For centuries, people have been recording their financial transactions. But the ways in which people document their transactions have developed significantly over time. Documenting practices became sophisticated accounts payable processes that grew out to be widely used all around the globe.
Nowadays, many of the accounts payable processes can be automated to ease the tasks fulfilled by accounts payable departments. However, 68% of companies are still manually processing their reports and invoice data, which takes up more than 10 hours per week for 56% of these companies.
Automating the accounts payable process can benefit these companies in various ways, including reductions in costs, time, human errors, fraud, and more.
In this blog, we will first discuss the fundamentals of the accounts payable process and the steps of the traditional process. Afterward, we delve deeper into automating the process and assess the benefits of automating the AP process. Lastly, we provide you with a solution to easily automate your AP process, so you can profit from the benefits of automation.
Fundamentals of the accounts payable process
Before discussing the process of accounts payable, it is important to go back to the basics and understand what the term accounts payable is about. Accounts payable refers to the amount of money that a company owes to its suppliers for goods or services that have been received but have not yet been paid for. These are typically recorded as a liability on the company’s balance sheet.
In general, accounts payables are considered short-term liabilities, since they are normally expected to be paid within a year or less. However, the specific terms of payment for accounts payables can vary depending on the agreement between the company and its suppliers. Some suppliers may offer longer payment terms, while others may require payment on delivery or within a shorter time frame.
To assure that financial reports remain accurate, it is important to record accounts payable immediately after they occur. This also substantiates the correctness of the balance sheet without getting outdated.
The accounts payable process refers to the process of managing and paying out money owed to vendors, suppliers, and other parties. It involves processing invoices, reconciling accounts, and issuing payments in a timely manner.
The main goal of the accounts payable process is to ensure timely, accurate, and secure payments to creditors. This helps maintain good relationships with vendors and prevents any potential disputes or delays in payments. Additionally, the accounts payable process helps to ensure compliance with accounting standards and regulations.
We will discuss the incremental steps of the accounts payable process in more detail in the next section of this article.
Account payable process steps
The traditional process of recording accounts payables consists of three key steps. These three steps are the foundation of the accounts payable process:
- Receiving and processing the purchase orders – This process typically starts with the purchase order or pro forma invoices, which is a document that is used to order goods or services. The purchase order is sent to the supplier, who ships the goods or provides the services.
- Creating and validating the invoice – Once the goods or services are received, the invoice is created. Before the invoice is sent to the accounting department, it is validated to assure that all information is correct before the payment occurs. An additional authorization layer can be added to the process. For instance, if the invoice sum exceeds a certain threshold, validation of an executive member is required. After validation is completed, the invoice is sent to the accounting department.
- Completing payment process – The invoice is received by the accounting department and the payment process is initiated. The accounting department may use a variety of methods to pay the invoice, such as writing a check, transferring money to an account, or using a credit card. Once the invoice is paid, the accounting department updates the accounting system to reflect the payment.
The implementation of a solid accounts payable process ensures that short-term debts are paid in time and allows you to keep track of your payments in an efficient way.
However, even though traditional accounts payable processes improve the accuracy and efficiency of paying creditors, the traditional method is still limited. In the next section, we will discuss the major drawbacks of the traditional accounts payable process.
Drawbacks of the traditional account payable process
We now know that a structured accounts payable process can boost a company’s financial efficiency. But traditional methods of handling accounts payables can still come with major drawbacks, including:
- Lengthy approval processes
- Tedious data entry processes
- Human error
- Overflow of paperwork
- High fraud potential
Lengthy approval processes
Initially, you might suppose that a three-step process would not be that lengthy, but additional steps can lengthen the process significantly. For instance, if a supplier sends out an invoice, the person receiving it is most likely not the person approving it. Therefore, within a company, the invoice needs to be sent to the right person for approval.
If the invoice then contains errors or missing information, the approver needs to send it back to the contact person, who then sends it back to the supplier. This noticeably lengthens the approval process.
