Challenges Outside and Inside Accounts Payable
The problem starts with the fact that invoices are often not sent to the Accounts Payable (AP) department. They are frequently sent to the person who purchased the product or service and may sit on that person’s desk for days or even weeks. Then there’s more time and effort forwarding the invoice to AP before it can be entered into the accounting system. Sometimes departmental procedures are methodical, but create even more paper – one study found that invoices were being copied and filed up to nine times.
But plenty of challenges exist within the AP department as well. Whether received directly from the supplier or forwarded from elsewhere in the organisation, invoice processing is very labour intensive. Besides the obvious mail handling and data entry activity, invoices must somehow be coded with appropriate purchase categories and GL accounts. That alone may require a lot of time-consuming research by AP personnel. In order to make sure the charges are valid, invoices need to be compared to one or more POs or a contract, and receipt of the goods or service needs to be confirmed. That takes more time. If the information isn’t available or the invoice doesn’t match the information AP has access to, the invoice needs to be sent to an appropriate person for review and approval. That takes more time. The more this is done with paper, the more time it takes and the more cost it accumulates.
There is no question that paper invoice handling is the enemy of efficiency in the AP department. Scanning invoices into a document management system can help, but by no means solves the entire problem. Receiving invoices electronically helps more, but only if the rest of the process is set up to really use the information in an automated fashion.
The “mail latency”, “desk float” and “information chase” associated with manual invoice processing results in a number of problems:
- Management does not have visibility of outstanding liabilities
- Invoices are beyond the discount period before they even enter the AP system
- The potential for paying duplicate invoices increases as suppliers send second copies
- The inclination to “just pay it” becomes greater when the validation process is too cumbersome
- AP personnel end up spending a high percentage of their time answering enquiries from suppliers about payment status
- Suppliers may stop delivering inventory or services when invoices are not paid on time
- Audits become long, costly and problematic
And that is all in addition to the direct cost of invoice processing – primarily Accounts Payable personnel and departmental operating costs. Industry analysts suggest that on average, it costs bottom performing companies ten times more to process an invoice than top performing companies. That means the difference between bottom and top performers can be over $30 per invoice! Multiply that by thousands of invoices, add the cost of missed opportunities for early payment discounts, and add the cost of Accounts Payable FTEs required to answer supplier payment queries, and it’s easy to see that the direct cost of inefficient invoice processing is substantial.