What is Accounts Payable (AP)?
Accounts Payable (AP) refers to the amount of money a business owes to its suppliers for goods or services received on credit. It is a short-term debt and a liability on the balance sheet. The AP department handles vendor invoices or bills and records these short-term debts in the general ledger (GL). The AP team follows a strict, often manual, process involving rigorous checks, verifying invoices against purchase orders and ensuring the goods or services were received before issuing payment to vendors. This process is a crucial part of every company’s finance function. Conversely, Accounts Receivable refers to the amount owed to a company by its customers.
Key Accounts Payable terms
- Invoice: a document that records a transaction sent from a seller to a buyer when an order has been fulfilled.
- Purchase Order: an official document sent from a buyer to a seller. It specifies the items the buyer is purchasing, and the buyer is then obliged to pay the seller for them at a later date.
- Automation: the use of technology where human effort is minimised. In the case of Accounts Payable, it usually refers to software that performs manual tasks such as reading and keying in data.
- OCR: short for Optical Character Recognition, and is a process that converts an image of text into machine readable text. Learn more about Zahara's Invoice Processing Software.
10 Accounts Payable Automation Benefits
For those of you already using automation tools, you'll know that taking the plunge comes with countless benefits. If you're not automating AP, I'm sure you'll have heard seemingly-too-true glowing reviews from people who have. We're here to tell you that all the rumours are true. We've compiled what we think are the most important accounts payable automation benefits that you'll experience.
1. Time Savings
Automating your invoice processing is the single most effective thing you can do to optimise your AP function. AP automation tools will help you process your invoices 9 times faster, with far less effort on your part. Zahara uses OCR (Optical Character Recognition) technology to accurately read your invoices for you, down-to-the-line items. Time-saving is generally the main reason people bring in AP software. There comes a point where the volume of invoices grows so much that it only makes financial sense to bring in a robust system. Receipt capture software can be a game changer both for big corporations and even for solopreneurs whose backgrounds aren’t in finance and don’t have the time or desire to manage their finances effectively.
2. Improved AP Accuracy
The truth is that mistakes happen; we're only human! However, intelligent software with OCR will highlight mistakes that even the most diligent among us may miss. You don’t have to leave it to chance; automation software will act as a safety net to make sure no invoice slips through the cracks.
3. Cost Savings
Additionally, while you do have to pay for accounts payable software, you will also see massive savings in the long run. You will initially have to pay for the software, but you’ll make savings by bringing in approvals or OCR (Optical Character Recognition), meaning that you can rest assured you won’t ever pay duplicate invoices. The costs you’ll cut can be more than you think!
4. Simplified Auditing
When you use AP automation software, you'll be able to integrate it with your existing finance system. Having everything in one place (and digitally recorded) means it'll be so much easier when it comes to auditing. There's an audit trail behind every purchase order and invoice, and the chances of you losing an important piece of paperwork are massively reduced.
5. Better Visibility
The reality is that once there’s more than one person in your business, you will need a new level of control and visibility so you know exactly where your money’s going. If you’re the boss, you want to give your employees the freedom to do their jobs effectively without worrying that they’re not adhering to the budget. With AP automation software, you get the best of both worlds. You gain peace of mind with full oversight of your finance operations, and your employees can make purchases with confidence.
6. Easier Compliance
Manual processes can be prone to compliance issues, such as duplicate payments or missed deadlines. Automation helps ensure compliance by enforcing approval workflows and providing audit trails, all with reduced effort and stress on your part.
7. Improved Supplier Relationships
Is your business one that relies on strong supplier relationships? If yes, then we strongly recommend bringing on software sooner rather than later. Overdue payments and disputes can happen to anyone, but if your business is reliant on a certain supplier, you need to be extra careful not to tarnish your relationship. Using accounts payable software greatly minimises these mistakes and keeps an exact record of all purchase orders and invoices, and where your supplies are in their journey, so you never have to wonder.