And what if the person in the additional authorization layer spots a mistake? This makes the approval sequence of a traditional accounts payable process even longer than expected.
Tedious data entry processes
In other cases, it might happen that a report or invoice is submitted and approved without any hiccups. This lowers the time before it reaches the payment process significantly, but also the payment process can be a long process.
This is mainly due to the tedious manual data entry tasks involved. Many companies rely on humans to process the payment of invoices all by hand. When taking into account that many companies process hundreds of invoices per month, the amount of time spent on data entry tasks becomes more serious.
As a result, payments take longer to be sent out because of the enormous amounts of invoices that need to be processed manually.
Human error
When large amounts of invoices are manually processed, the possibility of mistakes made by humans also increases. Human error can lead to errors in data entry, incorrect payments, or miscommunication between departments.
This can result in financial losses, late payments, and damaged relationships with suppliers. Additionally, human error can cause delays in the approval process, or in the payment process, resulting in late-payment fees or other financial penalties.
Overflow of paperwork
Traditional accounts payable processes are also prone to causing overflows of paperwork. This is mainly caused by the high volume of paperwork involved in manual accounts payable processes, including invoices, purchase orders, receipts, and other documents. As a result, your AP team can be overwhelmed by managing large volumes of transactions.
Furthermore, as previously mentioned, manual processing is a time-consuming task and is prone to high error rates. This can lead to inefficiencies, higher fraud potentials, and higher costs for your company.
High fraud potential
When money leaves your company, it most often passes the guard of the accounts payable department. This makes the accounts payable process vulnerable to fraud and is most attractive for fraudsters both internally and externally.
An internal fraudster could, for example, send out payments to fictitious suppliers, or manipulate invoices or reports. Therefore, you should always be aware of potential fraudulent actions that can jeopardize your organization.
One type of external fraud that can jeopardize your company is vendor invoice fraud. This type of fraud occurs when a fraudster submits an invoice for payment, claiming to have provided goods or services to your company. The invoice may be for a legitimate service or product, but the price may have been inflated or the vendor may have charged for goods or services that were not actually provided.
Vendor invoice fraud can be difficult to detect, especially if the fraudulent vendor has managed to establish a relationship with your company and has access to legitimate invoices or other documentation.
The drawbacks of a traditional accounts payable cycle can weigh heavily on the efficiency and safety of your company. However, the drawbacks that we discussed above could easily be tackled by automating the accounts payable process. In the next section, we will discuss how you can automate your accounts payable process and what the benefits are.
Automating the accounts payable process
Automation can solve a lot of challenges that people face in regard to processing their accounts payable. Nowadays financial management systems, such as Klippa SpendControl, allow you to automate various steps of your accounts payable process, including:
- Submitting invoices and reports automatically – Invoices and reports can be automatically submitted, for instance by forwarding your emails with attachments automatically to your financial management system. This removes the need for manual forwarding and eases your accounts payable process.
- Capturing data from all submitted invoices and reports – When an invoice or report is submitted, the data can automatically be captured and inserted in your management system by Optical Character Recognition (OCR). OCR technology converts text into machine-readable data by recognizing characters. This erases the need for manual data entry tasks.
- Automating the authorization process – The authorization process can be automated by automatically forwarding submitted documents to the correct approver for validation. These sequences can also be shortened. For instance, if the invoice sum is below a certain threshold, you can apply custom rules that ensure no authorization is required.
- Synchronizing all data with your accounting software – When the payment process is initiated, your data can be automatically synchronized with your preferred ERP or accounting software. Automating this step takes away another time-consuming task that your AP team deals with on a daily basis.
Automating the steps mentioned above comes with significant benefits. In the next section, we will discuss which benefits your company can bear fruits from when automating the accounts payable process.
Benefits of automating the accounts payable process
As discussed in the previous section, parts of your accounts payable process can be automated to improve accuracy and efficiency.
