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How automation can enhance accounts payable and accounts receivable efficiency

09/07/2024 minute read Ben Franklin

About 80% of finance leaders have either already implemented or are planning to adopt Robotic Process Automation (RPA), reports Gartner. These stat underscores the significant rise in automation adoption and its vital role within the realm of finance.

As crucial activities that directly influence cash flow, liquidity, and overall financial wellbeing, accounts payable (AP) and accounts receivable (AR) are at the forefront of transformative automation.

In this blog, we will explore exactly what accounts payable and accounts receivable are, the benefits of automating these processes, and how to achieve this automation via technology.

What is accounts payable?

Accounts payable refers to the money a business owes to its creditors, suppliers, or vendors. AP obligations are often short-term and are recorded on the company's balance sheet (in the accounts payable ledger as a current liability). Goods or services acquired on credit, and even monthly subscription fees to various software providers, are considered as payables until they are paid off.

Accounts payable process

The accounts payable process may differ depending on the complexity of the organisation and its systems. However, it typically includes the following steps:

  • The AP process starts with receiving invoices from suppliers against goods or services provided.
  • After which, these invoices are verified for accuracy by matching the invoice with purchase orders and confirming goods or services were received as specified.
  • These invoices are then recorded in the accounts payable ledger.
  • They are subsequently reviewed and approved for payment by an authorised person.
  • Once invoices are approved, payments are processed and scheduled according to the payment terms.
  • After payments are made, the transactions are recorded accordingly.

What is accounts receivable?

Accounts receivable refers to the payments owed to the business by its customers or clients for the goods and services they provide (which have received or utilised but are not yet been paid for). AR is recorded under current assets in the balance sheet.

Accounts receivable process

These steps outline the common stages of the accounts receivable process:

  • The process begins by sending invoices to customers or clients.
  • These invoices are verified to validate accuracy, ensuring that goods or services were delivered as per the agreement.
  • Subsequently, payments are collected from customers in adherence to the agreed payment terms.
  • Payment received from customers are documented in the company's accounting system and reconciled.

Furthermore, overseeing and retrieving outstanding payments and settling disputes are integral components of this procedure.

Why is there a need for automation?

Late supplier payments, long invoice and payment approval time, high volume of exceptions, and high invoice processing cost are some of the biggest challenges finance teams face.

Prompt invoicing and collection of payments from customers is essential to ensure steady cash inflows, lower accounts receivable ageing, and sustain profitability.

Due to their time-intensive and complex nature, AP and AR processes often lead to errors and notable delays, resulting in cash flow shortages and disruptions that adversely affect relationships with customers and suppliers, as well as overall financial health.

Efficiency in the accounts payable and accounts receivable processes is indispensable for the company's cash flow, liquidity and financial resilience, directly shaping metrics such as Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO).

Adopting automation emerges as the natural solution to vastly enhance efficiency in these key functions.

The role of automation in AP and AR

Both the AP and AR functions involve substantial data entry. This need for manual intervention can be drastically reduced through automation. Upon receipt, invoices can be scanned to extract and record data seamlessly within a unified platform. AR automation software can automate the generation and delivery of invoices based on stored customer details and purchase information.

With accounts payable automation, recurring vendor payments with consistent details can be set up for automatic processing, minimising the need for human input unless approval is required.

The approval of invoices can often be a lengthy and tedious process, involving multiple stakeholders and painstaking coordination. This challenge is mitigated by centralising the approval process into a single dashboard accessible to all approvers, anytime and anywhere.

Automated systems will often have features for receiving and sending reminders to ensure timely payments.

In addition to payment processing and data recording, automation can handle tasks such as invoice matching, account reconciliation, dispute resolution, and invoice coding.

As businesses expand, the volume of transactions and data also grows, amplifying the complexity of accounts payable and accounts receivable processes. Automation can swiftly scale to meet changing business needs, effectively streamlining and managing AP and AR operations.

Benefits of AR and AP automation for businesses

Automation of the accounts payable and accounts receivable functions bring numerous benefits to organisations, such as:

  • Reduced errors and discrepancies

Automating data entry tasks (like payment processing and reconciliations) substantially minimises the likelihood of human error. Through data validation checks, it ensures the completeness and accuracy of financial data, while also detecting and resolving exceptions.

