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AP Automation Byers Guide

It is time to automate Accounts Payable

From time immemorial, small, and large businesses have used the Accounts Payable (AP) process to receive invoices from suppliers, review and validate invoice details, code them the right ledger account, and pay suppliers on time.

While mission critical, at most businesses AP is a manual, ad hoc, paper-based, error-prone process. Studies have shown that it can cost a business as much as $20 to manually process an invoice.[1] And despite the increased adoption and use of digital payments, most invoice payments are still made by paper check at an estimated cost of $5 per check.[2]

As businesses grow and their invoice volumes increase, the cost of manual AP can be insidious; it is now estimated that U.S. businesses collectively spend more than $200 billion a year on this basic, everyday financial process.[3]

When AP is manual, it can also be difficult to consistently employ the controls necessary to mitigate the risk of fraud. Basic payment authorization controls such as segregation of duties can be laborious and impractical (e.g., imagine doing this in a post-COVID distributed workplace).

And poor controls expose businesses to the ever-present threat of internal and external fraud[4] ; it is inevitable that a business will eventually be a victim of a payment fraud attempt or attack. The 2022 AFP Payments Fraud and Control Survey reports that 71% of organizations were victims of payments fraud attacks or attempts in 2021.[5]

Today, businesses can use cost-effective, advanced software solutions to automate and digitize the AP process and experience the benefits of improved working capital, lower processing costs, increased staff efficiency, improved controls, and reduction in incidents of fraud.

At every business, the digital transformation of AP is underway.

It is now estimated that U.S. businesses collectively spend more than $200 billion annually to manually process and pay supplier invoices.

The 2022 AFP Payments Fraud and Control Survey reports that 71% of organizations were victims of payments fraud attacks or attempts in 2021.

The digital transformation of AP

What is AP Automation? Modern AP Automation solutions streamline and digitize all aspects of the AP process, from invoice capture and approval to payment authorization and disbursement.

It is estimated that a business can save 75% to 80% of its AP processing costs through automation, while AP Automation workflows enable AP staff members to process three times as many invoices as with manual processes.

And while cost savings and efficiency alone can be powerful benefits, AP Automation solutions can provide the essential controls necessary to mitigate the risk of internal and external fraud.

Every business can experience AP Automation benefits: improved working capital, reduced processing costs, increased staff productivity and reduced incidents of fraud. The greatest beneficiaries are small and mid-sized businesses — practically all such businesses process invoices manually and make over 80% of their supplier payments by paper check.[7]

It is no surprise that the past few years have seen the rapid emergence and growth of AP Automation, and the accelerating adoption of solutions by hundreds of thousands of small and mid-sized businesses in every industry.

But this explosive growth in AP Automation has also created a complex and confusing solution marketplace. Businesses seeking to embark on their AP digital transformation journey will find their choices plentiful and daunting, with solutions of every kind dotting the landscape.

The purpose of this guide is to help you, the buyer, gain a deeper understanding of the AP Automation marketplace: the range of solutions available, features and benefits, pricing approaches, and trends.

It is estimated that a business can save 75% to 80% of its AP processing costs through automation, while enabling staff to process three times as many invoices.

Small businesses make 80% of their payments by paper check, compared to large enterprises where check volumes are now below 50% [6]

Let us show you how AP Automation can help your business.

The AP Automation solution marketplace

The AP Automation solutions marketplace can be complex and confusing.

AP Automation software can be found that serves businesses large and small, industries wide and varied, with requirements simple and complex, needing features very narrowly defined or very general in nature.

There are “legacy” AP automation vendors that have served businesses for decades, and newly minted “disruptive” AP automation companies that leverage breathtaking advances in AI and machine learning to speed up time to value. There are solutions that repeat the mantra of lower cost and increased efficiency; there are solutions that package bright, shiny features that present new, strategic perspectives on the benefits of AP Automation.

It can be daunting to sift through the myriad excellent choices to identify the AP Automation solution that best serves your business. In fact, it is impossible to create a comprehensive guide that exhaustively analyzes the many choices available across business size, industry, and feature set.

As a result we have created this guide specifically for growing small and mid-sized businesses. This guide will be most helpful if you meet the following criteria:

  • Your business has between 10 and 1,000 employees — or annual revenue between $1M and $100M
  • Your business uses a general purpose accounting system like Intuit QuickBooks, Microsoft Dynamics, Oracle NetSuite (or other similar) that serves businesses your size
  • You process and pay at least 25-50 invoices per month
  • You believe that your AP follows a fairly standard process — from receiving and approving invoices to disbursing payments to suppliers by check, ACH, or credit card

Conversely, you will not find this guide helpful if:

  • You are part of a large, complex global enterprise with many divisions and international operations. If this is you, we would recommend the AFP’s excellent guide to enterprise treasury management solutions.[8]
  • Your businesses uses a customized ERP solution like SAP, Oracle Financials or Workday
What are the “must-have” features of AP Automation solutions? How specifically will your business benefit? What do AP Automation solutions cost? What will it take to get up and running? Read on.

[8] “2022 TMS Buyer's Guide” (Association for Financial Professionals)

AP solutions must tightly integrate with accounting systems

Your accounting system is your financial system of record, and AP Automation solutions complement, rather than replace, accounting systems. A foundational underpinning of every AP solution is that it must be able to pull from and push data into your accounting system.

AP Automation solutions start by pulling in relevant historical financial data from your accounting system necessary to run the AP process — your chart of accounts, suppliers and their payment terms, their open and paid invoices, and more. Conversely, as you run your AP process, data needs to be pushed to the accounting system — new invoices, payments made, and payments to be reconciled against open invoices.

Today, best-in-class AP Automation solutions include out-of-the-box, direct, API-based integration with general purpose accounting systems (e.g., Oracle NetSuite and Intuit QuickBooks).

The importance of this approach cannot be understated. Solutions that integrate with accounting systems in this fashion enable you to:

  • Get up and running quickly — usually within a few hours to a day or two
  • Significantly reduce the cost and complexity of implementing the solution
  • Rapidly shrink time to value — your investment pays back faster
  • Ensure that your accounting system constantly stays in coodinated with your AP solution, and in near real-time

Keeping your accounting system in coordinated with your AP solution, and in near real-time, is critical. Without it, actions taken in your accounting system (e.g., creating a new supplier) will not be quickly reflected in your AP solution. Conversely, any actions taken in your AP solution (e.g., payments made) will not reconcile with your accounting system.

One of the most common complaints about AP Automation software is that it can fail to consistently stay in coordinated with accounting systems. Solutions that feature out-of-the-box API-based integration with your accounting systems can overcome this hurdle.

Beware of solutions that tout “universal integration” — especially when the integration is done through the “batched” exchange of files with your accounting system. These solutions usually involve implementations that can take weeks or months, are very fragile operationally, and do not support real-time synchronization because the “integration” involves the infrequent periodic exchange of files between systems.

Best-in-class AP Automation solutions include out-of-the-box, direct, API-based integration with general purpose accounting systems

9 things best-in-class AP solutions must have

Businesses adopting AP solutions can expect to experience the AP Automation benefits including improved working capital, lower AP processing costs, increased staff efficiency, improved financial controls and reduction in incidents of fraud.

But how? What are the specific features of AP Automation software that can deliver these benefits? No two businesses are the same, but most small and mid-sized businesses — including yours — can benefit from the feature set described in this section.

End-to-end AP Automation is the digitization of three separate but connected processes that collectively accomplish the goal of accepting invoices from suppliers and safely sending them payments while optimizing the use of your cash and working capital.

1. Invoice Processing: Receive, approve and post invoices

Invoice receipt and capture. Invoice processing starts with receipt of invoices and then converting the incoming invoice from either a paper document or an unstructured electronic document (e.g., PDF) into an electronic representation where the invoice data is properly “captured” and saved as data elements that can be posted to your General Ledger. Modern AP Automation solutions can:

  • Capture and extract both header and line-level invoice data from scanned paper and electronic documents in near real-time with very high accuracy (90% or better)
  • Automatically and intelligently match supplier names extracted from invoices to supplier names in the General Ledger
  • Automatically assign and categorize invoices by General Ledger account

Invoice approval. A second critical step during invoice processing is to approve the incoming invoice. This important control ensures that: i) the person or group responsible for incurring the expense being invoiced agrees that it should be paid and ii) mitigates the risk that duplicate or fraudulent invoices are not inadvertently paid. Approval features include:

  • The ability to create and use hierarchical invoice approval routing rules based on invoice amount, class, department, location or other invoice attributes
  • For invoices presented against purchase orders, the ability to automatically match invoice header and line-level information against purchase orders implicitly serves an invoice approval function

Invoice posting. Invoice processing concludes when an approved invoice is posted to the General Ledger. Key features include:

  • Create properly related General Ledger records corresponding to the approved invoice, including the creation of supplier records
  • Posting received invoice documents along with the invoice record (if supported by the accounting application)
  • Properly handling exception conditions: a common exception is when an invoice is to be posted to an accounting period that is closed
2. Cash management: Engage suppliers, plan payment runs and optimize working capital

Supplier payments diminish cash and working capital, and as a consequence businesses are very thoughtful about which suppliers they need to pay, how and when. For instance, putting payroll at risk to make supplier payments is not a best practice!

The best run AP departments will employ a range of cash management practices as part of their AP and supplier payment decisions, and best-in-class AP Automation solutions now incorporate a cash management system to enable businesses to unlock valuable cash and working capital in AP.

Supplier engagement. While it is easy to simply send paper checks to suppliers on the invoice payment date, with a little bit of extra work businesses can unlock valuable cash and working capital by digitally engaging with their suppliers to capture their payment preferences:

  • Many suppliers will offer prompt payment discounts — often on a sliding scale (the earlier you pay the larger the discount)
  • Suppliers may willingly accept payment by credit card (even if they don’t advertise it broadly) in exchange for a guarantee to be paid in time (or even a bit early). Paying using a credit card can extend cash by 20 to 50 days and generate valuable cash rewards
  • Suppliers may be more willing to accept payments by electronic direct deposit (e.g., ACH) if they can securely share their bank account information
  • Suppliers may require that you send them payment remittance detail in a specific form to ease their cash reconciliation process

It is best to engage suppliers “just in time” — when you have open invoices — it is when suppliers are most open to being engaged. The best AP Automation solutions included digital supplier engagement functions to help with managing cash flow, as well as optimizing cash and working capital.

Plan payment runs

Every AP department plans their weekly or bi-weekly payment runs, and the principal goal of this planning process is to manage cash and working capital. Careful cash forecasting and planning may be less critical when a business is flush with cash, but in good times and bad, finance leaders can benefit from a real-time view into their cash forecast to plan their use of cash more effectively.[9] Modern AP Automation solutions include cash forecasting to ensure that AP departments can scenario plan their payment runs to consider their impact on their cash and working capital. Cash planning features include:

  • Cash flow forecasting that provides a 13-week forecast during a payment run
  • In real-time, view the impact of payment decisions (who to pay, how much, when, and how) on the cash forecast
  • Provide the ability for cash planners to create an AP payment plan to be shared with AP staff (who may not be privy to the information necessary to create cash use plan)

Optimize working capital Even the best run companies will occasionally have to strike a balance between conserving cash and ensuring that critical suppliers are paid on time. The best AP solutions will provide the ability for businesses to provide credit support to increase or maintain their cash during these critical times. Look for solutions that can:

  • Enable you to “defer” payments to suppliers for a brief period (say 30-60 days) — suppliers still get paid on time, but you pay a small fee to defer payments
  • Use any business credit card to pay any supplier (even if the supplier does not accept credit cards) — this can be a simple way for your business to extend working capital by 20-50 days

Do not limit yourself to solutions that profess to support payments by “virtual credit card,” but provide no actual credit. Most virtual card solutions embedded in AP automation solutions are “prepaid” cards that provide no extended payment terms, and therefore provide no working capital benefits.

In addition, many AP Automation solutions only limit credit card payments to those from the solution provider — you should be able to optimize your working capital by using your own business or commercial credit card to pay suppliers.

3. Payment processing: authorize, pay and reconcile invoices

The last step in the AP process is to send payments to suppliers. In the days of yore this was easy — write out a check and remittance detail, stuff it into a stamped envelope and the postal service did the rest.

