The enterprise resource planning (ERP) system is the most critical management tool for running finance and accounting. It collects, stores, manages and monitors essential business data; coordinates between departments; and helps companies manage approvals and workflow audit trails.
Your ERP system may track purchase orders and invoices from suppliers, but it won’t manage the actual supplier payment operation. The actual finance professionals in your Accounts Payable (AP) department take care of this step. But manual processes are time-consuming, labour-intensive, and can potentially lead to costly errors - both financially and legally.
With this in mind, here are some of the top reasons to consider technology to automate the AP process.
Manual processes eat up time and energy
AP is a cost center - money goes out but rarely comes in. AP is fueled by the manual effort, and all that manual work takes time. In fact, a recent survey conducted by Gatepoint Research and sponsored by my company, Tipalti, found that 72 per cent of respondents spend more than five hours a week setting up payees, approving and issuing payments, resolving payment issues, and performing payment reconciliation.
Without key information from AP on payment results, your financials cannot be closed in a timely fashion, which will have a ripple effect throughout your company.
In the survey conducted by Gatepoint Research, 48 per cent of respondents said they either submit payment instructions to their banks manually, or export a file from the ERP system and then re-import it as instructions to their bank. After the payments are made, nearly 60 per cent of respondents then update their accounting systems manually or re-import a bank file.
With all this back-and-forth, respondents named payment reconciliation as one of the most effort-intensive processes for their companies.
How automation can help: An automated AP workflow has been shown to reduce the workload related to managing the supplier payment operation by up to 80 per cent.
By automatically tracking each payment, accounting teams gain real-time insight into when each payment is sent, when a check is cashed, and why a payment is rejected. Cloud-based systems let executives and managers access these reports at any time, from anywhere. At the same time, suppliers gain visibility into their payment status and history without having to request time from the finance team. This means the team spends less cycles on the phone and email, and more time on what matters, such as tackling higher-value activities, improving expense and financial analysis, for example.
Manual wastes money
Nearly 90 per cent of respondents in the Gatepoint Research study pay suppliers by paper check. Yet, market research firm Aberdeen Group found that the average cost of a check payment is $7.78 - including labour, paper, printing, postage and other related costs.
In addition, while wire transfers are common as a payment method, they’re expensive, costing up to $20 each - which can add up if you’re paying hundreds or even thousands of suppliers.
How automation can help: Automation can eliminate much of the cost associated with checks and manual errors. Every time the bank rejects a payment transaction because of inaccurate bank account information, it charges fees. Finance professionals can also use incentives to push payees to adopt less costly payment methods, such as ACH or ewallets.
Manual means more errors
An AP workflow process that’s not automated nor tightly integrated with ERP systems can be more than costly - it can damage your business.
Inefficient AP processes lead to errors and delays. Accountants are human, too, and people on either side of the equation can make mistakes. Typically, errors are made on the payee side - suppliers provide the wrong bank routing number or incorrect contact information. Or maybe the supplier has an out of date address in the ERP. These payments are then rejected, creating extra work as the payer must investigate, manage, and resolve the issue. While the payer is scrambling to fix the problem, suppliers are getting impatient and begin calling and emailing about the payment status.
How automation can help: Automation eliminates payment-processing issues by validating that the correct payment information has been collected by country, currency, and payment method.
Manual is risky
In addition to human error, manual processes also expose you to risk for fraud. To reduce AP costs, some companies hire inexperienced clerks to perform manual tasks. But giving these individuals access to sensitive supplier information and company funds opens an organisation up to serious risk, especially when checks are involved.
Checks are the payment method most subjected to actual or attempted fraud and accounted for the largest dollar amount of loss in 2014, a survey conducted by the Association for Finance Professionals found. What’s more, the Association of Certified Fraud Examiners found its 2014 Global Fraud Study that check tampering is the most common fraud perpetrated by accounting departments.
Tax compliance regulations also must be considered. While many finance departments only collect tax forms before tax season, the best practice to avoid audit risk is to do this when first setting up a payee. In addition, new FATCA regulations put the onus on the payer to validate that your payee provided the correct tax form, that they completed this information correctly, and that, if applicable, taxes are withheld properly. Getting your 1099 and 1042-S tax filings wrong could have costly implications.
Finally, a staggering 66 per cent of those surveyed in the Gatepoint Research study admit that they do not or are not sure if they screen payees in accordance with anti-terrorism, money-laundering, and drug-trafficking requirements required by the Department of Treasury.
How automation can help: Before executing a payment cycle, control the handling of sensitive payment information while scanning all supplier payee records against international blacklists to avoid paying suspected terrorists, money launderers, cyber-terrorists, and drug traffickers. Collect tax form information for all payees automatically during the payment registration process through a supplier portal, eliminating the workload associated with gathering this information. Validate that the right tax forms and information have been collected, calculate necessary tax withholding, and prepare tax filing reports.
The final step
Financial executives want increased productivity and visibility, and that’s what ERP systems claim to bring. But to truly achieve these goals, automated AP processes should be considered for ERP integration. Automating AP processes can help businesses achieve the final step needed to cross over into ERP nirvana, where increased productivity, reduced costs, stronger vendor relationships, and better compliance reign supreme.
Chen Amit, CEO and co-founder of Tipalti
Image source: Shutterstock/iQoncept