The average business continually races to pay its invoices in a timely manner, jumping through a myriad of hoops in what should be a seemingly-simple process: ensure vendors, suppliers, and contractors are paid on time so business continues to run smoothly.
Perhaps many companies have accepted cumbersome Accounts Payable (AP) practices as an irksome though necessary part of doing business. But it doesn’t have to be this way.
This article illustrates the traditional methods of vendor invoicing, processing invoices and issuing vendor payments. Then goes into the hidden costs of adhering stringently to the outdated and manual accounts payable functions, and how new innovations like invoice automation can lead to easier and a more controlled B2B payments process.
The Basics of Vendor Invoicing and Accounts Payable
In a basic sense, invoices are a fundamental part of business life. Here’s how they traditionally have functioned.
Vendor Invoices, Defined
While formats vary from supplier to supplier, at their core, invoices or bills are a list of goods or services provided to customers which includes a statement of the sum and due date. Whether handwritten, crafted in a Microsoft Word document, Portable Document Format (PDF), or drafted in customizable software, invoices itemize work performed, billable hours, or goods purchased, with instructions for when, where, and how to provide vendors payment for products supplied or services performed.
Invoices are a tried and true part of business. Accordingly, even in a world that’s increasingly digitized and automated, invoices have remained predominantly old-fashioned. In a study published by Globys Research, 92 percent of out of 500 billion invoices sent annually were document-based.
But it doesn’t necessarily serve businesses to stick to old methods when it comes to handling invoicing.
The Manual Steps an Invoice Goes Through Before Payment
For companies these days, paying an invoice can be as simple as going to PayPal or Venmo, sending a quick request for money, and getting it within minutes. Generally, though, the invoice processing and payments process takes a little longer and can be more nuanced without the help of automation.
Here are the manual steps an invoice can go through before a payment is made:
- A supplier or contractor will create an invoice detailing their work, billable hours, or goods, as well as the date, the amount owed, and when, where, and how to send vendor payments.
- The invoicer will generally send it to the accounts payable department or system for their customer that handles invoices or will send it to their primary point person. In the latter case, the point person will need to direct the invoice internally, often to an accounts payable, or AP department.
- Once AP receives the invoice, they will capture the data manually and input it into their company’s financial system. Then AP will manually pull supporting documentation to verify the invoice is valid and the work, hours, or goods agreed to between their company and the vendor have been delivered. AP will then route the invoice internally for approval if the invoice can be verified.
- Then AP plays the waiting game in the manual process for invoice approvals, and then processes the vendor invoice for payment. It often takes more than three weeks to process an invoice manually without an AP Automation system. With many vendors wanting payment within 30 days, the manual process becomes a laggard in and of itself.
- After invoices get approved, AP will also sometimes need to wait for the next check run if not leveraging an AP Automation system to process payments via check or ACH, or send the invoice into their desired payment method — because oftentimes companies are advised to reduce check runs to twice a month for the sake of efficiency.
- Finally, the check is cut and either put in the mail or remunerated digitally. As of 2019, the share of companies that paid vendors through ACH was 63.8% and 80.8% by means of paper checks.
If it sounds like a lot of steps, it is. In today’s fast-paced digital world of business, there are too many steps for manual processes to keep up with, not to mention ensure processes are controlled.
The True Costs of Manual Invoice Processes
The true cost of an invoice is never just what’s printed on it. Here’s what to factor for true costs when it comes time to process a manual invoice.
Manual Invoice Processing Costs
For companies with manual steps in their AP processes, it can cost up to $30 to process a single invoice manually. Even companies with well-honed, but manual methods for dealing with invoices can easily spend $10.
Applied to the 500 billion invoices processed annually worldwide, that’s $5 trillion, or around one-fourth of America’s gross domestic product. Broken down on a per-company basis, with a business processing around 800 invoices a month, that equals roughly $10,000 in invoice processing costs for that time period.
Costs for Manually Capturing Data
When an invoice is received manually, AP staff keys in the data from it, generally into a system that their company uses internally. This is one of the most common costs associated with invoice processing, time.
Time can multiply if the invoice doesn’t contain all the relevant data for the system, such as a purchase order or invoice number. Hunting down this data can be the bane of an AP specialist’s professional existence. Only second to the next cost below, chasing down invoice approvals.
