While this article spells out the primary ways AP Automation can save money for a company, and we highly recommend you read the full article, here are four cost savings we will focus on:
- Implemetation Fees
- License Fees
- Maintenance Fees
- Personnel Support
Why Do Companies Choose AP Automation?
It is every company’s goal to minimize its expenses while maximizing its profits. And one of the most effective ways to do this is by automating processes.
When it comes to AP Automation, however, different industries require different approaches, so costs and savings will vary from one business to another. Whether it is a manufacturing company with PO-based invoices or an insurance company with primarily non-PO-based invoices makes a large difference in the ability to automate the AP process.
When Does AP Automation Actually Save Money?
No matter what industry we look at, studies have shown again and again that AP automation generally does not save money unless a company is very large, with over 50,000 invoices per month. This is because the cost of AP automation is high while the efficiencies gained from AP automation are low; a company needs a large volume of invoices to spread out the cost of the software to achieve a return on this investment.
What Are the Costs Associated With AP Automation?
The costs associated with AP automation software are as follows:
Fees for training, setup, integration, or actual technical implementation in addition to the license fees.
Amount of money paid for the right to use the software.
Depending on the licensing model, if it is a perpetual license, there will also be maintenance fees.
Personnel Support Costs
Costs of the employees needed to support the software; this includes IT personnel as well as new tasks that consume time such as scanning documents, resetting employees’ passwords, helping them with questions, issues, training, and so on.
The last cost is something companies rarely think about when embarking on an AP automation project. Additional labor costs that may also be overlooked include the following:
- Scanning documents to go into the system, which is time consuming and therefore expensive. If you do the math, a $40,000 per year salaried clerk with 30% payroll taxes and benefits will take about 5 minutes to scan a document, including the time to go to the scanner, set it up, scan the document, go back to their desk, and email it into the software inbox. That’s over $2 per document which doesn’t sound like much but when the full cost of processing an invoice manually is $5 on average, this just increased the cost to process an invoice by 40%.
- Routing documents for approval, by choosing the correct approvers also takes time.
- Maintaining the system with user IDs, passwords, security setup, approval matrices (who approves which invoices and at what dollar levels), manager roles, etc.; not to mention handling an excessive number of phone calls into the AP department that now come from people who forgot their passwords.
- Managers will now ask the AP department for more requests such as images of invoices and other documents.
- Finally, data entry into browser based AP automation systems is much more time consuming than ERP systems, so efficiency is lost.
So in order to save money, AP automation has to create efficiencies that outweigh these costs. Unfortunately, AP automation creates efficiencies in the areas that consume the least effort in AP. If you look at the main areas of effort in AP, you can see why this is the case.
|AP Effort Area||% Effort in AP||Description||AP Automation Impact|
|Invoice Receipt||15%||Receiving the invoice either on paper or electronically, opening the mail, and getting it ready for processing||Negligible unless emails can go right into the AP Software’s inbox|
|Data Entry and Invoice Matching||10% to 20%||Entering the invoice (in the case of a Non-PO invoice) or entering the data and performing a three-way match of the invoice, PO, and receipt (in the case of a PO invoice) into the accounting system||Can be significant if the AP Automation software has excellent OCR or automated matching|
|General ledger coding, problem resolution, sales/use tax compliance, vendor maintenance, accruals/other projects, and customer service||60% to 70%||Determining general ledger coding for an invoice, resolving any exceptions on an invoice such as a discrepancy between the PO price and invoice price, adding and maintaining vendors, performing customer service such as dealing with phone calls from vendors and other managers in the company, and performing monthly, quarterly or annual processes such as monthly accruals, 1099’s, etc.||Negligible|
|Disbursement||5%||Paying vendors according to terms in the appropriate format (check, wire, ACH), dealing with problems related to disbursement (stopped checks), escheatment, and so on||Negligible|
How Much Money Does AP Automation Save? Our Conclusion
As you can see the area where AP automation software has the greatest impact is on a small percentage of the overall effort in AP. This fact, plus the previously discussed additional labor costs are why AP Automation almost always has a negative ROI. Automation for the sake of automation rarely, if ever, yields results.
How can IQ BackOffice Help? Learn about our Accounts Payable service and our full range of outsourcing services.
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