8. Discounts
Did you know that you can make some pretty sizeable cost savings simply by making prompt payments? According to the Institute of Financial Management (IOFM), although the offers are ripe for the taking, businesses take advantage of less than 21% of prompt payment offers available to them. Shockingly, 10% of businesses don’t get any discounts at all simply by being late. This is just money down the drain that you could be utilising. Using an automated system means you don’t have to leave it to chance. You can guarantee you won’t be penalised for being late and even make some savings in the process. Many of our customers at Zahara have found that within the first few months of implementation, they made back the money spent on Zahara purely to avoid late fees.
9. Keeps your documents safe in the cloud:
Having an entire storage room for your paper files should be a thing of the past. Keep everything neat and tidy online rather than using paper purchase orders and emailing them around the office.
10. Makes AP accessible from anywhere:
Your employees are no longer tethered to their desks. People are working from home, on the road, and of course, in the office. If all your documents are physical, the relevant people must be in the office to do their jobs. Zahara encourages flexible working, which helps you match your workers' needs. In 2024, around 95% of workers prefer having the option of some sort of hybrid working, so if you want to gain and retain quality staff, you need to meet them where they're at. Having dynamic processes is just one easy way to accommodate that.
Integrating AP Automation with Your Accounting Software for a Streamlined Process:
It’s an important and thoroughly overlooked step in the process to think about your current accounting system. Before you do anything else, you need to know whether you’re happy with your current software, like Xero or Sage, in which case you may just need additional features that you can get with automation software. However, if you feel like you're being let down by your provider, it might be time to consider whether you need a new system entirely. This will massively dictate the direction your AP automation journey will go in.
There’s no point in doing demos with your current software in mind if you know deep down that you need to switch providers before automating. Think about which of your pain points can be solved with AP automation software and how many require a new system altogether. Whether you decide to stick or switch, it’s essential to find a bolt-on that seamlessly integrates with your chosen primary accounting software.
Once you've decided and know what you want from your perfect software, it’s time to look at what’s available. Some key features people find most helpful are optical character recognition (OCR) for invoice scanning and automated approval workflows.
It's also important to read customer reviews. Find out if your front-runner has a reputation for terrible customer support or if there’s a feature you hadn’t considered but users rave about. Once you have a rough idea, you can draw up a shortlist of your favourites.
Setting Up Workflows for Accounts Payable Automation:
Once you've done demos, are happy, and have decided on a provider, it’s time to make the most out of your software’s functionality. Moreover, AP software will allow you to have complex but effective approval workflows in the app. Instead of emailing POs and invoices to higher-ups and waiting for them to approve them, the software will automatically send them for approval to the right people. There’s no lengthy sign-off process. They’ll be able to ‘approve’ or ‘reject’ with the press of a button. Some software will even reward users for having super-fast approval times, utilising our competitive nature to speed up the process.
Have you ever sat and considered that it's probably not necessary to get approval every time you go to buy a pint of milk for the office fridge? It's good practice to spend considerable time customising your workflows so you can set specific budgets for certain departments and expenses. Purchases under an amount you choose can skip certain approvers in your regular workflow, meaning that small (yet important) purchases get approved much quicker. Luckily, when you do this in-app, you’ll get a full audit trail, so even though you don’t need approval for these purchases, you can still monitor your spending.
Oh, and if you're an approver, remember to keep your notifications on!
Training Employees on Accounts Payable Automation:
It can’t be emphasised enough how important this is and how many well-meaning finance teams skip this step. You can set yourself up for success by making sure everyone understands the software in and out. It can be understandably difficult because team members will join in the implementation process at different points, meaning that you’re working with varying levels of knowledge. Providing thorough training and budgeting for professional training, if needs be, will ensure a smooth transition.
