How to Automate Accounts Payable

How to Automate Accounts Payable | Accounting Smarts
Charles Hall

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Charles Hall

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June 10, 2022

Paying invoices for a small business seems like a straightforward activity. However, in practice, procedures and internal controls are necessary to have confidence you’re paying the right amount for the goods and services you received.

Paying invoices for a small business seems like a straightforward activity. However, in practice, procedures and internal controls are necessary to have confidence you’re paying the right amount for the goods and services you received.

Some areas of your accounts payable workflow can be automated to increase productivity and reduce wasted resources and time.

In this article, we will look at what sort of processes are often a part of an accounts payable system, which ones are suitable candidates to automate, and some solutions that you can look into to make that happen.

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Accounts Payable System

In simple terms, accounts payable is money a business owes to its suppliers. This takes the form of invoices sent to the business by the supplier that state what goods or services it provided to the business, how much it is charging for that provision, and when it expects to be paid. This is classified as a liability for the business on its balance sheet.

Accounts payable does not include money that a business borrows, such as bank loans, nor does it include the money it must pay to investors as part of its business ownership agreements. It only covers liabilities of a business that relate to goods and services it purchases from vendors and must therefore pay for.

Some organizations have an accounts payable department that manages their processes for handling and paying invoices. Still, every business has to manage it, and small business owners or sole proprietors will often manage this themselves.

Processing invoices, ensuring they are valid and accurate, and then submitting payments is a time-consuming system, so it is not surprising that businesses often seek to automate as much of their accounts payable management as possible.

Accounts Payable Processes You Can Automate

Understanding how to automate accounts payable for your business starts with understanding which processes you can automate. In this section, we’ll break down what parts of your accounts payable workflow lend themselves to automation and some strategies for doing so.

Receiving and Categorizing Invoices

Invoices can come in a wide variety of formats. Today they most often come in digital formats such as PDF, Microsoft Word, or image formats like PNG, JPG, and TIFF. They can often come through varying communication channels as well, such as email, online submission, or fax. Some vendors still send paper invoices by post.

Sifting through such a morass of invoices coming in all formats and all directions would be overwhelming for most businesses. Automating this part of your invoice pipeline should be one of your priorities if you value the time your employees are putting in.

One of the easiest ways to make substantial progress in streamlining your invoice receiving process is to restrict invoice submission to electronic means. This eliminates the time-wasting process of digitizing hard copies. This also opens up the possibility of automating the sorting and categorization of invoices as they arrive and then setting up process flows based on the invoice's format and how it came to you.

Approving Invoices

Once an invoice has been received, it needs to be reviewed and approved for payment. This review process ensures that the invoice is valid and that it requests the correct amount for what was purchased from the vendor.

Often, this means the department or person responsible for placing the order affirms that the invoice represents what was purchased, what was received from the vendor, and the amount the business agreed to pay. After that, someone in a position to authorize payment needs to finalize approval to transfer funds. Care must be taken to ensure that payments are deposited to the correct account.

This is an area of invoice management that can result in the most prolonged delays. Many companies rely on a rigorous review process to avoid overpaying for purchases and misrouted payments that can create real financial trouble. But when this process is manual, it can be cumbersome. Often it involves one person emailing another, waiting for a response or action that might be buried under someone’s very long backlog.

Automating this process using an accounts payable workflow automation software solution can be a valuable investment that can significantly increase your organization’s productivity. Using a tool like this can direct an invoice from one approver to the next without each person needing to know where the invoice should go next; they just click a mouse, and it moves onto the next stop in the pipeline on the way to payment.

Capturing Data

To process an invoice, its data must be entered into whatever accounting system your business uses. Manually entering this data is clearly going to be a slog. Instead, use optical character reader (OCR) and intelligent character recognition (ICR) software tools to automatically capture text from your invoices and convert them into meaningful accounting data. 

This type of software exists on its own, but it’s generally best to take advantage of such tools as part of a workflow automation suite since most include them.

It is hard to overstate the benefits of automating data entry. This is one of the most human-error-prone areas of accounts payable workflows, especially given its repetitive nature. Taking advantage of data capture systems not only speeds up your process greatly but avoids the complications arising from the incorrect data being entered, resulting in the wrong payment being processed down the line.

Matching and Verifying Invoices

Part of the process of confirming the authenticity and accuracy of an invoice is connecting it to the original purchase order and the receiving report that proved that the purchased goods were delivered. These should match up to the amount being invoiced and the number and type of items being purchased. This can end up being a multi-directional matching that can get complicated when done manually and create yet another opportunity for errors.

Software managing this workflow's automation will tie these disparate documents together through common identifiers in a document management system where it can be easily accessed and contextualized for that purchase. 

The system can then use these supporting documents to validate the invoice. You can provide the rules you want the system to follow that create the confidence you need to ensure the invoices are accurate and reflect an actual purchase order that was fulfilled.

Assigning General Ledger Codes

General ledger codes, or GL codes as more commonly known, are a means of classifying payables to aid a business in determining how to process them. These codes are often assigned based on a hierarchy of criteria such as country codes, freight information, business units, and storage locations. Larger organizations may have many GL codes to choose from when assigning one to a payable.

This is an area where things often break down when leaving it to employees to code a payable because it’s easy to assign a GL code that seems like a plausible choice but is actually the wrong one.

GL coding is, therefore, a prime candidate for automation since it can use data gleaned from supporting documents and invoices to narrow the selection to the correct GL code according to business requirements.

Accounts Payable Automation Solutions

We’ve talked about what processes you can automate in your accounts payable workflow, so let's move onto what solutions you can explore to bring that automation into your organization. This list is exhaustive by no means, but it contains a few examples that show the sort of features you’ll want to consider when shopping for AP automation software.

