Calculating the Full Value of AP Automation - Factors for Consideration
3 MIN READ
Virtually every business that adopts and successfully deploys best-of-breed AP automation technology sees a quick and clear return on investment. By “technology,” we mean a fully compliant and secure self-service supplier portal with built in electronic invoicing, purchase order status and payment information publishing.
In fact, studies show that organizations can cut the cost of processing an invoice from $15.02 to less than $1.00 using automation, amounting to a 93% reduction in costs.
Not only can organizations reduce processing costs, but they can also extend their return on investment by selecting an AP automation solution that provides:
- Streamlined and efficient P2P processes with analytical tools to accurately track and benchmark operational performance.
- A platform with easy-to-use treasury management tools for optimizing cash flow and garnering more supplier discounts.
- A centralized database which multiple departments can use to access information in a way that improves visibility and reporting across the organization.
- High flexibility so team members can be redeployed to roles where they can work more efficiently at higher value activities to improve productivity.
In this article, we outline the factors to consider to evaluate how much an AP automation can improve your business processes.
Automation Cost Factors to Consider
Deciding to invest in Accounts Payable automation requires that you make a clear and persuasive business case to senior executives that automating invoicing and other processes delivers significant value. This means correctly identifying your true costs to process a paper or emailed invoice today. Factors that must be considered when calculating the cost to process an invoice include:
- Mailroom and scanning costs
- Cost to validate an invoice
- Cost to process an invoice exception
- Cost to approve an invoice
- Cost to track an invoice
- Cost of compliance - monitoring and auditing invoices
- Help desk costs tied to answering questions about purchase orders, invoices and payments and other document statuses
- Cost to store invoices
- Other buildings, fixed assets, and variable costs required to support teams performing all of these tasks
Once you outline these costs, you can divide it by the total number of invoices processed to get the average cost of processing a single paper-based invoice. With automation, the only real remaining cost to consider is the cost of processing an invoice electronically--which can be estimated by P2P Automation service providers, generally it is less than $1.00 per invoice.
Beyond the cost of invoicing savings, there are huge opportunities for early payment discounts with your entire supplier community, which can yield ROI’s of less than one year.
Metrics Used to Calculate the Value Proposition
Companies use different frameworks to evaluate their financial decisions so make sure you are trained in those value proposition calculations. Whether your evaluation process includes Cost-Benefits Analysis, or Net Present Value (NPV) or Return on Investment (ROI) in all cases you need to be able to calculate the cash savings from your automation process so the starting point is to carefully flowchart and outline your current costs and then identify how much headcount and time can be reduced with automation. Scenario analysis, where you make assumptions about the “best case” and “worst case” savings should also be considered.
In our latest Direct Commerce e-book, “The Business Case for AP Automation,” we provide detailed information on these metrics and our methodology so that you can best gauge the benefits of AP automation.
Don’t underestimate the value you can get from supplier discounts too. Paying vendors early in exchange for substantial prompt-payment discounts makes great financial sense for almost all large companies. It’s a no-risk proposition with a very large reward. After all, you’re going to pay your suppliers anyway, so this merely adjusts payment dates and amounts.
The Soft Benefits Often Forgotten
In reality, your ROI could be much higher than estimated because there are many “soft” benefits that come from automation that are often not included in hard-cost saving calculations. These include the ease of capturing more early payment purchase discounts, a reduction in time required to manually approve and validate invoices, lower storage costs, and more. Here are some of the soft benefits to think about when making your AP Automation business case:
- Improved supplier relationships via your P2P Supplier Self-Service Portal
- Early payment discounts
- Accurate data means faster dispute resolution and a better supplier experience with your business
- Improved supplier pricing compliance leads to automated cost coding, and fewer pricing errors
- Centralized database of information that enables quick access links to any data
- Reduced document cycle times means that finance professionals can evaluate data in near real-time providing more granular insight into spending practices by commodity, supplier, business unit and employee
- Enhanced Analytics to improve strategic cash management and business analysis throughout other organizational areas
- Less burden on IT teams for infrastructure maintenance and reporting
- Extension of automation to integrated ePayments and online remittance delivery
In fact, for many Direct Commerce clients, these additional savings can easily eclipse their original estimated savings – making an even clearer business case for automation.
Making the Case for AP Automation
If you want to effectively calculate the benefits of AP automation for your business, download the free e-book detailing the ROI methodology, “The Business Case for AP Automation” or request a demo and we are happy to walk you through our needs assessment process.
You’ll learn which technologies you should consider deploying first to gain the fastest, most visible ROI – plus enable future long-term transformational process improvement.