Accounts Payable (AP) processes are complex and time-consuming, but with automation, these tedious tasks can be simplified and optimised for straight-through, touchless processing. And though an AP digital transformation can seem daunting, a “one-by-one” approach can help your organisation start small and build up to total automation. Read how these 8 AP processes can and should be automated now.
The accounts payable process can be complex and time-consuming without automation. Especially for global organisations with potentially tens of thousands of suppliers, and processing hundreds of thousands of invoices for multiple locations. A delayed invoice process can result in late fees, supply chain disruption, and high invoice processing costs. With its high transaction volumes and repetitive nature, it is no wonder that this is a target area for digital transformation.
However, do not be overwhelmed by the high volumes and complexity. An applicable analogy here is, “How do you eat an elephant? One bite at a time of course!”
Start by breaking down the accounts payable process into smaller, more digestible sub-processes. Then you can identify opportunities to improve and automate within each sub-process.
So, what is AP automation? Accounts payable automation (also referred to as AP automation) aims to optimise the process of receiving and processing supplier invoices. AP automation enables more of your AP process to be touchless, meaning that most tasks are automated, requiring minimal human effort.
When you embark on your AP automation journey make sure to start at a high level and consider global processes. Only then will you see opportunities to leverage any automation that you put in place by leveraging economies of scale.
Start by defining the overall start and end of the process as well as any reporting or compliance components.
What are the Accounts Payable (AP) Processes?
The accounts payable process includes all the steps required to collect, report on, and process an organisation's obligation to pay. This includes contracts, supplier invoices, check requests, and bills.
Where available invoices should be matched and reconciled with contracts and/or purchase orders (a purchase order is a legal binding contract to buy, like a contract), then properly apply GL (general ledger) coding, ensure proper approval to pay, and then post into the financial system for payment. This process also includes making sure to apply and process any credit notes from suppliers. As well as accurately reporting accruals for received but not yet paid obligations.
After you have defined the overall scope of the process, then you can dig into the details of each sub-process.
1. Invoice Receiving
The beginning of any accounts payable process starts with receiving invoices from suppliers.
While this sounds simple, invoice receiving is a critical step. Invoice receiving and digitisation set the stage for subsequent AP processes. Automating invoice receiving can be challenging since suppliers send in invoices in various formats (email, PDF, paper, portal-flip, and EDI) often to various locations. In a traditionally manual process, the invoice ends up sitting on someone’s desk or email inbox, while the supplier is calling to see where their payment is!
After the invoice is received, the AP team needs to extract the pertinent information from the invoice. Certain basic fields might need to be captured such as the invoice number, supplier name, amount, sales tax, VAT, purchase order lines, etc. Converting the invoice into an electronic image (if paper) should also be a part of invoice receiving. This enables a fully electronic and paperless process downstream.
There are many solutions out there for capturing the data via OCR (Optical Character Recognition). This is a good first step, but OCR is inaccurate and creates rework processes downstream. Look for a solution that converts emailed PDFs into electronic format with 100% accuracy, without relying solely on OCR technology.
Basware’s SmartPDF technology does just that. Our customers have found that 70-80% of emailed PDF’s are machine-readable (no OCR required).
Whatever your invoice receiving automation process entails, the outcome of this process should be two things:
2. Invoice Validation
After you have invoices triaged and relevant information captured, then you will need to make sure they are valid invoices. Some invoice processes skip this crucial step, but it is important to validate the invoice before you spend any time in subsequent processes.
Think of this as a car assembly line. What if the car got all the way to the customer only to determine it had a defective frame? Then all the cars must be recalled and scrapped or rebuilt. Have you ever sent an invoice for approval, then only during posting to the ERP do you realise that it is a duplicate invoice? All that processing effort was a waste!
Any good invoice validation process should check the following things:
Is the invoice from a valid supplier?
Is this a duplicate invoice?
Is there an invoice number and amount? (i.e., is this an invoice?)
Does it have other required information in the right format? (proper currency, correct PO format – if PO-based, tax if required)
Finally, you will need to decide how to handle the invalid invoices. Do you send them back to the supplier, put them in a queue for AP to resolve manually, or just delete them? Having this sorted out in advance will help prevent downstream issues in invoice process automation. The output of this sub-process should be a valid electronic invoice.
3. Invoice to Purchase Order Matching
The next process is matching an invoice to a purchase order. Matching an invoice to a purchase order can be time-consuming if done manually. During matching, automation can help auto-check if the invoice is within tolerance as compared to the purchase order.
Invoices with a PO-number should be auto-coded with the coding that was applied when the Purchase Requisition and/or Purchase Order lines were created and approved. If you are using a procurement system, then a good first step is to make sure your purchasing system is integrated into your AP system for automated matching. This can be challenging if trying to match with purchase orders from more than one purchasing system so make sure to keep that in mind when choosing a platform for accounts payable automation!
If the invoice header and lines match to an open PO, within an acceptable tolerance, then these should be able to pass through for payment without manual intervention.