It is well worth taking the time and effort to research various AP solutions for your business and consider which ones offer the best combination of features and price. Some customers find they are caught by surprise to learn that certain aspects of their business result in higher fees for their chosen product, such as using multiple bank accounts for payments, so make sure you ask questions of sales and support representatives before making your final decision.

You should also check out what existing and former customers have to say about their customer support since you will almost certainly have to rely on it to resolve problems.

Here are some of the highest-rated AP solutions according to Capterra:

Tipalti

As AP automation software goes, Tipalti covers all the bases. It includes the means to manage your vendors and your approval process. It uses cloud-based OCR to capture data from your invoices and integrates with document management to store and contextualize your invoices with supporting documentation.

It also includes features to manage your cash and issue payments and warns you when duplicate payments have been issued. It also has features that assist you with tax compliance and data gathering for filings. It is used by some major brands in the business world, such as Uber, Vimeo, and Twitch.

Tipalti gets high marks from its customers for ease of use and excellent customer service.

Avidxchange

Avidxchange is another solution that includes several features to streamline and automate your AP process. It manages invoice receiving and routing through email and can automate data capture into your accounting system. It also can issue checks or electronic payments and file invoices for you for future reference and tax reporting.

Avidxchange offers a reasonably high amount of automation for invoice and payment processing, and customers have praised it for being easy to set up and get started.

MineralTree

MineralTree is a bit lighter in features, but it focuses on the most critical and valuable areas for automation of your AP workflow.

It starts with capturing data from your invoices on their way in, simplifies the approval process by directing invoices to the responsible parties, streamlines authorization of payments, and issues payments through ACH and checks. It also offers a virtual card that rewards you with rebates when you use it to make payments.

MineralTree also has some notable customers, including RxBar, Rover, Jamba, and Butcher Box.

Bill.com

Bill.com is another AP automation solution running in the cloud that, like its competitors, streamlines your invoice processing to reduce or eliminate data entry. It is highly rated for its ease of use and offers features like approval process control, recurring payments, fraud detection, PO reconciliation, check writing, and cash management.

It focuses on small to mid-sized businesses and integrates with accounting solutions like QuickBooks, Xero, and Oracle NetSuite.

Nvoicepay

Last but not least, Nvoicepay is another all-in-one solution designed to combine your invoice payments into a single payment channel running through your organization.

Nvoicepay issues payments to your vendors, who can submit their own account information for where their payments should be routed and resolves payment issues on your behalf. It is focused more on the approval and payment side of the AP workflow. Still, it gets high praise from customers for taking the burden and hassle of issuing and resolving payments off of their shoulders and ranks among the highest-rated services in its space.

Why Automate Your Accounts Payable?

If your organization already has established procedures for managing invoices and issuing payments, you might wonder if automating these processes would justify the investment in time and money. You might feel you have a handle on the situation already. If you lose an invoice here or there or payment is issued for the wrong amount, well, surely you can improve on the system you have and push your people to do better, right?

However, automating your accounts payable, regardless of the method or software you choose to use, can actually offer a few benefits that are worth considering before you decide to simply grin and bear it.

Automation Eliminates the Risk of Human Error

The thing you may be overlooking is that the mistakes and lost invoices you know about are just the ones you know about.

A system that relies on human intervention at every stage is prone to lose track of critical data that tells you when something is wrong, masking the error until it can blow up at a later and more difficult point to address it. 

Without automation, you can find yourself without the insights to identify problems in your AP workflow. There is also a strong instinct for people to be blind to (or even cover up) their mistakes, so you might have hidden inefficiencies in your AP system that you will never see.

Less Likely to Pay the Cost for Mistakes

Additionally, many businesses struggle with accounts payable because of these often lengthy processes and hefty backlogs resulting from slow, manual workflows prone to these sorts of human errors.

These mistakes can be costly for your business, resulting in overpayments that hurt your bottom line or late payments that can sour essential business partnerships with suppliers. No matter how well you train your employees, they may seem to make the same mistakes because of cumbersome procedures and hurried deadlines. Automation can help alleviate these issues.  

Productivity

You probably have extended processing times due to long backlogs at each stage of the accounts payable workflow because humans can only work so fast and be appropriately attentive to detail at the same time.

An organization that doesn’t automate these workflows is certainly operating with lower productivity because its resources are tied up with moving invoices through a slow, bureaucratic process that requires people to sign off at each step, instead of allowing technological solutions to streamline these and leave them free to pursue more valuable activities that drive the business forward.

Final Thoughts

Managing your accounts payable processes manually will put you on the fast track to confusion over misplaced invoices, lower productivity, delays in processing payments, and financial losses from overpaying or underpaying invoices. You can expect frustrated vendors and exasperated, burned-out employees from relying on human processes for too much of your payable’s management.

A well-integrated and reliable automated accounts payable workflow solution can greatly increase your business productivity and avoid many of the headaches associated with human error and cumbersome processes.

Remember that a fully automated system covers all the aspects of accounts payable processing, starting from receipt of an invoice to confirmation of payment. It should include ways to:

  1. Tie invoices to supporting documents
  2. Verify their accuracy
  3. Move them through the approval pipeline
  4. Categorize them accordingly

Even if you aren’t in a position to automate all of these steps at once, automating even some can reap serious benefits to your bottom line and relieve a lot of pressure on your employees.

Finally, understand that implementing an AP automation system will require a significant investment of resources and time. It will probably be a frustrating experience as your employees learn how to use it to its full potential. Be patient and give the new system time to demonstrate its value to your business.

With the right solution in place, you will discover how much value automation is giving you in terms of productivity gains, faster invoice processing, fewer mistakes, and less frustration at slow, cumbersome bureaucracies for approving payments. You’ll be reaping the benefits sooner than you might expect and enjoying them for years to come.

Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall