Did you know that the costs of manually processing a single invoice can range from $12 to $30 per invoice? No wonder that over the last years, invoice automation and digital invoice approval software have gained a lot of popularity.
Companies that are looking to save costs and increase efficiency on administrative processes, quickly end up identifying their accounts payable procedure as the best candidate for efficiency gains.
Every company has to process invoices, there are usually many people involved in the process and the volumes are usually high. So all the characteristics of room for improvement are there. Over the last few years the market for invoice automation and digital invoice approval software has surged with 38% of businesses making the transition this year, compared to just 24% in the year before.
Because you are reading this blog, you are probably one of the driving powers within your organization looking to implement an invoice automation solution. You see the potential cost savings, efficiency gains and like to implement change. But your organization, like many others, probably has a business case driven approach to change. That means you actually have to substantiate your gut feeling with a business case to get executives, IT and other team members on board. In this blog we will provide you with all the guidelines on how to create a business case for invoice automation.
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Where to get started?
Step 1: Identify the current situation within your organization
Step 2: Identify market solutions, their benefits and their costs
Step 3: Identify what makes decision makers tick in your organization
Step 4: Turn the information into a business case
Learn more about Klippa
Where to get started?
A good business case starts with some solid research. We can divide this research into three categories: factual research on the current situation of your invoice processing and approval process (this creates a base line), research into the expected gains and an analysis into what makes the decision makers within your organization tick.
Step 1: Identify the current situation within your organization
So let’s start with the first part. To get a good overview of the current situation you will have to identify the current process and the current metrics. You can do this on a daily, weekly, monthly or yearly level. You can choose based on your personal preference, but monthly and yearly are most commonly used. The following topics can be discussed in your business case:
1.1 Defining the current invoice processing and approval process
Determine the current steps involved in the workflow. Create something like a flowchart to have a high level overview. You might have to make multiple flowcharts if you see big differences between, for example, paper invoices and digital invoices. You can find an example flowchart below:
Involve your team and ask them what they see as the biggest challenges in the current procedures. Try to speak with different stakeholders and identify organizational pain points. You could do this via interviews or perhaps with a questionnaire. If you use the latter option, you might be able to include a few nice graphs, like the one below:
Alright, so now you have the current procedures and pain points clear. You have just finished the first part of your business case! Let’s move forward to defining the current metrics.
1.2 Defining the current metrics
If you want to create a good business case for invoice automation and calculate payback times and ROIs for software investments, you will need metrics. Metrics in this case are hard numbers that quantify the amounts of invoices, costs, FTE involved and more. This will give you a factual overview of the current situation in metrics.
These metrics can later be used to calculate your cost and time savings after implementing a software solution for invoice automation. Below we will list all the metrics that can be relevant. The more specific information you can find, the better your business case will be. Don’t stress if you can’t find all the information, you can probably still create a business case, just less specific. Most of this data will come from your finance department or accounting software / ERP system, so start digging there.
- How many invoices does your company process (per day, week, month, year)?
- If possible, define how many invoices are received on paper and how many are received as a digital invoice.
- Does your organization work with POs? If so, separate the invoices that have a PO from the ones that do not.
This could result in an overview like the one below:
- What is the average time between receiving and paying an invoice?
- Is this different for invoices with or without POs?
- Is this different for invoices received on paper versus digital?
This could result in an overview like the one below:
- What percentage of your invoices have early payment discounts?
- On what percentage of your invoices do you actually benefit from the early payment discounts?
- What is the average amount of early payment discounts?
This could result in an overview like the one below:
- What percentage of invoices gets paid late?
- What percentage of late invoices results in a late payment fine?
- What is the average late payment fine?
This could result in an overview like the one below:
- How many FTEs are involved in the current process of invoice processing?
- On how many different locations are they located?
- On how many different locations are they located?
- How many FTEs are involved in the current invoice approval process?
- On how many different locations are they located?
- On how many different locations are they located?
- How many approvers does a single invoice have on average?
- What is the average cost per FTE for the people involved in invoice processing & approval?
