AP automation, or accounts payable automation, is technology that simplifies and speeds up the accounts payable process. It helps businesses reduce the amount of manual work involved in processing vendor invoices and managing payments, and it reduces the incidence of errors such as duplicate payments and incorrect data entry.

These faster and more accurate payment processes can improve vendor relations and save your business money. Automated AP costs are only 33% of manual costs in large part because of lower labor expenses. Below, we’ll explain how AP automation works, the main factors that determine its return on investment (ROI), how to calculate its ROI, and how to successfully roll it out.

What’s in this article?

• How does AP automation work?
  
• Main factors that influence the ROI of AP automation
  
• How to calculate the ROI of AP automation
  
• How to increase efficiency with AP automation
  
• How to successfully roll out AP automation
  
• How to encourage AP automation adoption
  

How does AP automation work?

AP automation uses technology to streamline and automate steps in the accounts payable process. Here’s an overview of how it typically works:

Invoice capture

AP automation can receive electronic invoices and paper invoices.

• Electronic invoices: These invoices are received directly from suppliers in a structured digital format (e.g., extensible markup language [XML], electronic documents interchange [EDI]) and automatically imported into the AP system.

• Paper invoices: These invoices are scanned or captured using optical character recognition (OCR) technology to extract relevant data (e.g., vendor name, invoice number, line items) and convert them to a digital format.

Data extraction and validation

AP automation software extracts key data from invoices, validates it against purchase orders and receipts (if applicable), and flags any discrepancies for review. Some systems have fraud detection features; some use machine learning to improve accuracy and recognize patterns over time, while others might require manual validation for certain fields.

Invoice matching and approval

• Matching: Invoices are automatically matched to corresponding purchase orders and receipts based on predefined rules and tolerances. Some software has duplicate invoice detection tools to prevent duplicate payments.

• Approval: If a match is found, the invoice is routed for approval based on preconfigured workflows that define approvers and thresholds. Approvers receive notifications and can review and approve invoices electronically, often with the ability to add comments or questions. Some software also gives approvers mobile access to review and approve invoices.

Payment processing

Once an invoice is approved, the AP system initiates payment according to the business’s payment terms and preferred payment method (e.g., check, ACH transfer, credit card). Some systems can schedule payments to improve cash flow and take advantage of early payment discounts.

Archiving and reporting

• Archiving: All invoices, supporting documents, and audit trails are securely archived for easy retrieval and compliance purposes.

• Reporting: The AP system generates reports and analytics on spending patterns, vendor performance, approval cycle times, and other key metrics.

Main factors that influence the ROI of AP automation

Determining the ROI of AP automation involves assessing the direct financial benefits and the indirect advantages of using this software. These factors determine what the ROI of AP automation can be for your business:

• Initial and ongoing costs: The initial costs of setting up AP automation include purchasing software or paying subscription fees, integrating with financial systems, and possible customization. Ongoing costs include software maintenance, updates, and staff training.

• Process efficiency: Automation cuts the time required to process invoices by eliminating manual data entry and speeding up approval workflows. Reducing the time and personnel needed for invoice processing can lead to substantial labor cost savings, particularly in larger organizations with high invoice volumes.

• Fewer errors: Automated systems minimize human errors such as duplicate payments and incorrect data entries, which can lead to financial losses and the need for time-consuming corrections.

• Compliance help: Automation helps businesses adhere to regulatory requirements and internal controls by maintaining accurate and traceable records, reducing the risk of penalties.

• Vendor relationships and discounts: By processing payments more quickly, businesses can take advantage of early payment discounts offered by vendors, improving cash flow and reducing costs. Faster and more accurate payment processes also improve relationships with suppliers, potentially leading to more favorable terms and conditions.

• Scalability costs: AP automation systems can scale to handle a higher volume of invoices without incurring major additional costs.

• Reporting and analytics insights: Automated systems provide greater insight into spending patterns and financial commitments, allowing for better financial decision-making. Advanced analytics help identify inefficiencies and improve the procure-to-pay process, contributing to overall savings.

How to calculate the ROI of AP automation

Calculating the ROI of AP automation involves comparing the costs of implementing and maintaining the system with the financial benefits and savings it generates. Here’s a step-by-step look at the process:

Determine the costs of AP automation

• Software costs: The initial purchase or subscription fees for the AP automation software and any ongoing licensing or maintenance costs.

• Implementation costs: The expenses related to setting up the software, configuring workflows, training employees, and integrating with existing systems.

• Operational costs: Any ongoing costs for running the system, such as cloud hosting fees, support services, and potential upgrades.

Identify the benefits and savings

• Reduced labor costs: The time saved by automating manual tasks such as data entry, invoice matching, and approval workflows. Multiply the saved time by the average hourly rate of employees who had performed these tasks.

• Early payment discounts: The discounts earned by taking advantage of early payment terms because of faster invoice processing.

• Reduced late payment fees: The potential savings from avoiding late payment fees because of timely payment processing.

• Lower error rates: The cost of errors associated with manual processing, such as duplicate payments, overpayments, or late fees. AP automation can greatly reduce these errors, leading to savings.

• Improved efficiency: The intangible benefits of improved efficiency, including faster approval cycles, better visibility into the AP process, and reduced risk of fraud.

Calculate net savings

Subtract the total costs associated with AP automation from the total benefits and savings to determine the net savings generated by the system.