4. PO-Invoice Match Exception Handling
In theory, a perfect PO will match perfectly with the invoice. However, in practice, this does not happen all the time. Automating the exception process involves identifying the exception and highlighting that to the appropriate person. This might also include automatic routing to a business user such as the buyer/approver.
There can be many reasons for PO to Invoice match exceptions:
Total header or line sum out of tolerance
Total header or line quantity out of tolerance
Product code mismatch
Additional costs not on PO (freight, taxes, etc.)
Purchase Order not receipted
Incorrect Purchase Order
Purchase Order closed or canceled
One of the most common problems we hear about is when an invoice is waiting for goods or services receipt. This is important for 3-way matching of the invoice before payment and ensures you do not pay for something you did not yet receive. AP teams spend time chasing down business users to validate if items were received. Having an automated way of parking these invoices waiting for goods receipt is a good place to start. Auto-notifying the buyer they have an invoice waiting on their receiving step is also an area of opportunity for automation.
Another common exception that can be automated is related to additional costs such as freight, taxes, or anything else not on the PO. However, if you can pre-determine acceptable amounts and coding for these then they can be automatically processed as well.
5. Non-PO Invoice Coding and Review
Invoices without a matching PO-number (aka non-PO Invoices) will need to have proper coding applied before approval and posting.
When a non-PO invoice comes in it's often an AP person that must determine manually who the invoice should go to. Automated systems can recognise information for auto-routing such as reference person, supplier, organisation, keywords, or any other information captured from the invoice in step 1.
Then the invoice needs to have general ledger (GL) coding applied. As someone that use to purchase large machinery for a manufacturer, I can attest that this is one of the more cryptic and confusing parts of the process for business users.
I remember having to ask different people, while they consulted their post-its and hidden spreadsheets to get the right account code and cost center. Then the controller would send the invoice back to me saying it needed a special project code for budgeting purposes, or that the account code I was using was obsolete.
Automating how coding solutions that can apply (% distributions/splits) coding in a standardised way represent an opportunity to streamline and automate your accounts payable process for non-PO invoices.
Furthermore, certain types of coding may need special review, like capital or IT purchases. If done manually, this can be frustrating and slow the procurement process down.
The output of this sub-process should be a fully coded and approved invoice that is ready to pay. If the invoice was matched to an approved payment plan (aka spend plan - Basware supports automation of non-PO invoices via payment or spend plans) then it will skip the next sub-process (invoice approval).
6. Non-PO Invoice Approval
Invoices that are not matched to a purchase order or payment (spend) plan will need approval to pay. Automating the routing of invoices to the right person to approve is a good first step. Make sure any automation system you setup adheres to your organisation's delegation of authority and approval limits to make sure you are ensuring compliance.
Invoices can sit on someone’s desk or inbox for what seems like an eternity awaiting approval. The reason is that the work may already have been done, or the services delivered. The invoice approval is not at top of mind for a business person that has many other priorities. This leaves it up to the AP department to chase them down to get approval for payment. This is often after a supplier inquiry that the invoice is late, or that AP sees potential for a late fee.
Recurring non-PO invoices such as leases, rents, utilities, or project spend also represent an opportunity for automation. The reason is that the invoices are often coded the same way and the expenses can be known upfront and pre-approved. Systems such as Basware provide automated payment (spend) plans to auto-process these invoices when matched with pre-approved plans. This saves time not having to manually process repetitive invoices and gives visibility for spend commitments for spend that might not be suitable for a purchase order.
The output of this sub-process is a fully coded and approved invoice.
7. Invoice Posting and Payment
Finally, after an invoice has been validated, coded, and approved you are ready to pay. This means posting the ‘account payable’ to your financial system (usually the ERP). Automating this step usually involves aggregating the ‘ready-to-pay’ data file and then importing it into your ERP system periodically. Modern automation solutions will use an API to trigger getting invoices ready to pay on a more real-time basis.
8. Accrual Reporting
The accrual reporting process is important so that organisations can properly account for all liabilities to be compliant with GAAP (Generally Accepted Accounting Principles). In short, accruals allow expenses to be reported when incurred, not paid. This may also include purchase orders for goods or services that have been received but the invoice not yet received and/or paid. As well as (in the Basware Solution) any automated payment (spend) plans for non-PO invoices.
While the publishing of GL entries may or may not be fully automated, it is good to have a quick and reliable way to pull accruals reports on invoices at any point in time. After all, nobody wants to be stuck chasing down invoices left on people’s desks to get accurate accruals at period end.
In summary, there are 8 different processes within accounts payable that can be automated. Each of these has their own unique challenges and often impact further downstream processes. When tackling any AP Automation project, you should consider the overall global scope and volume as well as approaching each sub-process with care, making sure to involve procurement and business users since they will be impacted by any process changes.
We hope this gives you a good place to start your AP Automation journey, or to further digitise and build on improvements you have already made. Wherever you are, just keep looking forward, and best of luck in your process transformation!
If you would like any help or further guidance feel free to reach out to us for a FREE Success Lab workshop. We will help you map your processes and identify the highest-value opportunities.