There’s no denying that the enterprise resource planning (ERP) system is a critical management tool for running finance and accounting. It functions as an important productivity system that collects, stores, manages and monitors essential business data. The ERP system coordinates between departments and helps companies manage approvals and workflow audit trails. But here’s where it falls short, particularly for accounts payable: Execution.
While your ERP system may track purchase orders and invoices from suppliers, it won’t manage the actual supplier payment process. It’s the human beings in your Accounts Payable (AP) department walking that last mile. But not only is this time-consuming and labor intensive: it’s also rife with the possibility for errors that can be costly not only financially but legally.
Automation permeates most other areas of business. It’s time to automate the AP function, which until now has been hamstrung by manual processes and the resulting costly labor spend. Without automating that final part of the procurement-to-pay cycle, the accounts payable payments operation will never truly be a closed-loop process, and the AP function will be an increasing burden on the enterprise’s profitability as it grows and scales its global supply chain.
The Last Critical Process Flow
For most companies, AP is a cost center: money goes out but rarely comes in. AP is fueled by the manual effort required to communicate with and onboard suppliers; collect tax documents; set up payments in a variety of methods, including checks, wire transfers, eChecks, and SEPA or ACH payments; verify and reconcile payments and accounts; and report back to the ERP system. A recent Gatepoint Research study found that 72% of respondents said they spend more than five hours a week setting up payees, approving and issuing payments, resolving issues, and reconciliation.
Few of these activities are automated. In a recent survey we conducted, nearly half of respondents (48%) reported that they either submit payment instructions to their banks manually, or export a file from the ERP system and then re-import it as instructions to their bank. After the payments are made, nearly 60% of respondents said they update their accounting systems manually or re-import a bank file. These processes only become more of a time drag as your supplier base expands across multiple countries, because your AP staff must manage each country’s diverse payment method and tax requirements.
Not surprisingly with all this back-and-forth, respondents named payment reconciliation as one of the most effort-intensive for their companies. A manual payment reconciliation process is not only slow but also error-prone, increasing the likelihood of audit issues.
Manual processes have a real cost. Nearly 90% of the respondents in the Gatepoint Research study pay suppliers by paper cheque, even though the manual cost to issue a check—including labor, paper, printing, postage and other related costs—can range from £6 to £10 ($9 to $15). Market research firm Aberdeen Group found that the average cost of a check payment is £5 ($7.78). And while wire transfers are commonplace, they’re expensive, costing up to £13 ($20) each—which can add up if you’re paying hundreds or even thousands of suppliers.
Streamlining the payee onboarding-to-pay-to-reconciliation process should be elevated as a priority, because it’s the last critical flow of your core financial management process. For one thing, without key information from AP on payment results, your financials cannot be closed in a timely fashion - which will have a ripple effect throughout your company.
Manual AP Fraught with Risk
An AP workflow process that’s not automated nor tightly integrated with ERP systems can be more than costly. It can actually damage your business, for several reasons.
Inefficient AP processes lead to errors and delays. Accountants are human, too. With manual entry of account, invoice and payment information, people on either side of the equation can make mistakes. Overwhelmingly, the issues are on the payee side, such as suppliers providing incorrect bank routing information or contact information.
Payments rejected due to incorrect or missing information create extra work as the payer investigates, manages, and resolves the issue. Meanwhile, payments are delayed, and suppliers begin calling and emailing to inquire about payment status.
Upset suppliers can hurt a company’s reputation. Late or incorrect payments tend to make suppliers unhappy, and supplier unhappiness can become a malignant problem through bad word-of-mouth. Poor accounts payable practices can lead to damaged negotiation leverage, lost suppliers and difficulties in finding new ones.
Manual processes are inherently insecure. In an effort to reduce AP costs, some organisations hire relatively inexperienced clerks to perform tasks like collecting payee payment information, tax documents, and proof of identity, mailing checks, and uploading invoices. Any time you allow someone access to sensitive supplier information and company funds, you expose yourself to serious risk.
Although declining, checks are by far the payment method most subjected to actual or attempted fraud (77%), and they accounted for the largest dollar amount of loss in 2014, according to a survey conducted by the Association for Finance Professionals. In its 2014 Global Fraud Study, the Association of Certified Fraud Examiners (ACFE) found that check tampering is the most common fraud perpetrated by accounting departments.
Efficiencies and Benefits of AP Workflow Automation
In contrast to manual AP processes, using technology to automate the accounts payable workflow offers numerous benefits and efficiencies. At the top of the list is setting up your AP function so that it efficiently scales with your organisation’s growth.
Key benefits include:
Frictionless payment processing and reconciliation. An automated AP workflow reduces the workload of payouts, freeing finance staff for higher-value activities such as improving financial and business analysis. It also eliminates payment-processing issues by proactively validating that the correct payment information has been collected by country, currency, and payment method. When payment issues do occur, the system automatically identifies the cause of the error and communicates with the payee to collect missing information, while giving the payer full visibility into status. Detailed transaction and reconciliation reports give the finance team a consolidated view of all payable accounts.
Accurate (and real-time) reconciliation of payments and cash flow. In a survey conducted by Aberdeen Group, 65% of respondents cited the demand for timely information as the greatest pressure on finance and accounting teams today. By automatically tracking each payment, accounting teams gain real-time insight into when each payment is sent, when a check is cashed, and why a payment is rejected. Cloud-based systems let executives and managers access these reports at any time, from anywhere - while also letting suppliers get self-service visibility into their payment status and history without having to bother your finance team.
Reduced transaction costs. Every time the bank rejects a payment transaction because of inaccurate bank account information, it charges fees, and these costs add up. In addition, opening up bank investigations for problem transactions is exceedingly expensive and requires a great deal of manual effort to hand-hold and monitor. Automation eliminates all of this.
Built-in tax and compliance controls. An AP automation platform should collect tax form information for all payees during the payment registration process on a supplier portal, eliminating the workload associated today with gathering this information. The most advanced solutions will also validate that the right tax forms and information have been collected, calculate necessary tax withholding, and prepare tax filing reports.
Another requirement with which AP processes must comply is checking to ensure payments are never made to anyone on the various international blacklists. Stunningly, 66% of those surveyed in the Gatepoint Research study admit that they do no - or are not sure if they - screen payees in accordance with anti-terrorism, money-laundering, and drug-trafficking requirements. This problem can be solved with automation. Before executing a payment cycle, your system should be able to scan all supplier payee records against international blacklists to avoid paying suspected terrorists, money launderers, cyber-terrorists, and drug traffickers.
It’s Time to Cross the Last Mile
“Productivity” and “visibility”are the rallying cries of today’s financial executives - and they’re also the promise of ERP systems. But ERP nirvana can’t be attained until it extends to all of an organisation’s core financial processes, particularly the function that pays the bills. By automating AP processes and integrating them with their ERP systems, companies can cross that last mile, and set themselves up to go beyond. The benefits - increased productivity, reduced costs, strengthened vendor relationships and better compliance - are too good to stop short.
By Chen Amit, CEO, Tipalti