Accounts Payable Automation Best Practices for Cost Savings
Automating Invoice Processing:
At Zahara, OCR is utilised whenever you take a picture of a receipt or a supplier emails an invoice. Instead of you reading the documents and then typing them up, the OCR reads them for you and inputs all the data for you. If you have experience of keying in large batches of invoices, you’ll understand how much of an asset OCR is! Companies who use OCR generally end up paying their invoices 9 times faster, with significantly less effort required. Zahara’s in-built OCR can accurately read your invoices for you down-to-the-line. It's one of the best ways to follow lots of accounts payable automation best practices by unleashing the full potential of your time and resources.
Optimising Cash Flow Management:
A saying you’ve probably heard a million times (which makes it no less important) is ‘Cash is king’. Essentially, you could be the most profitable company in the world, but that doesn’t mean anything without positive cash flow. You need to be able to see what you owe or have committed to buying to get an idea of your profits and available funds. This is the easiest way to avoid short-changing yourself.
Using AP automation software with a purchase order system is a great way to gain full visibility of your cash flow. When you have a purchase order system in place, the purchase orders themselves act as legal promises that you will pay for what you’ve ordered when you’re invoiced. Instead of scrambling to get the cash together when the invoices come in, you already know how much you’re going to spend in advance when you use purchase orders. When you’re making large volumes of orders every month, you can lose track, so when invoices come in, you may pay them without question.
Reducing Fraud and Compliance Risks:
Following on from our last point, a purchase order system will help you cut costs while also boosting your compliance and reducing the risk of fraud. If fraudulent or duplicate invoices appear in your AP software, they’ll be flagged for your attention. A number of things could raise the alarms; not having an adjacent purchase order, a different total cost on the invoice, or the items not aligning. Fraudsters find new ways to con people all the time, and usually in ways which wouldn’t be immediately obvious, even to seasoned professionals.
There are other ways you can reduce your risk of fraud as well. We recommend segregation of duties so that there’s never anyone on your team who can approve their own purchase orders and can commit fraud from within your company. No one wants to think that it could happen to their team, but with AP automation software, there is no chance of it happening, so you can fully trust your team to do their jobs.
As a side note, this is your sign from the universe to immediately deactivate your old employees' accounts and access to your finance software when they leave the company! The sooner you do it and lock down who has access to your systems, the more secure you’ll be.
An example of a traditional Accounts Payable process
If you’re working in Accounts Payable at the moment, chances are your process looks something like this:
- You receive invoices from suppliers, whether by email or paper copy.
- You manually enter the data from the invoices into an accounting system, like Xero, Sage, or Quickbooks. Sometimes, AP Clerks input the data into an Excel spreadsheet or paper record, but this is less common as finance functions have advanced over the years.
- You then either match the invoice to a purchase order or receipt.
- Once you or a higher-up are happy with it, payments are scheduled and processed.
In its totality, this can be described as a traditional manual AP process. Despite being the default, the process is widely considered inefficient because of mistakes that can draw out the process and the length of time manual data entry takes to complete and authorise.
Accounts Payable plus automation software:
- You raise a purchase order using your AP software when you want to buy something.
- The purchase order is approved in-app after going through checks in a workflow. It is then sent out to the supplier.
- Your supplier's email invoices to your AP software
- The intelligent software reads the invoice and automatically matches it to the corresponding purchase order.
- You can then make the payment confidently.
You might like to learn more about how Zahara Software integrates with your accounting software:
Invoice Processing for Xero
- Sync Type: Full Sync
- Integration Type: Cloud
Speed up Bill payments with OCR invoice processing, invoice approvals and bulk payments in one great Xero addon.
Strategies for optimising your accounts payable
We've sourced a helpful guide written by Deloitte to help you on the following topics:
- Strategies for optimizing your accounts receivable
- Strategies for optimizing your accounts payable
- Cash management
- Strategies for optimizing your inventory
Download the AP Strategies guide here
If you’re interested in how the Accounts Payable process could work for you with the help of automation, contact one of our experts. We’re always happy to show you how it works and see if we can help optimise your processes:
