Accounts Payable Automation : Where to Start

Accounts Payable is a back-office process that only gets CXO attention when issues with payments start affecting operations (e.g. being put on credit hold with key suppliers). This is unfortunate as Accounts Payable is a hidden well of value for organizations that are willing to put in the work to optimize and automate this core business process.

In the following deep dive guide, we’ll define the typical Accounts Payable process, discuss the potential of AP automation and show you how to get started.

The “Traditional” Accounts Payable Process

1/ Invoice Receipt

The Accounts Payable process begins when a supplier sends your company an invoice for the goods or services provided to your company. The main complexity at this stage in the process is that different suppliers have different invoice transmission methods. For example, some suppliers may send you electronic invoices via EDI/cXML. Others, pdf invoices via email. You may even still receive physical paper invoices by mail…

If left up to supplier choice, the invoice receipt process can cause headaches as you try to centralize all invoices for processing. Furthermore, suppliers may be sending invoices directly to their contacts across the business instead of to a central Accounts Payable department. This adds an exponential set of stakeholders that are interacting with vendor invoices, further complicating the task.

2/ Invoice Capture/Processing

Assuming you can gather all the invoices from these various sources in a central location, they need to be converted into an electronic format and converted into an accounting entry in your systems to be paid. In a rudimentary invoice capture process, this translates to employees manually (and laboriously) inputting the invoice data into your accounting system (invoice date, vendor, amount, general ledger account, payment term, etc.).

3/ Invoice Exception Management and/or Approval

Once invoices are captured in your systems, these can be validated and processed for payment.

There are 2 kinds of invoices:

• Non-PO invoices: Invoices received without other supporting documentation.

• Purchase Order invoices: Invoices related to a purchase order previously sent to the vendor.

3A/ Non-PO Invoice Coding and Approval

Since Non-Purchase Order invoices don’t have supporting documentation, they need to be manually assigned to a general ledger account and cost object (e.g. cost center or project) to be properly accounted for in your system.

They should always be approved by the person who requested the good or service before payment to ensure the invoice is legitimate given there is no supporting documentation.

Without supporting workflow technology, a typical method to achieve this is to:

1. Ask the requester to receive the invoice from the supplier

2. Add coding details and initials on the invoice by hand to provide approval

3. Scan or take a picture of the invoice

4. Forward it in pdf format to AP for payment (or walk over the physical invoice when possible)

Painful.

3B/ PO Invoice Exception Management

For PO Invoices, the purchase order should be approved before being sent to the supplier. Consequently, this means invoices should only be blocked and re-approved if there are discrepancies between the purchase order and the invoice at receipt (a “mismatch exception”). Otherwise, these invoices can be processed and paid when received by Accounts Payable because they match what was ordered.

There are 3 types of PO invoice matching:

• “2-way” matching: The invoice is validated against the initial purchase order for accuracy.

• “3-way” matching: The invoice is validated against the initial purchase order and receiving documentation for accuracy (or timesheets for services).

• “4-way” matching: The invoice is validated against the initial purchase order, the receiving documentation and a quality inspection report for accuracy.

As you increase the amount of supporting documentation in the audit trail for use in invoice matching, you also reduce the risk of paying for goods and services that were either not delivered or don’t meet your quality standards. However, processing this additional documentation also has a cost… Striking the balance between rigor and benefits by adapting the AP process to different purchasing categories is essential for an efficient accounts payable process.

If you don’t have supporting technology, it is hard to enforce any business rules that mandate the above matching rules… You most likely use an approval process similar to the one described for Non-PO invoices which relies on the judgement, records and memory of the requester instead of systematic supporting documentation.

In any case, the objective of the invoice exception management and/or approval sub-process remains the same: validating the invoice before proceeding to payment and resolving issues with suppliers as needed.

4/ Payment

Once invoices are approved for payment, they are formally logged into the company’s financial statements as accruals. They await a payment run based on the payment terms listed on the invoice (e.g. Net30 - pay net invoice amount in 30 days). To optimize cashflow, your payment runs disburse funds on the invoice due dates. This preserves precious working capital than can work for you in the meantime.

5/ Reconciliation & Remittance

Once payments are made, you reconcile these with your accrued account payable entries to formalize the expenses in your financial statements. Remittance information on the payment method/channel and transaction information can also be provided to vendors who want to reconcile revenue accounts on their end.

This is the typical accounts payable process in a nutshell. It doesn’t pose many problems at a small scale and when everything respects the “sunny day” scenarios. Challenges arise when:

• You multiply this process by tens or hundreds of thousands of invoices

• When a good percentage require disputes or corrections from suppliers

• When you operate in different countries with varied e-invoicing compliance legislation

Without proper processes and tooling, a growing business can quickly end up with a big “Accounts Payable problem”…

Enter AP Automation.

What Is AP Automation?

AP automation is the digitalization, and subsequent automation, of the entire Accounts Payable process, from invoice receipt to payment.

By leveraging workflow-based technology and explicitly defining businesses processes and rules, accounts payable activities can be reorganized to improve efficiency, accuracy, compliance.

Here are some of the principles that enable AP automation:

• Explicitly defining supported invoice receipt options for suppliers (and sticking to them)

• Automating the conversion of different invoice types into electronic format, helping eliminate manual invoice capture activities (e.g. with Optical Character Recognition technology or by receiving invoices in EDI/cXML formats from vendors)

• Explicitly defining your invoice matching business rules and the role(s) responsible for resolving each exception type. This enables the use of automatic invoice processing workflows:

  • PO Invoices

    • Price mismatches

    • Quantity mismatches

    • Missing goods receipts

    • Additional, unexpected charges

    • Expected sales tax mismatches

    • Duplicate invoices

    • Wrong legal entity information on invoices (e.g. Wrong Bill-to address)

  • No PO Invoices

    • Coding routes

      • Who enters the General Ledger information?

      • Who enters cost center / project information?

      • Based on which criteria (e.g. business unit)?

    • Approval routes

      • Who approves your non-PO invoices?

      • Based on which routing information?

      • Limiting Non-PO Invoices to appropriate purchasing categories

• Involving suppliers in workflows via a portal/notifications

• Automatically posting invoices to your accounting system once workflows are completed and issues are resolved

• Increasing visibility over process health (e.g. Key Performance Indicators) to focus on the highest priority bottlenecks and issues

• Supporting all of the above with a built-for-purpose, configurable system

The Benefits of AP Automation

AP automation solutions offer various benefits, including:

• Invoice processing cost reduction. An efficient workflow-driven process will drastically reduce the cost to process and pay supplier invoices.

• Accuracy of financial information. Reducing manual tasks from the accounts payable process eliminates the impact of manual errors on your accounting processes.

• Fraud prevention. Increased auditing capabilities, segregation of duty and compliance with business rules minimizes risks of payment fraud.

• Increased cash flow management capabilities. Better reporting, visibility and control over payment terms and payment dates, leading to better decision making around cashflow optimization initiatives.

• Positive impact on employee retention. Get employees out of the repetitive manual minutiae of processing invoices.

• Better relationships with suppliers. Better information, processes and systems means that suppliers can have more visibility into the status of their invoices, disputes and payment information. This correlates directly to a better business relationship with your company.

Instead of being bogged down in repetitive, essential but non-value add activities surrounding manual processing of invoices, AP automation technology allows you to increase Accounts Payable efficiency, plain and simple. This frees up company resources for other, more strategic priorities.

How to Get Started with AP Automation

Understand and Document Your Current State

It’s important to have a clear picture of your starting point to correctly quantify the effort needed to get from your current state to your ideal end state (fully automated AP). Before an AP Automation project, you should be able to answer the following questions about your current process:

• Process dimension. What are the step-by-step activities for your Accounts Payable process today (same scope as detailed in the AP overview section above)?

  • How many different invoice receipt methods do you support?

  • What are the invoice volumes for each method?

• People dimension. Who executes each activity in the current process? What are the different roles and responsibilities? How many people sit in each role?

• Governance dimension. Which business rules are validated by invoice approvers today?

  • This part is tough because you need to pull business rules out of people’s heads… They may not know exactly how they are validating invoices. They just “know”.

• Technology dimension. What technology currently supports the AP process today, if any? How is it connected to other systems (interfaces and architecture)?

• Data dimension. What is the business unit / geographical scope of your accounts payable process? Do you have multiple different Accounts Payable teams/processes by geography? What are the types (PO & Non-PO) and volume of invoice processed in these centers? What is the state of your vendor data quality?

To get a good understanding of the above, you may need to meet with multiple different stakeholders in the business. As you carry out this exercise, you should also keep in mind the next step in an eventual AP automation project.

Identify Pain Points and Key Business Requirements

While documenting your current state, you will naturally uncover AP process pain points felt by your business units (they will tell you 😅). These may be related to geography, industry, an outdated process or how particular business units operate. In any case, you should capture pain points as they come up to inform the messaging and value levers of an eventual business case.

Additionally, documenting your current state will lead you to identify key requirements that an eventual AP Automation solution must support to be viable in your context:

• Tax requirements. Depending on the industries and jurisdictions you operate in, you will have different sales tax obligations that need to be supported.

• Language requirements. If you operate in multiple geographies, chances are your AP process (and supporting applications) must support multiple languages.

• Regulatory requirements. Supplier invoicing is subject to multiple different (and sometimes odd) regulatory requirements in different jurisdictions.

• Integration to your back-end accounting systems. An eventual AP Automation tool will need to integrate with your existing back-end systems (or integration development will need to be priced into your project).

• Do you need the eventual application to support payment? Some AP automation tools will only support invoice receipt, capture/processing, exception management/approval but won’t support payment (this is handled in your existing accounting system). Others support the entire end-to-end process. What do you need/want?

Ensuring you capture pain points and key requirements as you document your current state will prevent you from having to reverse engineer them when crafting your business case and change messaging.

Get a Sense for the “Art of the Possible”

In parallel to the documentation of your current state, you should get intimate with the AP automation possibilities the market has to offer. This will help you link your vision to tactical and operational considerations while documenting your current state. Learning the AP software market will help you develop your reflexes for the eventual software selection and implementation phases. There are a number of activities you can partake in to achieve this:

• Meet informally with software vendors before any sourcing event

• Attend AP automation conferences

• Attend consulting firm events on AP automation

• Find and meet with peers who have implemented AP Automation solutions

• Seek out and read AP automation market analyst reports

• Run a Request for Information (RFI)

• Etc.

During these activities, ask questions about the dimensions listed above. The more inputs you have to help craft your vision, the better. The quality of your current state assessment, deployment and business case assumptions is the foundation upon which the rest of your implementation is built.

Build Your Roadmap and Business Case

Once you’ve documented your current state and mastered “the art of the possible” in the AP Automation market (possibilities, limitations, constraints, etc.), it’s time to turn your strategy into a realistic plan.

To achieve this, your business case should always be crafted in parallel to your implementation roadmap. Why? Well, depending on how you decide to implement the solution (e.g. regional deployments, “big bang”, certain invoice types first, etc.), the timing of associated costs and benefits of your business case will change.

Here are a few of the metrics to consider for use in your business case:

• Avg time needed to process an invoice by type (paper, fax, email pdf, etc.)

• Invoice processed per Full Time Equivalent (FTE) employee

• Percentage of invoice discounts lost

• Current late payment penalties, if any

• Historical cost of fraud (and benefits of detection/prevention)

How will implementing an AP Automation solution positively influence these metrics in your context? What amounts ($) are these benefits tied to? The pain points captured earlier will guide you to the metrics that make the most sense for a winning business case in your context.

Your roadmap may also include preparation activities/initiatives for the software implementation to reduce the complexity/risks of the project and/or increase the benefits. For example:

• Re-engineer and standardize business processes to reduce the change impact of a technological solution implementation

• Cleanse/Enrich vendor data

• Implement master data governance processes to ensure continuously high-quality data

Building your business case and roadmap in tandem based on what you’ve learned in previous steps will give you a very realistic idea of the potential of AP automation in your context before formally going out to market to partner with a specific technology provider and/or integrator.

Decide on Your Sourcing Strategy

Once you have a high-level business case and deployment plan, you are ready to engage with AP automation software vendors. This can take many forms based on the number of solutions you are considering and your contractual/negotiation objectives.

More formal approaches such as an RFP can be used when requirements are very clear and multiple solutions can be compared “apples-to-apples”.

However, if after your current state and market research exercises there is still lots of ambiguity in your vision, design and assumptions, a more informal and collaborative approach (e.g. agile sourcing) might be better suited to help you achieve your objectives.

When you ultimately settle on a given solution provider, you might need to make small adjustments to your business case and/or deployment roadmap to adapt to the chosen piece of tech. This is normal and to be expected as specific solutions will introduce additional constraints into the equation as you operationalize your tactical deployment plan.

Implement the Solution

The next step is to implement the solution according to your deployment plan. All solution implementations follow a similar lifecycle:

• Design. Design the desired end state business processes, security roles, data structures, interfaces, etc. when supported by the new tool in your business.

• Build. Execute on the design. Configure the solution, develop interfaces, prepare the data loads, etc.

• Test. Run through testing scenarios that validate that the ‘build’ matches the ‘design’ and meets the key requirements and main value drivers of the business case. There can be may testing phases that include different user groups (e.g. project team testing, end user acceptance testing, etc.)

• Deploy. Build the transition plan – both for the technical transition to the desired end state and the human transition to the new process (e.g. communication and training).

• Support. Once deployed, support, measure and continuously improve the solution to ensure you realize the value planned in your business case.

The Importance of Change Management

The above can be fairly simple from a technical perspective as solution providers and integrators deploy these solutions regularly as their core business. However, the biggest challenge in these types of projects is ensuring you equip your teams with the new skills and knowledge required to perform the new tasks required of them in your “new normal”.

This can mean developing digital skills to be able to operate and navigate the new solution correctly but can also be unrelated to the tool. For example, what new types of strategic tasks will you expect of employees who are no longer doing administrative work? How do you ensure they are supported in developing the required skills to accomplish these tasks? It is hard to overstate the importance and positive impact of change management in these types of projects.

Conclusion

After a few months of operation with an AP Automation solution, you'll wonder how you were getting by without one… These tools are truly transformational for Accounts Payable teams. The newfound automation capabilities and the associated visibility over the general health of the process at any point will feel like a super power.

It is important to note that to get the full benefits of AP Automation, the whole Procure-to-Pay process should be reviews and optimized (e.g. implementing purchase orders and invoice matching as referenced earlier). While automating a Non-PO Invoice process will provide benefits, pairing AP Automation with appropriate Procure-to-Pay processes and governance will generate another level of value for your organization.