Calculate ROI

Divide the net savings by the total cost of AP automation and multiply by 100 to find the percentage of ROI.

Formula:

(Net Savings / Total Cost of AP Automation) x 100 = ROI (%)

Example calculation: Let’s say a business invests $50,000 in AP automation and realizes the following savings and benefits annually:

• Reduced labor costs: $30,000

• Early payment discounts: $5,000

• Reduced late payment fees: $2,000

• Decreased error costs: $3,000

The net savings come to $40,000. If the total cost of AP automation is $50,000, then here’s how you calculate the ROI:

ROI = ($40,000 / $50,000) x 100 = 80%

In this example, the business achieves an 80% ROI in the first year of implementing AP automation. The ROI is likely to increase in subsequent years as the initial investment is recouped and the savings continue to accrue.

How to increase efficiency with AP automation

Here’s how to get the most out of AP automation:

• Get your invoices in electronic formats such as PDFs or e-invoices. This makes it easier for your automation software to capture and process them quickly.

• Let the software automatically extract key data from your invoices, eliminating the need for manual data entry.

• Set up rules to automatically match invoices with purchase orders and receipts to greatly speed up the approval process.

• Use the software to schedule reminders for upcoming payments so you can pay on time and save money.

• Consider cloud-based or mobile-friendly AP automation software that’s accessible anywhere.

• Look for software that integrates with your accounting software so you don’t have to juggle multiple systems.

• Use the software to generate reports on key metrics such as invoice processing time and payment accuracy to help identify areas for improvement.

• Stay up-to-date with the latest features and best practices with training and support resources.

How to successfully roll out AP automation

With planning, your business can effectively roll out AP automation and start enjoying the benefits. Here’s how to structure the process:

Assess your needs

• Analyze your AP process: Identify challenges, bottlenecks, and areas for improvement. Determine your goals for automation (e.g., reduce costs, increase efficiency, improve accuracy).

• Define your requirements: Consider factors such as invoice volume, invoice formats, approval workflows, integration needs, and budget.

Build a business case

• Quantify the potential benefits: Estimate the cost savings, improved efficiency, and other benefits based on your needs and data.

• Calculate the ROI: Determine the potential ROI to justify the cost of the software and implementation.

• Present the business case to stakeholders: Clearly communicate the benefits and ROI to get buy-in from key decision-makers.

Select a vendor and solution

• Evaluate different vendors: Consider factors such as software features, pricing, customer support, the implementation process, and integration capabilities.

• Request demos and trials: Test the software to make sure it fits your workflow and meets your needs.

• Choose a vendor: Select the vendor and solution that meets your requirements and budget.

Plan and prepare for implementation

• Assemble a project team: Include stakeholders from finance, information technology (IT), procurement, and other relevant departments.

• Develop an implementation plan: Define the scope, timeline, milestones, and responsibilities for each phase of the project.

• Prepare your data: Cleanse and standardize your vendor and invoice data for smooth migration to the new system.

• Customize the software: Configure workflows, approval rules, payment terms, and other settings to match your processes.

• Integrate with your systems: If necessary, integrate the AP automation software with your enterprise resource planning (ERP) system or other financial systems for data flow and to avoid manual data entry.

Train your team

• Provide comprehensive training: Make sure all relevant employees understand how to use the new system and its features.

• Offer ongoing support: Establish a support system to address any questions or issues that arise during and after implementation.

Go live and monitor

• Start with a pilot phase: If possible, test the system with a small group of invoices or vendors before rolling it out across the entire AP process.

• Monitor performance: Track key metrics such as invoice processing time, error rates, and approval cycle times to check whether the system is meeting expectations.

• Gather feedback: Collect feedback from users to identify any complications or areas for improvement.

• Make adjustments as needed: Refine workflows, adjust settings, and address any issues to enhance the system’s performance.

How to encourage AP automation adoption

When starting with AP automation, choose software that is intuitive and easy to use. If possible, pilot the system with a small group of users or invoices before rolling it out to the entire organization. Once the system is in place, you can use these key strategies to encourage adoption within your business:

Communicate the benefits

• Explain how AP automation will make employees’ lives easier, such as by reducing manual tasks, minimizing errors, and improving collaboration.

• Share stories from other businesses or departments that have implemented AP automation and the positive impacts it has had on their work.

• Explain how AP automation fits with broader business goals such as cost reduction, improving efficiency, and mitigating risk.

Address concerns and resistance

• Talk to employees about their worries or reservations about the new system. Common concerns might include job security, learning curves, and fear of change.

• Address concerns directly, and provide training, resources, and ongoing support to help employees feel comfortable with the transition.

• Encourage open communication, and let employees share feedback and suggestions for improvement.

Provide comprehensive training

• Keep staff training relevant and specific to each employee’s role and responsibilities.

• Offer training through channels such as online modules, technical support, in-person sessions, workshops, and user guides.

• Provide ongoing learning opportunities to help employees stay up-to-date on new features and best practices.

Celebrate achievements

• Share positive results from the early stages of implementation to build momentum and excitement.

• Acknowledge and reward employees who actively participate in the adoption process.

• Encourage employees to share ideas and suggestions to further fine-tune the AP automation process.

Lead by example

• Ensure managers and executives are actively involved in the adoption process and demonstrate their commitment to the new system. Managers should actively use the AP automation software to show employees it is valuable for their work.

• Understand that change takes time, and provide encouragement and support to employees throughout the transition.