Reducing Invoice Processing Costs With AP Automation

If manual invoice processing costs are getting in the way of your business’s growth and progress, then it’s time to see what AP automation can do for your accounts payable team.

Of all the financial functions a business must manage, accounts payable (AP) is one of the most time-consuming and labor-intensive of them, particularly when processes must be completed manually. A number of industry studies have actually found that manually processing an invoice ranges from a few dollars to over $40 per invoice depending on business type and company size.

These ongoing expenses can result in thousands, even millions, of dollars in expenditures each year that could be eliminated by an AP automation solution. Let’s review the various aspects of manual invoice processing and then see how automation works to streamline AP functions and reduce the overall time and dollars spent moving invoices from receipt to payment.

The Many Costs of Manual Invoice Processing

Manual invoice processing is a pricey endeavor for many businesses. The costs associated with it can be broadly categorized into direct, indirect, and hidden costs, and each cost type impacts the overall efficiency and financial health of a business in different ways.

Manual Invoice Processing: Direct Costs

One of the most significant direct costs of manual invoice processing is labor, since employees spend considerable time entering data, verifying invoice details, and managing approval workflows. And manual data entry is not only time-consuming, it’s alo susceptible to human error. In fact, industry estimates say it takes an average of 10-15 minutes to process a single invoice manually. When you multiply this time range by hundreds or thousands of invoices, the labor costs quickly add up.

Manual processing also generally involves a lot of paper usage. Invoices need to be printed, copied, and filed, leading to substantial expenses for paper, printing ink, and maintenance of printers and copiers. Over time, these costs accumulate, especially for larger organizations dealing with significant volumes of invoices.

The storage of paper invoices also requires physical space, whether it’s filing cabinets or entire rooms devoted to document storage. Not only is this space expensive, but it requires management and maintenance, adding to the overall direct costs of an AP department.

Manual Invoice Processing: Indirect Costs

Manual invoice processing is inherently slower than automated systems, and this extended processing time can lead to delayed payments, which may result in late fees and affect vendor relationships. The processing inefficiency can also delay the financial closing process and affect financial reporting and decision-making.

Because of the human element involved, error handling is fairly common with manual invoice processing. In this regard, some of the most common mistakes staff must resolve include data entry errors, lost invoices, and duplicate payments. Correcting these problems often requires additional time and resources, which further increases costs and sometimes leads to compliance issues and potential fines.

When you combine processing time and error handling time, the overall hours staff members spend on manual invoice processing will lower employee productivity by taking them away from more strategic, value-added tasks. This misallocation of human resources can lead to reduced overall productivity and lower employee morale as workers spend their time on repetitive, low-value tasks.

Manual Invoice Processing: Hidden Costs

The opportunity costs of manual payment processes are often overlooked but significant in accounts payable since the time and resources spent on manual invoicing could be better utilized in other areas such as innovation or customer service. The resource misallocation can gradually hinder growth and competitiveness of the organization.

Another hidden cost in manual invoice processing is the vulnerability it creates. Manual processes are much more vulnerable to fraud and pose a higher security risk than automated processes, therefore raising the importance of risk management. The security measures required to protect against these risks can be Implementing robust security measures to protect against these risks can be very costly.

Although not a direct financial cost, the environmental impact of manual invoice processing is a hidden cost that businesses should also consider. The heavy use of paper and energy for printing contributes to deforestation and carbon emissions. WIth this in mind, companies focusing on ESG (Environment, Social, and Governance) and sustainability may find that manual processes conflict with their sustainability goals and their corporate reputation.

How AP Automation Works to Streamline AP Functions

Automating AP functions helps a business streamline the entire invoice processing workflow by reducing the time and costs associated with moving invoices from receipt to payment. In order to make this transformation happen, a business must rely on a number of key technologies and processes made available through an AP automation provider.

The journey begins with the automated capture of incoming invoices. Using Optical Character Recognition (OCR) technology, paper invoices are automatically scanned, converted into digital formats, and uploaded to an automation software platform for processing. Any invoices received electronically via email or through Electronic Data Interchange (EDI) are parsed with advanced automation technology, processed automatically, and uploaded to the automation software platform for processing.

Once all invoices are in a digital format, intelligent data extraction and validation come into play. Here, machine learning algorithms extract key information such as vendor details, invoice numbers, dates, amounts, and line items. This information is then matched against purchase orders (PO) and other internal records to ensure its accuracy.

At the core of AP automation is the workflow engine, which routes invoices through the necessary approval hierarchies based on pre-configured rules and conditions. For example, invoices can be automatically forwarded to the appropriate personnel based on factors like invoice amount, department, or vendor. This automation of workflow ensures that invoices are processed swiftly and consistently, eliminating bottlenecks and expediting the approval process.

Despite all the automation features described above, exceptions will inevitably occur. Fortunately, advanced automation systems are able to incorporate predefined rules to manage these exceptions by automatically flagging them for review or sending them to a specific staff member or team for review. Overall, automated handling of exceptions ensures that only problematic invoices require human attention, thereby reducing the overall time spent resolving issues.

Once invoices are approved, automated payment systems have the ability to schedule and execute payments according to predefined terms, and methods of payment can include ACHs, wire transfers, virtual cards, or any combination of these. By automating this phase, businesses can ensure timely payments, avoid late fees, and even capitalize on cash rebates if virtual cards are used.

Besides all the available invoice payment functions, the real-time reporting and analytics capabilities provided by automated AP systems offer deep insights into key metrics like invoice processing time, outstanding liabilities, and payment status. Finance teams can use these insights to make informed decisions, optimize cash flow, and identify areas for further improvement.

Ultimately, the cumulative effect of automating AP functions is a substantial reduction in costs since automation solutions have the ability to change traditionally labor-intensive processes into efficient, streamlined operations. By leveraging technologies like OCR, machine learning, and workflow automation, businesses can enhance operational efficiency and position themselves for sustained growth and success.

Invoice Processing Savings, Revealed

When examining the financial impact of AP automation, statistics clearly illustrate its benefits in reducing invoice processing costs. While traditional, manual invoice processing is time-consuming and expensive, AP automation significantly cuts costs while boosting efficiency. These statistics highlight some of the savings:

• AP departments that use automation can process invoices and payments 60–80% faster than their competitors (Goldman Sachs).
• On average, businesses using AP automation spent $1.77 per invoice, while those not using automation spent $8.78 (Institute of Finance & Management).
• Costly paper checks account for 65-80 percent of B2B payments for SMBs. After shifting to AP automation, checks only account for 15-25 percent of payments (Goldman Sachs).

Learn More About Invoice Automation First Steps

Transforming your AP processes begins with automating your invoice processing functions, and in a short time, you’ll start seeing significant improvements in the efficiency, accuracy, and cost savings of your business.

For more information about how invoice automation works and to learn more about APSmart by CloudX, please fill out our online form here.