De-Centralized Approval Costs
During the 25-day average it can take an invoice to be approved in a manual process, it will likely pass through multiple checkpoints to ensure controls are in order. It might be seen by an AP specialist, invoice approver, or a final decision maker such as a department head, operations manager, or vice president before it’s approved and vendor payment can be made.
All of which are either threaded in email chains or manually delivered to the authorized approvers. Both of these approval processes costs time and invoice context is lost as the invoice isn’t centralized with all the relevant information, such as supporting documentation or previous approver questions and answers. This often leads to additional questions from approvers and as a result, additional time for all stakeholders involved.
Aside from direct costs for invoice approvals, hidden costs can lurk in the dark as well. For example, early payment discounts for paying invoices by a specified date, which can be lost through a protracted approval process. In the era of COVID-19, IOFM notes that these discounts are growing, too, sometimes now as much as 5-7 percent.
The Cost of Payments
For companies mailing paper checks — and that’s the vast majority of them, even in 2020 — there’s the cost of printing the check, mailing it out, and periodic stop payment fees when checks don’t make it where they’re supposed to go.
But that’s just the tip of the iceberg, so to speak.
Paystand noted in 2019, North American businesses lost $550 billion — that’s billion — in profits “due to delays, labor, and errors” associated with paper checks. It also costs companies 10 times as much to use paper checks than opt for digital vendor payments. Another solution is to use a service that can fulfill the check printing and mailing process, which can decrease costs and time spent cutting checks to pay vendors manually.
Streamlining Invoice Processing and Vendor Payments
For anyone tired of all the costs and time associated with the maul ways of processing invoices and vendor payments, there is a brighter road ahead with automation.
Here are some strategies for streamlining invoice processes and vendor payments.
Leverage Technology to Mitigate Fraud and Duplicate Payments
There might be a temptation for AP specialists to cut checks or processing payments as quickly as possible when invoices come in, to appease vendors and satisfy bill payment as quickly as possible. While this is a noble goal, it lacks controls as this practice enables fraud and increases the chance of duplicate payments.
AP Automation, a system to process invoices will flag potential duplicate invoices so an invoice is never paid twice and it also mitigates fraud as it will flag mismatches with vendor information. With AP Automation technology, time will be saved from trying to resolve a duplicate payment with a vendor and strengthen relationships as receiving a refund is never an easy process for either party.
Invest in Accounts Payable Automation
Such systems can offer a range of benefits from less time spent on admin tasks to quicker monthly closes. They also can exponentially increase AP department production, with FEI noting that highly-automated AP departments could process 16 times as many invoices per month as companies still using manual methods. With AP Automation, the average cost to process an invoice is around $2.13 depending on invoice volume and the invoice automation platform. For companies looking to decrease invoice processing costs, it’s advised to adopt AP Automation which is also more controlled and decreases the time to process invoices as well.
Use Corporate Credit Cards
Transitioning corporate payments to credit cards can earn businesses cashback incentives, with some cards offering as much as 4 percent. Paying invoices via credit card is also great for record-keeping since, as Plastiq notes, “Credit card statements allow you to quickly and easily update your bookkeeping system.”
Of course, in order for businesses to be able to pay with credit cards, they have to get vendors onboard. This isn’t always easy, due in part to reluctance among vendors to pay fees commonly associated with credit cards. This reticence is understandable, since the fees can range as high as 3.5 percent per transaction.
To get vendors more enthusiastic about accepting credit card payments, businesses can negotiate with their financial institutions for lower credit card fees. Businesses can also work with their vendors, promising quicker payment, offering to cover some or all of the fees, and even providing tips in exchange for accepting credit payments. Otherwise, ACH plays well with AP Automation systems and is a fast method to pay vendors.
Negotiate Payment Terms and Deadlines
Most anything printed on them can be adjusted with the agreement of both parties. How you pay can be negotiated as well. Say if a vendor doesn’t accept credit cards and prefers checks, you can point out the benefits of ACH payments and how they will receive payment faster than cutting a check.
Thus, it’s imperative businesses utilize good negotiation strategies when it comes to vendor payments terms, such as requesting early payment discounts more time for processing or being proactive in communications if something seems off with an invoice.
Inquire about Discount Opportunities
Many vendors are willing to provide discounts to companies that can pay earlier than listed on an invoice. Moreover, other discounts such as annual pricing can even be in their best interest. Thus, a company isn’t necessarily doing a disservice to their vendor if they inquire about how the company can obtain a discount.
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