Thanks to machine learning and the document data extraction, validation and processing technologies it enables, ~80% no touch AP automation is possible for invoices submitted outside of the company’s Electronic Data Interchange (EDI). Additionally, companies should push foe EDI adoption to further increase no touch automation rate.
By adopting these technologies, companies can dramatically reduce manual document processing. Therefore they can reduce costs and errors while increasing compliance and employee satisfaction. According to our interviews with project managers from the Big 4 and solution providers in the space, an average Fortune 500 processes a few millions of documents manually per year and adopting the latest automation technologies can result in savings of hundreds of millions of dollars per year.
What is the Accounts Payable (AP) process?
Accounts payable (AP) process includes receiving, processing, and paying out invoices from suppliers that provided goods or services to the company. In accounting, such transactions are written under accounts payable account, until the payment is made.
An AP department is responsible for
- keeping track of transactions. For example, invoices need to be stored for ~10 years in some EU jurisdictions like Germany
- making payments on time
- ensuring payments are compliant to company policies and relevant laws and regulations (e.g., not making payments to Specially Designated Nationals And Blocked Persons List – SDN)
- ensuring that payments are correctly accounted for. Company’s General Ledger (GL) includes all transactions along with the accounts those transactions belong to. For example, classifying an operating expense as a capital expense would have implications in both taxation as well company’s bottom line results.
What are the steps to be automated in accounts payable?
Almost all accounts payable process steps can be automated. Here is a step-by-step summary of an AP process for invoices received outside the company’s Electronic Data Interchange (EDI). We focused on this because this process is much simpler when structured data is received through the EDI.
Manage vendor data
Even before invoices arrive, most companies expect procurement teams create master data records for suppliers to ensure that accounts payable team is aware of whom they should make payments to.
Receive the invoice
When a purchase is made, the supplier needs to prepare an invoice. An invoice needs to include
- sender and sender’s detail such as VAT ID and address
- recipient and its address
- the items purchased along with prices and VAT rates
Additionally, it can also include details such as payment terms, the purchase order, original offer etc. Recipients store invoices to keep track of expenses and for VAT returns.
The received invoices need to be scanned and sorted in order. They are also archived in the company’s database in case the related transaction details are required in the future.
Capture the data stored in the invoice
Most of enterprise invoices are sent through Electronic Data Interchange (EDI) systems. However, large companies still end up with millions of invoices sent mostly through email in the form of pdf or image attachments. These tend to be from smaller suppliers or suppliers that rarely work with that company. The data in these invoices needed to be manually captured in the past. Since the 90s, OCR solutions were able to provide a text output for images which facilitated manual capturing. However, clerks still needed to match the text to the fields they were looking for in the document. Now invoice capture solutions can achieve ~80% no touch automation rates, providing structured data as output.
In our interview, Hypatos team shared that since manual data capture is expensive, companies tend to capture just a few fields from each document to enable the payment. This results in limited automation in downstream processes. For example, with more data captured from a document, the account of the invoice can be estimated with higher accuracy. will be the to assign invoices to accounts, since they are necessary, for example to identify the account an invoice belongs to.
Companies have various compliance processes to minimize fraud and other compliance issues. For example,
- invoice needs to include critical data fields such as supplier details etc. as mentioned above
- For purchases of physical goods, invoices needs to be 3-way matched. This means that invoice will be matched against the original Purchase Order (PO) and Good Received (GR) document. If this match fails, company can not be sure that the invoice belongs to a purchase of the company that the company has received. In case a match does not happen, which frequently takes place, this is fixed in Goods Received Invoice Received Clearing (GRIRC). Reasons for matches failing include multiple good deliveries corresponding to a single invoice or multiple invoices corresponding to a single good delivery.
- Non-physical purchases such as services like consulting need to be 2-way matched with the Invoice Received (IR) matched against the original Purchase Order (PO).
- payments beyond a specified amount need to be verified by the department
- payment should be internally consistent and in line with the applicable laws and regulations like sanctions or VAT. For example, companies can be fined up to a few percentage points of their revenues if they fail to comply with VAT regulations in the EU
Validation is crucial because problems are far easier to fix early. For example, many EU companies do not perform real-time checking of invoices for VAT compliance. When a compliance issue arises after the payment is made, the supplier is likely to be less motivated and slower to respond. Re-issuing an invoice requires manual effort and companies are much faster to do it before they receive the payment for the invoice.