But checks are going the way of the dodo, and payment fraud is fraught with the risk of both employee fraud and a global community of fraudsters willing to exploit your every weakness and inclination to trust.

Following best practices in payment processing means that you should implement authorization controls to limit the risk of internal and external fraud, ensure that you can disburse payments by all means practicable, and automatically reconcile payments against open invoices.

Payment authorization A your AP Automation solution must have configurable dual approval controls to ensure that at least two people can authorize a payment transaction. Basic as it is, this is one of the most effective ways to limit the risk of internal and external fraud.

Send payments. Every modern AP Automation solution includes the ability to disburse payments:

  • Send payments by check, ACH, or credit card
  • Support cross-border payments to international suppliers
  • Send remittance detail along with payments
  • Provide detailed tracking and payment progress information to both you and your supplier

Reconcile payments against open invoices a And finally, AP Automation solutions will include the ability to automatically close out open invoices by posting payment details (e.g., a transaction reference number) against open invoices and marking them closed. 

End-to-end AP Automation is the digitization of three separate but connected processes that collectively accomplish the goal of accepting invoices from suppliers and safely sending them payments while optimizing the use of your cash and working capital.

The best AP Automation solutions include digital supplier engagement functions to help optimize cash and working capital.

Experience the features of Centime AP yourself.

Will my business benefit from AP Automation?

Not every business will benefit from AP Automation.

There are numerous criteria to consider and weigh to see if your business can benefit, but we have identified four that are the most important. If you can answer in the affirmative to any one of the following, then it is quite likely that your business will benefit from an AP Automation solution.

Does your business process and pay at least 25 invoices per month? Is that volume projected to grow? With an average of 25 invoices per month (some months are going to be higher), it is a promising idea to start to streamline your AP process. As you grow, you know that you will have scalable processes to support you.

Do you have a distributed workforce? It was never practical to physically ship invoices for approval and paper checks to be signed. Before COVID, it was likely that your finance teams worked on site. But now, remote work is here to stay, and anything done manually seems primitive. AP Automation is transformative and necessary.

Do you care about optimizing cash and working capital? Cash is important, and AP by its nature reduces cash. The careful decision making by accounts payable staff can extend Days Payable Outstanding, unlock valuable working capital, and preserve cash on the balance sheet. Look for solutions that can help you plan your payment runs, capture prompt payment discounts, maximize payments using your credit cards.

Do you worry about being victimized by fraud? Business Email Compromise is now impacting 80% of all businesses[10] with the AP department being a prime target of fraudsters. And insidious employee fraud is easily perpetrated through misplaced trust and unenforced controls. AP Automation solutions will help..

So will your business benefit? If your response to any of the questions above is yes, then Start Your Engines!

Get a free customized ROI analysis.

[10] “2022 AFP Payments Fraud and Control Survey” (Association for Financial Professionals)

10 tangible AP Automation benefits

In the U.S. alone, over the past decade about 200,000 businesses have adopted AP Automation solutions. We can now rely on benchmark studies of these businesses conducted by organizations like the Institute of Financial Management (IOFM) to gain an understanding of the tangible benefits of AP Automation. Here are some highlights from a recent IOFM AP Automation Benchmark study.[11]

Process invoices 14 times faster. Highly automated accounts payable departments process 14 times as many invoices per FTE each month as their peers.

Spend $5 to process an invoice. Highly automated accounts payable departments spend less than one-fourth as much as their peers with little or no automation to process a single invoice ($5 per invoice versus $20 per invoice).

Match 90% of invoices and purchase orders on the first pass. Matching invoice line items with data in a PO system is the top point of pain for 28% of accounts payable departments, according to the IOFM survey. Automation does the work for accounts payable departments.

Correct only 1% of all supplier invoices processed. Thirty-nine percent of businesses report that duplicate payments and over-payments represent more than 1% of their payments. A rule of thumb is that a duplicate payment rate over 0.5% indicates weak controls. Top performers have a duplicate payment rate of less than 1%.