Then the final overview of all current metrics could look like the one below:
- What is the average cost per FTE for the people involved in invoice processing & approval?
1.3 Calculating the current costs
Now that you have done your research and you know how many FTEs are involved, what the average FTE costs and how many invoices you process, you should be able to calculate the current baseline costs. It is really important that you do this accurately, because the entire business case is based on this. You can decide how far you want to take this, as it will differ per company. Below you will find some calculations that are usually relevant.
This might look a bit challenging at first, but it really is some basic math:
* If you are currently using some kind of invoice processing software that you are looking to replace, you can also add these (and potentially other) costs to the Total AP Costs.
Tip: Benchmark yourself with market averages to substantiate your business case!
Step 2: Identify market solutions, their benefits and their costs
Now that you have a clear overview of the current numbers within your organization, it is time to research the potential solutions that you are interested in. You might have already done this, but generally speaking it is best to first get all the numbers and then start looking for market solutions. Every solution is different and one might focus more on certain aspects than others. Knowing where your pain points are and where the most costs are incurred, will help you find the suppliers with the best fit.
When you have identified the solutions, you have to find their benefits and their costs. To get an overview of the costs you will just have to get a few quotes from suppliers. To get an overview of the benefits can be a bit harder. Of course suppliers will make all kinds of promises, but the proof is in the pudding. So you can use market research or talk to clients from certain vendors to identify what their savings have been. You are looking for numbers such as:
- Costs of the solution per year
- Average time saved per invoice
- Average cost saving per invoice
- Average FTE reduction
- Average reduction of late invoice payments (and with that fines)
- Average improvement on invoice payments within discount period (and with that discounts)
These types of numbers allow you to calculate how much savings you should expect. You can use a formula similar to the one below (you can make this more complicated or more simplified based on your business case requirements):
In the end, this allows you to calculate your ROI. This is a common metric that senior management likes to see in business cases. The ROI is the Return On Investment. So how many times higher will the benefits be than the investment costs. Usually they also want to know the Payback Period. This is the time, for example in years, it takes to earn back the initial investment. If your ROI is 5, it means you get 5 times more cost savings than the investment costs. If your Payback Period is 2, it means it takes 2 years before the cost savings equal the initial investment.
Step 3: Identify what makes decision makers tick in your organization
Every manager and company is different. So if you want to have the highest chance to get approval on your plans, it is smart to do your research and identify what interests your manager or company most. What KPIs make them tick? Are they interested in reducing the FTE count? Are they interested in cost savings? Are they looking to speed up the process for better relationships with suppliers? Make sure you know this and highlight the right benefits in your business case. If you have multiple stakeholders, you can use a small survey and let your managers rate their most important benefits from top to bottom for example.
Step 4: Turn the information into a business case
So now that you know the current situation, you know the potential improvements and costs of solutions, and you know what interests your managers most. Time to turn this information into a business case for invoice automation!
A business case can be a slidedeck, it can be a PDF document and it can even be an Excel file. This really depends on your organization. Usually a slidedeck is a great way to set up a business case. In a slide deck you can highlight your research, the current problems, current costs, solutions and the expected benefits. Usually you end with the benefits on a high level. These are commonly the Required Budget, Cost Saving Total, FTE Saving Total, Payback Time and ROI. It should include all the information that decision makers need to give you the go-ahead.
We actually devoted an entire blog to calculating the ROI on accounts payable automation and even created an Excel template for calculating your invoice automation ROI.
Learn more about Klippa
At Klippa we create smart software solutions to automate and digitize document-related processes within organizations on an international level. We have a lot of experience with invoice automation solutions and the creation of business cases.
On one side this experience comes from an API perspective with our Invoice OCR API solution and Receipt OCR API solution that can be integrated with for example your RPA software (Mendix, UIPath and Automation Anywhere). On the other side our experience comes from our end to end invoice automation solution called Klippa SpendControl. This solution includes a web app and mobile app to streamline the invoice processing and invoice approval within your organization.
If you need help with creating a solid business case for invoice automation and invoice approval software, or you would like to learn more about our products, get in touch with us or schedule a free online demo below.
