Just like any other asset or liability, accounts payable, your company’s unpaid bills can have a big impact on profitability. They can either improve company profitability, or they can cause it to really take a hit. Accounts Payable (AP) are what the company owes its suppliers or the vendors from which it buys its inventory and other supplies. We guess you are related…
AP is a current liability, and they are listed on the right-hand side of the balance sheet. They are expected to be repaid to the suppliers within the arranged time.
One basic way that accounts payable affect company profitability is the company’s relationships with its suppliers or vendors, which are the businesses from whom companies get their inventory and other supplies. It is crucial that business operations maintain good relationships with their suppliers.
The single most important thing a company can do to maintain good supplier relationships is to pay its bills on time. As a company grows, the number of its suppliers grows as does the invoices it has to pay. Good supplier relationships mean increased company efficiency and have to be cultivated.
If the company pays its bills on time, actively cultivates good relationships with its suppliers, doesn’t cut off suppliers with no reason, and keeps lines of communication open, a good supplier should then offer the company the best trade credit terms possible and this will maximize the company’s profitability.
According to CFO Magazine’s metrics by the recompilation of APQC’s data, of the 1.485 organizations in research, the bottom 25% are spending $10 or more per invoice processed, while the median are the organizations spending $5.83 to process an invoice or a bit more and the lowest range have the best performances in which can do the same task at a cost of $2.07 per invoice or less.
Can these numbers cause panic? Yes, and you might be wondering right now what you’re doing wrong and how you can improve it. And we have to be clear that some industries, by nature, process a lot of invoices and many of them invested long ago in technology to automate accounts payable, reducing the amount of labor required to keep the money flowing in and out.
CFO Magazine compares the median AP cost per invoice for three different industries. According to APQC data, the public sector/government median would fall into the third quartile of the cross-industry data distribution, with a total cost to process AP of $9.43 per invoice processed.
The best-performing industry is distribution/transportation, which at the median spends $1.14 to process an invoice. The median point for the consumer products/packaged goods industry is $4.58 per invoice processed. Again, for comparison, the cross-industry median is $5.83 per invoice.
At this point, doesn’t matter what industry organizations are in, but is a fact that if enterprises handle automation, the faster the process moves and the fewer errors are likely to work their way in and require fixes later.
What’s the effect of having an inefficient AP process?
While most of the problems in this process are a result of inefficient systems and errors due to manual entry, there are many other common issues that can hurt your AP process.
This would be one of the most tedious and attention-demanding tasks in AP is keying in the data for entering, approving and paying a vendor invoice. Not only does this seemingly simple task eat up a lot of resources, but it also opens the floodgate for the errors. If your organization relies on paper documents at every stage of the AP process, the likelihood of manual errors rises exponentially.
Automation is a must if you want to reduce errors. Asignet can help to digitize and automate the AP process through RPA. This saves time, money effort, and also minimizes human errors.
Complex bills process
Purchase orders start at various levels in a large organization. These may require the approval of several authorities. When there’s several departments involved and the chain of approvers is long, things not only get complicated but also slow down the payment process and drive up the costs of internal communication.
A purchase order may end up passing through 5-6 people and the information can deform in the process, leading to decisions based on inaccurate data.
Ineffective payment process
Late payments to suppliers can have bitter consequences: the supplier may block your account or you may be penalized for late payments. At the very least, it will damage your reputation and trust. Similarly, duplicate payments may impact the cash flow and have a negative effect on the credibility of your finance function. The common reason for this is missed payments, duplicate payments or manual payments to suppliers who are set on direct debit.
Contact us if you want to automate/improve your organization’s accounts payable process.