Create accounting entry
Once validations are completed, accountants need to create new ledger entries based on the invoice. General Ledger (GL) entry includes details in the invoice such as the amount as well as
For orders with Purchase Orders (POs), this can be automated with ease as the PO includes the account that made the purchase. However, when the invoice lacks a purchase order, accountants need to assign one to it manually. However, if all data in the invoice is captured, a machine learning model can be built to predict accounts from invoices. Hypatos is a solution provider that provides such functionality.
The 2-way and 3-way matches explained in the validation phase do not always get completed due to various issues explained above. Then, accounts payable team tries to clear unmatched records periodically by manually analyzing them. Having improved extraction increases match rate and reduces GR/IR clearing issues that need to be resolved manually.
Make payments on time
Businesses need to process all payments before the due date on the invoice. Late payment can result in fees and reduced supplier trust which impacts future procurement.
Finish period end tasks
Some IR/GR clearing activities and other accounting related activities need to be delayed until the period end. With increased automation in the previous steps, these issues can be resolved earlier.
Which technologies are involved in AP automation?
AP automation is a developing technology that aims to enhance the accounts payable process by reducing manual processing of repetitive tasks. While automating AP processes, businesses benefit from the broad group of technologies listed below:
- Data management
- Data extraction technologies including
- document scanning
- Optical Character Recognition (OCR)
- machine/deep learning to assign data to specific labels (e.g., supplier address)
- Machine learning to automate tasks like matching invoices to accounts
- Payment processing
- General purpose automation tools like RPA can help automate rules based parts of the process
Why do businesses need AP Automation?
Although AP processes seem simple, the increasing number of transactions in businesses raises the complexity and resource requirements of AP teams. By automating this process, companies can reduce cycle times, give employees more time for more intellectually challenging tasks, reduce human errors and increase employee satisfaction.
Shorter Cycle Times
Late payments can risk supplier relationships of companies. Thus, it is vital to make payments on time and keep cycle times short. AP automation prevents these late payments and reduces cycle times. Ardent Partners reports that AP automation can reduce the cycle time to 4 days, while the manual process takes 17 days for most companies. They also indicate that this is the main reason why only 4% of businesses pay all of their invoices on time.
By just eliminating manual tasks, AP automation can provide significant cost savings for a company. Besides, it can reduce costs by optimizing vendor portfolios, avoiding duplicate or erroneous payments, and taking advantage of early payment discounts. Aberdeen Group indicates that the payment processing cost per receipt decreases from $11 to $5 by automating AP processes.
Preventing manual errors
As human-made invoices are prone to errors, duplicate or incorrect payments can always occur. AP automation can reduce these errors and help companies to maintain this process smoothly.
Manual accounts payable processes have lower visibility because companies mostly operate these processes in paper forms. Without digitalization, it would be harder to follow up AP processes, and it makes these processes more open to fraudulent actions. AP automation might detect fake invoices and reduce the possibility of internal or supplier fraud to protect the company.
Nobody wants to spend their work time punching in numbers from a document. Automation enables employees to focus on higher value added tasks.
How to choose an AP automation solution?
High level of automation
The automation software should increase automation to an acceptable level. A good measure of automation is the no touch processing rate. Leading solutions in the market claim ~80% no touch automation rates.
AP systems need to be integrated to a company ERP system like SAP. Understanding the company’s experience with system integration helps evaluate the timeline for the integration
As in any solution, having a user-friendly interface is vital for companies. Employees can become familiar with such software faster and use them more appropriately. AP automation solutions are the same. The UI will be used as clerks fix issues in the extracted data and other exceptions.
According to Moody’s, Electronic payments added $296 billion to GDP in the 70 countries from 2011 to 2015. This number is expected to be higher today. Businesses prefer electronic payment strategies for improved efficiency in payment processes, increased command over their cash flows, and enhanced protection against fraudulent activities. Business Insider states that digitization in transactions can increase productivity by 73% and decrease costs by 81%. Thus, payment solutions should also be considered while evaluating an AP automation approach.
What are top AP Automation solutions?
Feel free to use our prioritized, sortable list of the top AP automation solutions based on our benchmarking exercise which compared different AP automation solutions in terms of the automation rate they enable.
If you have questions on AP automation, feel free to contact us: