What is AP Automation

What is AP (accounts payable) automation?

AP (accounts payable) automation is an approach that leverages tech-based solutions to automate, manage, and streamline the accounts payable process. Specifically, it involves handling suppliers’ invoices — from receipt all the way to approval and payment.

The pace of technological change and new e-invoicing mandates is rapidly accelerating, pushing the need for accounts payable (AP) automation. A seamless alternative to tedious manual processes, automating the AP workflow brings a new level of agility and accuracy to the accounting process.

How does accounts payable automation work?

AP automation works by streamlining financial operations to address inefficiencies in traditional AP processes like manual data entry and the risk of human errors. The result? More accurate and efficient invoicing that saves time, resources, and operation costs.

How to automate accounts payable tasks

The following outlines how automation supports and augments every stage of the AP process:

• Invoice capture: When invoices are received from a digital channel like email, automation tools pull invoice numbers, dates, line items and supplier details to get the process started.
• Data validation: The system validates data gathered during invoice capture, using pre-set rules to check for accuracy, completeness, and consistency.
• Approval workflow: For any discrepancies, the automated system triggers alerts for manual review, sending notifications to approvers for timely processing and routing invoices through appropriate workflows.
• Matching: Once captured, validated, and approved, the system verifies quantities, prices, and items all match by comparing those invoice details with corresponding purchase orders (POs) and goods receipts.
• Coding and posting: Next, the correct general ledger (GL) codes, accounts, and cost centers are assigned to an invoice and the invoice is posted to the accounting system.
• Payment processing: Once approvals are completed the system triggers payments through electronic funds transfer (EFT), check, or other accepted payment methods.
• Reporting and analytics: With real-time visibility and insights reports and dashboards help organizations track performance metrics, identify bottlenecks, and improve efficiency.

Related read: Key trends shaping the accounting profession in 2024

Benefits of AP automation

According to Gartner, expenditure on AP automation software is expected to reach $1.75 billion by 2026, a mere two years away. This is significant growth compared to the $925 million recorded in 2021. Additionally, the Institute of Financial Operations & Leadership found almost half of professionals in the finance industry anticipate their accounts payable department to be fully automated within the next one to three years.

It makes sense why finance professionals are getting in on automation. From boosting efficiency, accuracy, and collaboration to reducing costs and risks — automating digital workflows within the AP process offers a variety of benefits to businesses.

1. Reduces costs and boosts ROI with AP automation implementation

Automation helps lower overall labor and operational costs as it cuts out the need for manual data entry, paper handling, and approval routing. The faster a business can process an invoice, the faster it receives payment. This improves cash flow and reduces costly late-payment penalties. Another perk? Since automated systems are programmed to detect duplicate entries, businesses don’t have to worry about paying an invoice more than once.

2. Automates manual tasks for process and workflow efficiency

AP automation not only processes invoices faster, it accelerates approvals and payment cycles. And the improvements don’t stop there. Businesses can also eliminate bottlenecks that come with manual processes, so operations run more smoothly and accounting workflows are more streamlined and efficient.

3. Enables transparency for the entire accounts payable workflow

Having a transparent accounts payable process is critical for businesses to easily track invoices, approvals, and payment statuses. It also helps instill trust with vendors, leading to longer, more prosperous partnerships. Automated technology can support this by enabling real-time visibility across the entire AP process.

4. Reduces errors to ensure accurate records

Maintaining accurate financial records is vital to the success of any business — from handling taxes to budgeting to understanding a company’s financial health. While manual data entry is notoriously error-prone, AP automation drives consistent accuracy for accounting departments. This means less disputes around payment and issues with reconciliations.

5. Enforces compliance with internal policies and regulatory requirements

Ensuring consistent adherence to approval workflows and the segregation of duties

Through AP automation accounting teams have access to a detailed audit trail. Additionally, automation securely handles sensitive financial information. Both important for maintaining accountability and ensuring consistent adherence to approval workflows and regulations.

