Processing of Accounts Payable Invoices
In the finance department, the processing of accounts payable invoices is an interesting paradox. With a plot full of all the ironic twists of a Shakespearean comedy, Accounts Payable (AP) processing can be high priority or low priority, a key business driver or a drain on resources, a cost center or a revenue stream.
It’s only natural to want to pay our debts as late as possible, but the faster we can process invoices, the more money we can save via early payment discounts. The goal should be to move invoices through the system as quickly as possible. But the reality is that AP is a resource-eating monster that consumes much more than it gives back.
And one of the biggest ironies of all? The continued use of manual approvals.
3 Reasons Why We See Manual Approvals
The majority of organizations, as much as 79%, claim to have at least some form of automated approval. In reality, this is not an accurate metric. For example, should a manual approval that triggers an automated posting to a ledger or payment system be considered automated? It is for some organizations. However, it is still a manual task that requires human effort and cannot happen without this intervention, which is clearly not automation.
With the increased digitization of AP, you might expect manual approvals to be a thing of the past. Unfortunately, they are a huge part of day-to-day operations. Within each manual approval play-within-a-play, we frequently see four common themes:
Lack of TrustIf auditors do not trust the data extracted from an invoice, matching automation is only available for the most straightforward invoice instances, and coding is almost always a human procedure. No one wants a machine to have the final say on whether an invoice gets paid. This simple, undeniable truth may seem bizarre in today’s digital world, but it still exists.
The whole process is stuck in the pastAccording to Ardent Partners1, at least 23% of finance departments had not adopted document scanning for processing. These AP teams are still using outdated manual approval processes whereby human team members must receive, scan, and input every document. Manual accounting may have been de-rigueur in the Elizabethan era but not in the 21st century.
Exceptions OccurNumerous, pre-defined rules govern many AP processes; invoice type, supplier, and value range determine how an invoice passes through the process. But within these rules, there can be defined exceptions that need managing. For example, if an invoice value is above a certain threshold or includes specific items, it may require explicit, manual approval.
Defined exceptions are understandable. But there will always be undefined and unexpected situations, forcing AP teams to require manual approval and verification.
No-PO existsWhen thinking about invoice approval, most people imagine the final approval for payment. However, when an invoice without a purchase order arrives in the system, a different type of approval is needed. In this case, we need to validate and categorize the invoice.
In many ways, this scenario is another exception to the rules. With an average of only 50.3% of invoices linked to a purchase order, this is possibly the biggest reason many AP teams revert to manual approvals.
The Pre-Problem with Approvals
And the plot twists keep coming. Ironically, manual routing of invoices for approvals is as great a problem as the manual approvals, themselves.
Data from Levvel Research shows that 37% of AP teams find manual routing of invoices their biggest AP pain point. Almost half of AP teams are not using invoice workflow and automation to route invoices. Instead, they use a combination of manual, email, and even mail-based distribution. Even if the subsequent approval process is automated (and it most likely is not), the time and cost spent simply getting invoices to the approval stage is painful.
The Cost of Manual AP Approval
To approve or not to approve? That may be the question on the minds of those involved in the AP process, but a more relevant question should be, what is the cost of manual approval? Or, more to the point, what are the multiple areas of cost associated with the continued practice of manual approvals?
Full-time employees (FTEs)Data from the Hackett Group shows that the top performers in terms of invoice verification and approval of invoices average one, full-time AP employee per $1billion in business spend. Their peers, on the other hand, have at least 3 FTEs for the same function, a 200% increase in FTE cost.
Management TimeAP approvals, by default, require more senior staff, which in turn means higher costs. In most cases, an AP team should have the authority to approve invoices for lesser amounts. However, in the scenarios detailed above where manual approvals still exist, the approval process goes outside this core team.
According to Hackett Group, 57% of approvals are centralized at corporate headquarters, adding to approval time and increasing the likelihood the approver may not be immediately available or aware of the incoming request. AP teams often spend extra time following up with various people to ensure they can make approvals on time, which can become a cost factor in itself.
Departmental Efficiency for Modern FinanceAccording to Ardent, 60% of AP leaders still face lengthy invoice and payment approval times. This has always been a “top five” issue for AP groups, but in 2021, approval process deficiencies made it to Number 1.
Is AP automation the answer?
Shakespeare was the king of delivering layer upon layer of plot twist, nuance, intrigue, and villains hiding right under your nose. So who are the significant players in our story?
Non-PO invoices, manual routing of approvals, and invoice exceptions, might be the three witches, driving the Macbeth of the AP team slowly mad. Unfortunately, current invoice processing software falls woefully short of its goal of automating the action of approving incoming invoices. Is this the real villain in our midst?
Actually, it’s more like a flawed hero. Automation can help at each stage of the AP process: capture, extraction, matching, GL coding, approval, and posting. Yet, most existing automation efforts focus on the early parts of the process, meaning that very few invoices get through to the approval stage without needing manual intervention. Quite clearly, automation itself is not the cure to manual approvals.
So are we destined to be stuck in an ever-increasing pool of invoice exceptions and manual approvals? Thankfully not.
In Shakespearean terms: Automation exits stage left and Autonomous AP enters to huge applause.
What is Autonomous AP?
The future of accounts payable approvals is Autonomous AP, which presents a complete re-envisioning of how organizations process their invoices.
Instead of automating individual pieces of the process such as data extraction or approvals, Autonomous Accounts Payable looks to provide the equivalent of a self-driving car, making the whole process autonomous where possible.
Imagine a self-driving car asking the driver at every intersection which way it should go or whether the road is clear. This validation step is the equivalent of manual approvals and is the opposite of autonomy.
For autonomy to work, processing decisions move from "software-assisted" human decisions to "fully autonomous and automated" software decisions, where human intervention is only needed to resolve exceptions.
It can extract, understand, and process around 80% of an organization’s manual invoices with absolutely no help required. Humans are then freed up to work on more meaningful tasks, such as scrutinizing those invoices that really need their attention, as well as analyzing and predicting spend trends. There are countless other benefits, too, from ensuring compliance and identifying duplicate invoices before they are paid, to automatically categorizing spend to the right geo or cost center.
The move to autonomous AP does not occur in a single step, however. The Autonomous Index defines six maturity levels of a self-driving finance team, from no automation, moving through simple automation, and ending at 100% autonomous activities. Understanding where your organization is on this index can help identify to your team the need to move to autonomous AP, and the steps required to get you there.
The removal of manual approvals is one of the critical benefits of autonomous AP processing. This solution is not some magical potion but a practical, real-world set of tools that can deliver tangible benefits to the embattled AP team.
Autonomous finance enables approvals to be automated and deliver accelerated business speed and agility, reduced costs, and strengthened controls. Equally important, it provides the fundamental trust and confidence in every autonomous decision to give up the wild plot twists of manual approvals and reach a more poetic conclusion.
Surely, it makes sense to review the script before manual approvals drive your AP team slowly insane. For, as brilliant as he was, Shakespeare did get one thing wrong. In the case of manual approvals, what is done can be undone.
Jamie Dimon is fed up with Zoom calls | Finance Team Tools for Corporate Travel
The 5 Myths of Invoice Automation for Modern Finance Leaders
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