  • Cost and time savings

Automation offers significant cost and time savings by cutting down on the required labour. According to Gartner, Robotic Process Automation bots cost only one-third of offshore employees and one-fifth of onshore employees, highlighting significant cost savings potential.

Automated workflows in AR and AP processes streamline operations, accelerating task completion. According to Ardent Partners' AP Metrics that Matter in 2023 Report, enterprises leveraging automation can reduce their invoice processing cost by 76% and make the average processing time 81% faster.

Additionally, electronic payment methods such as ACH transfers and virtual credit cards minimise transaction fees compared to traditional paper-based methods like checks, further reducing transaction costs.

By expediting invoice processing and streamlining workflows, automation notably decreases the time frame for receiving payments from clients and settling payments with suppliers. This quick turnaround enhances liquidity and facilitates more accurate expense forecasting, mitigating cash flow shortages and ensuring funds for financial commitments.

Automated AP & AR systems offer real-time visibility into accounts payable processes, outstanding invoices, and payment statuses, aiding in forecasting cash flows and managing working capital. Enhanced tracking and monitoring of accounts receivable metrics, such as days sales outstanding (DSO) and aging reports, allows businesses to identify bottlenecks, implement effective collection strategies, and proactively manage cash flow.

Certain software solutions can generate customisable reports, providing insights into critical financial metrics such as cash flow projections, revenue forecasts, spending patterns, and historical trends. These insights empower businesses with enhanced control over financial processes, enabling proactive optimisation, identification of improvement areas, and informed, data-driven decision-making.

  • Increased compliance and security measures

Technology that facilitates automation helps with maintaining detailed audit trails of all transactions, approvals, and changes, providing a comprehensive history of financial activity (for the purpose of compliance audits and dispute resolution). Standardised processes and document formats implemented by automation ensure consistency in invoices and payments, meeting regulatory and organisational requirements.

With these capabilities you can proactively monitor transactions for anomalies or suspicious activities too, triggering alerts for further investigation as and when necessary, thereby aiding in fraud detection and prevention. Access controls and role-based permissions within these systems bolster data security, safeguarding sensitive financial information from unauthorised access. Moreover, you can generate compliance reports, simplifying the demonstration of regulatory adherence during audits or inquiries.

  • Improved efficiency

The biggest benefit (and the primary reason businesses adopt automation) is the efficiency gains. When combining all of the previously mentioned benefits it inevitably results in boosted overall efficiency.

Advantages of AR automation

Faster payments and improved liquidity: Automation enhances and accelerates the AR workflow, reducing delays and errors. This improvement enables businesses to expedite payment processing, leading to faster cash inflows and enhanced liquidity.

Better customer relations: AR automation offers convenient payment options, such as electronic payments and quicker invoice delivery, simplifying the payment process for customers. It also facilitates tracking communication with customers and managing dispute cases. Additionally, AR automation provides customers with instant access to their account status, outstanding balances, payment history, and transaction details through self-service portals or online dashboards. By streamlining communication and dispute resolution processes, AR automation contributes to quicker issue resolution, enhanced transparency, and improved customer satisfaction.

Advantages of AP automation

Fewer late payments: By integrating predefined rules and workflows, AP automation streamlines the invoice approval process for quicker approvals and payments. This not only helps in avoiding late fees but also prevents the accumulation of bad debt.

Stronger supplier relationships: Timely payments combined with visibility into AP processes/payment statuses nurture trust and credibility, promoting seamless communication and collaboration between companies and their suppliers.

Choosing the right solution

Automated data entry, invoice and payment processing, reconciliation, approval workflows, and invoice matching are essential functionalities that any automated accounts payable and accounts receivable system should possess. Cash flow forecasting, analytics and reporting are other necessary features. Most importantly, it should offer robust security, integration capabilities, and scalability to accommodate business growth.

Financials, our Cloud-based financial management software, possesses a whole range of functionality in this regard. It automates and simplifies the supplier invoicing procedure, ensuring that financial records are securely stored in a central, easily accessible repository. It offers real-time reporting and dashboards, robust financial analysis, budgeting, forecasting, and planning tools in an accessible user interface. This innovative system offers clear visibility into cash flow and overall performance too. With features such as automated bank reconciliation, complete invoice management, and self-service portals for suppliers and customers, you can optimise your accounts payable and accounts receivable processes and start to reap the full benefits of automation.