Lengthen Days Payable Outstanding (DPOs) by 30%, unlock working capital. Businesses do not change payment terms but can use cash forecasting and an array of credit-related products to pay suppliers on time and still conserve valuable working capital.

Capture 97% of early pay discounts offered. Eighty percent of the businesses surveyed by IOFM report receiving invoices that offer discounts on the invoice due amount in exchange for prompt payment. AP Automation solutions enable businesses to capture 97% of prompt payment discounts offered.

Manage cash, optimize working capital. Modern AP Automation is not just about lowering costs and improving efficiency – but about planning your payment runs with a view to cash and cash flow. Timing your payments will shore up working capital when you most need it.

Earn some cash back on 10% of your spending. Every AP automation solution simplifies the ability to pay vendors by credit card. Driving at least 10% of your supplier spend onto commercial cards is a best practice.

Reduce payments by check to under 50%. AP Automation solutions make it easier to send payments by electronic means (ACH direct deposit and credit card). Businesses can easily shift their payment mix to drive paper check payments to less than 50%.

Dramatically reduce payment fraud. Payment fraud is devastating. Surveys show that 80% of reported fraud cases involve some Business Email Compromise (BEC), with the accounts payable department being the primary target (58% of all cases). Invoice approval workflows eliminate fraudulent payments. Dual payment control — a standard feature of AP automation solutions — will reduce employee fraud and BEC.

[11] "2022 Benchmarking Reports” (Institute of Finance and Management (IOFM))

How are AP Automation solutions priced? What do they cost?

Most modern AP Automation solutions are priced as a combination of subscription fees and transaction fees.

Subscription fees are linked to the number of users of the solution, although some solution providers also charge a monthly software subscription fee. Transaction fees are linked to the number of invoices processed and payments made.

When solutions require a reasonable effort to implement — usually because implementation requires days or weeks of effort to integrate the solution with your accounting system, and subsequently configure and train AP staff — solution providers will add an implementation fee.

In addition, solutions that support payments made by credit card may include cash rebates that offset any subscription and transaction fees. An emerging crop of solutions targeting small businesses (defined as businesses with less than $1MM in annual revenue) may charge no subscription fees and transaction fees; these solutions rely on businesses adopting the embedded credit card to make payments.

It is difficult to firmly state the cost of an AP solution given that there is a range of pricing approaches, but surveys indicate that the payback period for investments in AP Automation is anywhere from five to nine months. Smaller businesses with lower volumes can take advantage of creative pricing packages and drive faster payback.[12]

Surveys indicate that the payback period for investments in AP Automation is anywhere from five to nine months.[13]

[12]   “B2B How the next payments frontier will unleash small business” (Goldman Sachs)

[13] “Automating AP/AR Financial Processes” (The Association for Intelligent Information Management.(AIIM))

What does the future hold for AP Automation? Conclusions, trends, next steps

The AP Automation marketplace rapidly continues to mature. As innovative solutions emerge and needs specific to industry verticals, it is inevitable that most businesses will adopt AP automation as the bedrock of their digital financial operation. The benefits are too many and the value is crystal clear to most.

It is estimated that more than 7 million U.S. businesses can benefit from digitizing the AP process. It is also estimated that just under 200,000 businesses use AP Automation solutions today, with the market growing at 20-30% annually.

The past few years have seen several trends with AP Automation, but two trends stand out:

  1. The emergence of solution suites that complement and extend AP Automation with other closely related solutions. For example, some providers complement AP Automation with “Spend Management” — enabling businesses to streamline employee expense management. Other solutions extend AP Automation into the realm of purchasing — providing a single solution to automate the entire “Purchase to Pay” process.
  2. A more urgent trend is the emergence of comprehensive “Cash Management” solution suites, which add Cash Forecasting, AR Automation and Working Capital Credit to ensure that businesses can manage their most critical asset — cash — more effectively.

AP Automation solutions are exploding into the marketplace, but navigating the sometimes bewildering array of solutions can be difficult. We have worked hard to create a guide that we think is vendor neutral and value focused. We hope this guide can help you navigate the landscape so that you can find the solution that best fits your needs.

The features overview is a compilation of what we consider the most important drivers of value. Please review the list to prioritize the feature set most important to your business.