6. Enable seamless digital communication between suppliers and buyers

Providing better communication, more transparency into the payments process, and improved connectivity with trading partners via electronic invoicing strengthens relationships with suppliers. They appreciate timeliness on invoicing and effective lines of communication.

Related read: Automation: putting accounting on the right path

Manual accounts payable challenges

Only 5% of mid-sized firms have fully automated their AP or AR (accounts receivable) processes, according to a December 2023 report from Pymnts Intelligence. There’s room for growth across industries and organization size when it comes to embracing and implementing automation in the accounts payable process.

Many companies still rely on manual approaches to certain aspects of accounts payable workflows even as adoption of automation in AP rises. Legacy systems and resource constraints are common challenges. Leaning on manual methods directly affects the AP workflow in various ways.

1. Lags in processing

Using manual and paper-based processes leads to longer timeframes for approvals. Physical documents shuffling between departments means there isn’t a single source of truth in the process, making payments slower. Lags in payment processing can cause big problems. Ardent Partners’ “The State of ePayables 2023'' survey found almost half (49%) of AP professionals say invoice and payment approvals taking too long is a critical hurdle.

2. Error-prone data entry

Entering data manually is prone to human error and increased risk for inaccuracies. Data entry mistakes may seem small or not harmful, they stack up into major downstream costs. As an example, incorrect or incomplete data can directly cause discrepancies or duplications in payment as well as invoices being missed entirely.

3. Vulnerability to fraud and compliance issues

Handling invoices and checks manually makes them more susceptible to fraud. Lacking automated controls increases risks around unauthorized payments — when buyers claim they did not make a payment and whoever did was not authorized to do so. Compliance must also be considered. Without automation, it’s a far more complex undertaking to ensure compliance with policy and regulations. What does that mean? Higher risk of missing critical steps and failure to comply.

4. Higher costs and resource drain

Manually handling accounts payable processes uses up resources like time, labor, and materials. Human workers have less time to focus on other processes or tasks that can’t be automated like managing client relationships. Costs tied to storing paper documents and printing and mailing checks also add up for companies still leveraging a paper trail in some approaches.

5. Inability to effectively scale

Business growth is good, but when transaction volumes increase, manual approaches to handling AP become tough to manage. Staff can easily become overwhelmed as the volume of work increases and if they have to handle repetitive or administrative tasks along with everything else, how the business is able to scale can be hindered.

6. Workflow inefficiencies

Paper-based, manual workflows pull too much focus from human workers since time is needed to physically route documents causing delays and inefficiencies. Ardent Partners’ State of ePayables 2023 report shows handling paper-based invoices and payments manually is a primary obstacle to reducing costs and improving AP performance.

7. Lack of visibility

Tracking things like approvals, payment schedules, and outstanding invoices are challenging on their own, add in a lack of visibility into the full process and lags deepen. Real-time visibility into invoice and payment data or status takes a hit in manual processes. Ardent Partners’ data shows proof: Lack of visibility causes AP teams to struggle with tracking invoice status, identifying bottlenecks, or making informed and timely decisions.

Related read: Accounting in the modern age: Recapping ShareFile’s LinkedIn Live on technology’s role in a digital future

Solve AP workflow issues with automation

From streamlining invoice processing to improving visibility and control, leveraging automation to solve critical issues within AP workflows needs to be table stakes for organizations today. Change can be scary and switching from a process that’s “always gotten the job done” to something new isn’t an overnight transition. But with the right automation technology it’s very possible.

Reducing risks around fraud, ensuring compliance with the latest regulations, upleveling speed and process efficiencies, and strengthening relationships with suppliers — as well as between suppliers and buyers — can’t be put off to a later date.

Now is the time to evaluate current AP workflows and processes to build a case for AP automation that secures stakeholder buy-in. Choosing the right technology partner to help implement AP automation is a critical next step. From there businesses can take back control and valuable time to focus on what’s really important — paid invoices and client satisfaction.