The True Cost of Manual Accounts Payable / Accounts Receivable Processes

Manual Accounts Payable

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Institute of Finance & Management (IOFM) data reveals that only 5% of PO-to-invoice matches are 100% accurate on the first try. Besides being inefficient, manual accounts payable (AP) or accounts receivable (AR) processes have many hidden and direct costs eating up the bottom line. 

Most CFOs concentrate on direct invoicing costs like printing, postage, etc. However, the true cost of invoice management and collection in manual accounts payable processing is much higher and impacts the efficiency of your finance team to an even greater degree. 

IOFM’s data reveals that 1/3rd of organizations have more than 1% duplicate payments. About 1/4th of organizations have more than 10% of transactions requiring correction.

Organizations can greatly benefit from finance automation solutions like OPEN to automate their manual accounts payable and AR processes. Numerous examples exist. For instance, SaaS software solution provider LucidWorks was struggling with manually feeding invoices into its ERP system and the never-ending relay of chasing down W-8 and W-9 forms from suppliers. It also spent unnecessary time managing tax compliance and currency conversion. 

The management opted for a payment automation solution, which resulted in the highest degree of optimization and cost savings. LucidWorks gained better control over spending and expenses. The financial controls were stricter, and the company had better access to economical global payment methods and FX conversion. Tax compliance also became a breeze for cross-border payments, and financial forecasting, which wasn’t possible earlier, helped improve the spending management of the organization as a whole. 

Despite the advantages, many businesses today still cling to traditional, manual methods for managing manual accounts payable and AR processing. While these processes may seem familiar and comfortable, they often have hidden costs. 

Let’s delve deeper into these true costs of manual Accounts Payable/AR and explore how automation can revolutionize your financial operations.

Is Manual Accounts Payable Processing Eating Away at Your Profits?

APQC findings reveal that inefficient accounting organizations are 2x-3x more costly to run than their top-performing peers.

As a CFO, you must realize the delicate balance between keeping costs down and maintaining smooth operations. Your finance team plays a critical role in this equation, ensuring timely vendor payments and collecting customer dues. 

CFOs must study the cost structures of manual Accounts Payable/AR processes deeply to identify patterns and points where costs are significantly high or don’t show in the books. Here’s a breakdown of the direct, indirect, and hidden costs of manual accounts payable processing today. 

Source:

Here’s a closer look at some of the biggest numbers on your expense list:

Labor Costs

90% of costs in manual invoice processing are labor costs. 

CFOs should consider the time and effort the team spends on manual tasks like data entry, invoice processing, check printing, and chasing overdue payments. Studies by the Institute of Finance and Management (IOFM) reveal that processing a single invoice manually can cost anywhere from $12 to $35.  

These repetitive, time-consuming activities drain employee morale and translate to significant labor costs. The cumulative effect on your budget is huge when you factor in the large volume of invoices processed each month.

Error-Related Costs

A recent survey of over 1,100 C-level executives and finance professionals found that nearly 70% of the executives made significant business decisions based on inaccurate financials, with 41% blaming manual data inputting.

Manual data entry and processing are prone to human error. Mistakes can range from typing errors on invoices to accidentally paying the same vendor twice.  Manual accounts payable processing can lead to approval delays, errors, late payments, and high costs. 

These otherwise small errors can prove costlier in the case of manual Accounts Payable/AR processing. Duplicate payments are a direct loss of funds. Late fees incurred due to processing delays can strain your cash flow. Incorrect information on invoices can lead to disputes with vendors, delays in payments, and impact on supplier relationships.

The fastest month-end closers save more than five days against heavily manual Accounts Payable/AR processes. Manual processes may also give rise to fraud and manipulations. One study by the American Accounting Association quantified the risk of fraud. The study found an 80-90% higher incidence of fraud in companies with material weaknesses in accounting processes.

Lost Opportunity Costs

Slow and inefficient manual processes can significantly impact an organization’s cash flow. Delayed payments to vendors can damage your credit score, limiting your ability to secure favorable financing terms.  

On the AR side, delays in collecting payments from customers restrict the firm’s ability to benefit from investments in growth opportunities. These lost opportunities represent a hidden cost that manual processes can exacerbate.

Besides, manual processes are cumbersome, boring, and time-consuming. For instance, extracting general ledger actuals from the ERP and comparing them with data from banking, credit cards, accounts receivable, etc., for reconciliation or variance analysis gets highly repetitive.

Often, finance teams become disengaged and demotivated, which contributes to a lack of productivity and opportunity loss at the organizational and personal levels. Disengagement due to manual processes costs the organization $3,400 for every $10,000 salary.

Finance Automation for Reducing Hidden Costs

Automation solutions for AP and AR offer a powerful alternative to manual processes. Finance automation can combat the hidden costs of Accounts Payable/AR processing and streamline financial operations. 

The 2016  APQC report posits the cost of preparing an invoice can go as high as $11.50. If a company does 1,000 invoices per month, the expenses can go up to $138,000 per year. With AR automation, you can bring the cost 17x less at the best cost – $0.71 per invoice or $8,520 per year.

Finance automation can reconcile high-volume accounts like invoices, purchase orders, and receipts involving hundreds of thousands of transactions in a matter of seconds. 

Take, for instance, the case of the aviation training academy Coast Flight. The company found it difficult to manage its purchasing processes across multiple locations. This led to inefficiencies and control in expense management.  

The company was using manual spreadsheets which also led to a lack of visibility, high costs, and other complications. 

CFO Kevin Slatnick highlighted the lack of control and tracking of purchasing requirements was creating a situational awareness problem for the company until Coast Flight opted for a finance automation solution. 

Within a week, the requisition creation time was reduced from 10-15 minutes to a few minutes. Real-time visibility helped to shorten the approval cycle by 50%.

Implementing an automated AP solution can significantly reduce processing time. According to a study by Ardent Partners, automation can cut invoice processing times by 4/5th of the time taken under manual processing. This frees up a substantial amount of employee time for other tasks. 

Some of the repetitive tasks that can be automated via a good finance automation software include:

  • Automating data entry and invoice processing
  • Streamlining invoice approvals
  • Facilitating electronic payments
  • Simplifying reconciliation and record-keeping

Also, cost reduction isn’t just a by-product of optimizing AP/AR processes. The ROI generated from finance automation trickles down to customer-client relationships by making it easier to view, solve disputes, and pay invoices.

Beyond cost savings, finance automation, and connected banking solutions bring in additional efficiencies such as improved customer satisfaction, better compliance, enhanced data security, and better scalability for an organization. 

Manual Accounts Payable processes are monolithic and redundant. Any organization still clinging to pen and paper for issuing, approving, reconciling, and recording invoices is bringing the biggest disadvantage to its finance team and the organization’s overall objectives. 

Finance Automation is the Future

Despite the benefits, a recent study by Robert Half found that nearly 50% of companies still don’t use any automation for account reconciliation.

The return on investment (ROI) for implementing AP/AR automation solutions is undeniable. Studies show businesses can achieve significant cost savings through reduced processing times, improved accuracy, and enhanced cash flow. 

Automation frees your finance team to focus on more strategic tasks, further enhancing the overall value proposition. 

OPEN provides customized payment solutions to help you manage finances efficiently with connected banking. By automating your AP and AR processes, OPEN’s finance automation solutions help you eliminate hidden costs, boost efficiency, and empower your finance team to focus on strategic initiatives that drive growth. 

Don’t let manual processes silently erode your profits. Finance automation is the only way to unlock true profitability, cash flow, and workflow balance in your accounts payable and receivables processes.

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