Let’s take a look at the five key benefits of automating your accounts payable process:
- Saving time
- Reducing costs
- More insight and overview
- Reducing human error
- Minimizing the risk of fraud
Saving time
As mentioned earlier, traditional accounts payable processes lead to overflows of paperwork which take hours to be manually processed. Goldman Sachs even stated that AP professionals spend around 30% of their valuable time collecting data and fielding inquiries
Automating these tasks with a data entry solution decreases the amount of human effort required and therefore reduces the amount of time spent on tedious tasks drastically.
The number of hours saved by automation can now be invested into tasks that really make a difference. Furthermore, it streamlines the accounts payable process by automating tasks such as routing invoices for approval, generating payment reports, and reconciling vendor statements. This can help to free up time for other tasks and improve the overall efficiency of the process.
Reducing costs
As mentioned above, automation reduces the time it takes to process invoices and make payments, which can help reduce labor costs. Also, it reduces the need for paper and other physical documents, which decreases the cost of supplies and storage.
More insight and overview
Besides the matter of costs and time, automating the accounts payable process can provide more insight into your spending, enabling you to track invoices and payments better. This can help to ensure that bills are paid on time and to the correct vendors. With automated accounts payable systems, you can easily monitor and track invoice statuses, payments, and vendor statements.
In addition, it allows you to get real-time insights into payments and invoices, enabling you to make informed decisions about supplier relationships and cash flow.
Reducing human error
As previously discussed, a disadvantage of traditional ways of invoice management is human error. We also stated that invoice errors can lengthen the invoice process significantly since it has to go backward in the validation funnel.
Automating your accounts payable process can reduce the amount of manual data entry required to process invoices and make payments. This can help to reduce the risk of errors caused by typos, incorrect data entry, or other mistakes.
Minimizing the risk of fraud
Since manual invoice processing is vulnerable to exploitation, automating the accounts payable process can minimize the risk of fraud. Automation also helps to ensure that all payments are made accurately and according to predefined criteria. This reduces the risk of fraudulent activities such as misappropriation of funds, duplicate payments, and phantom vendors.
Automated processes also improve the tracking and traceability of payments, allowing any suspicious transactions to be easily identified and investigated.
At Klippa, we help you ease your accounts payable processes by providing a financial management solution, named Klippa Spendcontrol. Our solution helps you to bear fruits from all the benefits mentioned above.
In the next section, we will explain the power of Klippa SpendControl in more detail and what it can do for you to improve your accounts payable process.
Automate the AP process with Klippa SpendControl
With Klippa SpendControl, automating your accounts payable process feels like a walk in the park. The solution allows you to easily process your accounts payables in a few simple steps:
- Submit your report or invoice via the Klippa mailbox, web application, or mobile app.
- SpendControl automatically extracts all the payment data from the submitted document with the power of data extraction technology driven by AI.
- The report or invoice can be assigned to the right approver in your company via a multi-level approval workflow.
- The approval is done with a simple touch of a button in the mobile app or web application.
The approved document contains all required data to be recorded into your accounting system or ERP program. Klippa provides a booking suggestion for the supplier, including a general ledger account, VAT code, amount(s), cost center, and project.
By implementing Klippa SpendControl into your accounts payable process, you can benefit from even more advantages besides the ones we explained earlier in the article.
SpendControl allows you to:
- Match your credit card statements with payments from both expenses and invoices.
- Utilize Klippa’s built-in pixel-level analysis to trace fraud attempts of submitted documents.
- Implement your accounts payable policy via smart business rules and automate the approval process.
- Gain insight into costs incurred by category, person, project, cost center, period, and department.
- Synchronize your data with your accounting system or ERP program in place to streamline your bookkeeping.
- Get 24/7 access to all your documents, which are being saved for up to 10 years in a secure cloud environment.
Do you want to improve your organization’s accounts payable process? Are you looking for a solution to automate your ways of working? Book a free demo below to see how our solution can help you, or contact one of our SpendControl specialists for more information.
