that 47 percent of vendor-selection and negotiation activities can be automated.
3. Evaluate your Current Processes
Knowing where to start is half the battle and determining problem areas within your current payment process is next step in preparing your business for the future so you can begin increasing efficiency. There are obvious pain points that businesses can use as indicators to determine their specific needs to automate AP functions.
- Outdated Accounting Systems: Systems that create more work than is necessary can slow your cash flow to a trickle, which in turn can lead to inefficiencies, stunted growth, and lower profitability.
- Limited Transaction Visibility: A limited end-to-end view of transactions associated with multiple payment methods results in extra costs, delays, chargebacks, and payment cycle disruption.
- High processing costs: It costs Accounts Payable (AP) organizations nearly $8 to process a single supplier payment with 62% of costs stemming from labor.
- Manual AP processing: Manual tasks are time-consuming, which can cost you hundreds of man-hours that could have been spent on other important tasks within the organization. It also leaves room for data entry errors and even the smallest error can cost you hundreds of thousands of dollars.
- Low Productivity, High Error Rates: Manual processes lead to low productivity and inevitably an increase in human errors. It takes an average of 30 days to complete a payment manually, and as such 47% of vendors are paid late for their products or services.
- Poor Supplier Relationships: Manual processes, human errors, late payments, and delays in billing approvals lead to an unhealthy relationship with your vendors. This can result in unnecessary delays and cause you excessive losses in the form of bad deals and bad service.
- Fraud Risk: The risk of fraud is very high with checks as well — manual processes have limited authorization controls for each transaction, leading to internal fraud.
4. Finding an AP Automation Partner
Selecting the right automation partner for your business is critical to the success of your program. It will likely require extensive research. Prepare by asking your AP team to answer the following questions:
- Why are we looking to automate payments?
- What are the biggest concerns/issues with the current AP process?
- How do we pay our vendors today?
- How much time do we spend on weekly check runs?
- Have we calculated the cost of our current processes to initiate vendor payments?