Performance Improvement

April 14, 2021

AP Automation — How Does it Work and How Much Will it Save Me?

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One of the few winners in 2020 was automation. With employees working from home — or not working at all — businesses had to further prioritize doing more with less. One logical place to introduce automation is into the accounts payable processing cycle. Lots of repetitive tasks, many approval steps, and lots of paperwork make AP Automation a favorite with businesses across every industry. What is AP Automation and how does it differ from its cousin Procure-to-Pay? What are the benefits and how can you select the best application for your organization?

AP Automation or Procure-to-Pay— What’s the Difference?

The terms AP Automation and Procure-to-Pay get a bit confused. Rightly so, as they’re both related to an organization’s purchasing processes. There’s no definitive definition of either, but here’s is a quick overview highlighting the differences.

AP automation refers to the automation of the processes surrounding entering, approving, and paying invoices, with the goals of reducing paper and postage costs and streamlining invoice handling. AP Automation software often includes optical character recognition (OCR) functionality, approval workflow routing, and electronic payment capabilities (we dive into specifics of these next). Whenever and wherever companies can automate routine processes, they gain efficiencies, reduce overhead, and improve accuracy. While AP Automation software provides these benefits, it does leave a larger portion of the purchasing process unaddressed — and that’s where Procure-to-Pay software comes into play.

Procure-to-Pay software usually includes all of AP Automation applications’ functionality, however Procure-to-Pay applications start earlier in the process with requisition creation and approval routing, purchase order creation, two or three-way invoice matching, and budget validation. Some procure-to-pay applications go further, providing supplier contract management capabilities, inventory control, and vendor self-service portals. Other procure-to-pay vendors go further yet, incorporating artificial intelligence (AI), machine learning, and robotic process automation (RPA) in their offerings. In short, AP Automation starts once an invoice is received, while Procure-to-Pay begins much earlier — when someone wants to buy something.

In general, we recommend that companies that use purchase orders consider a Procure-to-Pay application, not simply an AP Automation application. By instituting approvals and workflow routing early on — before a purchase order has even be created — companies gain better control over their spending and have the potential for even greater efficiencies and cost savings.

How They Work

Both AP Automation and Procure-to-Pay applications work by automating various processes. Below are two high-level examples of what both applications can do.

AP Automation: Rather than passing a paper invoice around the office to secure various approvals, the applications provide electronic approval routing. You establish routing rules based on variables such as dollar amount, department, vendor, or item classification and the software routes an electronic copy of the invoice to each approver specified in your routing rule. Once the invoice is approved, it’s flagged as ready to pay. The software may even initiate an automated payment to the vendor according to the invoice terms.

Procure-to-Pay: An employee or their manager initiates a purchase request (requisition) in the software when they want to make a purchase. That requisition follows its own established electronic approval routing, and when fully approved, the software creates a purchase order. The software may even go ahead and send the purchase order to the vendor for you. When the invoice associated with that purchase order arrives, the Procure-to-Pay software can match it to the purchase order and, optionally, the requisition to ensure the right product was invoiced at the agreed-upon price. If everything matches up, the software flags the invoice as ready to pay, and like AP Automation applications, may even initiate an electronic payment to the vendor.

There’s Money to Be Saved

You’ve likely heard the statistics — accounts payable can cost companies more than $10 to process a single invoice. Some estimates put that number at over $15. Or even over $25. If your company processes 200 payable invoices a month, you could be spending well over $36,000 annually. Highly efficient companies, on the other hand, those that have introduced AP Automation workflows, pay an average of just $2.07 per invoice, or using our example, just under $5,000 annually. That’s a big difference and one worth investigating.

In its recent study, The Increasing ROI of Spend Management Automation, Levvel Research found that automating steps in the spend management cycle can eliminate inefficiencies and drive new savings. The report identified a number of savings including a 65% reduction in the cost per purchase order and an 85% reduction in the cost per invoice stemming from process automation.

Automation does more than just lower transaction costs. Cash flow also benefits when companies automate AP tasks — by reducing invoice lifecycle times and increasing the chances of taking advantage of early payment discounts. The same Levvel Research study found that companies were capturing 75% of available invoice discount terms using AP Automation. In addition, by freeing AP staff time from manual tasks, they’re free to work on more strategic initiatives, like building better supplier relationships or negotiating better pricing.

How to Find the Right Spend Management Solution

There are dozens of AP Automation and Procure-to-Pay applications available. How can you identify the right one for your organization? You could spend months viewing demonstrations — and still wind up shrugging your shoulders and tossing a coin to decide. Instead, we’d recommend you work with a partner, like BT Partners, that understands what’s out there and the sometimes subtle yet significant differences between them. We can quickly rule out those that aren’t a good fit and show you just the contenders that have the functionality that best aligns with your business.

While the pandemic may have spiked demand for automation tools like AP Automation and Procure-to-Pay, these applications deliver perennial benefits that will continue far into the future.

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