Guide to Measure and Reduce Accounts Payable Processing Cost

Reducing accounts payable processing costs is becoming a top priority for companies looking to work smarter, not harder. Many companies are embracing automation to speed up their AP processes, reduce manual work, and improve accuracy—all of which help free up teams for more impactful tasks. Yet, despite the clear benefits, around 90% of companies still rely on paper invoices, which drive up costs, create inefficiencies, and increase error risks. 

Relying on outdated methods slows businesses down and adds unnecessary costs. Identifying these inefficiencies is the first step toward meaningful change. This guide will help you assess your AP performance and explore practical ways to reduce accounts payable processing costs, making finance operations simpler and more effective. 

Understanding Accounts Payable Processing Costs 

What are Accounts Payable Processing Costs? 

Accounts payable processing costs refer to the total expenses involved in managing the payment of invoices and other financial obligations of a company. These costs encompass all activities required to review, approve, and process payments to vendors and suppliers. 

Processing costs are crucial for financial management as they directly affect a company’s cash flow and operational efficiency. 

Common Components of Processing Costs 

The main components of accounts payable processing costs include: 

• Labor: This is often the most significant part of AP costs, encompassing salaries and benefits for the staff involved in invoice processing, data entry, and payment authorisation. 
• Technology: Investments in AP software and other technologies that automate invoice matching, payment scheduling, and record keeping are also included under processing costs. While technology may represent an upfront cost, it can lead to longer-term savings through increased efficiency and reduced errors. 
• Errors: Mistakes in invoice processing can be costly. Errors might lead to duplicate payments, overpayments, or underpayments, all of which require additional resources to rectify, thus increasing the overall processing costs. 
• Delays: Late payments can result in late fees and strained vendor relationships. Conversely, inefficiencies in the AP process can also tie up capital that might otherwise be used more productively elsewhere in the business. 

The Impact of High Accounts Payable Processing Costs on the Business 

High processing costs can have a detrimental impact on a business in several ways: 

• Reduced Profitability: High costs reduce the overall profitability of a company. Every dollar spent on inefficient processes is a missed opportunity to invest in other areas of the business that could yield higher returns. 
• Cash Flow Issues: Inefficient processing can lead to slower payment cycles and strained liquidity. This can affect the company’s ability to meet its financial obligations on time, potentially leading to higher borrowing costs. 
• Operational Inefficiencies: Excessive costs can be symptomatic of broader operational inefficiencies within the AP department. This can divert attention and resources from strategic activities, impacting overall business growth and adaptability. 
• Vendor Relationships: High processing costs often result from delays and errors that can also affect vendor relationships. Suppliers may become less willing to offer favorable terms or prioritise service for companies that do not manage their payables effectively. 

See how QX helped a global beverage leader streamline their AP process. Read the case study to learn about the impact of AP optimisation! 

5 Key Metrics for Measuring Accounts Payable Processing Costs 

AP Metric #1 – Average Cost per Invoice Type 

Calculating the average cost per invoice type is a key, yet challenging metric in automated invoice processing due to the complexity of the steps involved. Not every invoice costs the same to process; for example, invoices with exceptions and those without purchase orders (non-PO) often cost more than straightforward ones. 

Reviewing a benchmarking study that shows average and best-in-class costs can help you understand how your AP performance stacks up against others. The cost savings from automating invoice processing are substantial, potentially reducing costs by 60% to 90% per document, depending on the sophistication of your existing processes. 

AP Metric #2 – Discounts Captured vs. Offered 

Optimised AP processes enable quicker invoice processing, which allows your company to capitalise on early payment discounts. It’s important to monitor both the amount and the number of discounts missed and use reason codes to pinpoint why discounts are not being captured. To enhance this KPI, consider an invoice processing system that alerts you as discount deadlines approach to ensure timely payments. 

AP Metric #3 – Late Payments and Penalties 

Focusing on the late payment metric is crucial, despite it being an unpleasant aspect to consider. A high rate of late payments leads to unnecessary costs through penalties and interest and can damage your company’s reputation. Aim high with goals, like achieving 100% on-time payments, as this can enhance your standing with suppliers and improve negotiation terms. 

AP Metric #4 – ROI on Invoice Automation 

AP is often a step behind other departments like payroll in adopting automation. However, digitising and optimising AP processes provide the transparency needed for strategic decision making and growth. Investing in invoice automation can significantly improve your AP metrics. If you need to justify the investment, use an ROI Calculator to articulate the financial benefits to your executives. 

AP Metric #5 – Average Invoice Processing Time 

The average time it takes to process an invoice indicates how much of your AP team’s effort is consumed by manual, repetitive tasks. In efficient departments, the typical processing time is around 3 to 4 days, whereas less efficient units might take up to 17 days. To reduce delays, especially when key staff are unavailable, ensure that your AP system can be accessed on mobile devices, enabling approvals to be made anytime, anywhere. 

5 Best Practices for Reducing Accounts Payable Processing Cost 

1) Implement a Paperless Automation Solution 

Every practice listed here is valuable, whether you choose to automate with AP software or not. However, adopting paperless automation significantly enhances the likelihood of optimising these practices. Eliminating paper invoices and manual entries, which are expensive, slow, and error-prone, can transform your processes. 

Regardless of your business size, switching to digital and using AP automation software will quickly showcase the benefits of automation, such as reducing the cost of processing an invoice from an average of $15.96 to just $2.94 for top-performing AP departments. 

Automating the invoice process relieves your staff from manually tracking each invoice, as the system automatically handles tasks like invoice matching. This is particularly useful during periods of high volume, such as seasonal spikes, because it allows you to manage more invoices without additional hires. 

2) Create Safeguards Against Duplicate Payments 

Preventing duplicate payments involves similar steps used to detect and prevent fraud, though usually without malicious intent. For example, a vendor might send the same invoice by both mail and email to ensure it’s received, which can lead to duplicates being processed in manual systems. Your AP software should be equipped to flag and stop duplicates automatically. However, if you’re still approving invoices manually, constant vigilance is necessary to prevent such issues. 

3) Standardise Payment Terms 

Standardising payment terms helps streamline operations, maintain better control over cash flow, and optimise the payment process. This is particularly vital when you have many suppliers, each potentially seeking unique payment terms. Standardisation prevents ad hoc negotiations that could adversely affect your Days Payable Outstanding (DPO) and, consequently, your bottom line. 

Even with standardised terms, remain open to renegotiation to ensure your terms are competitive. Consider the timing of payments as well; sometimes the benefits of early payment discounts can outweigh the advantages of a longer DPO. 

When negotiating with suppliers, also consider transitioning to electronic payment methods like ACH, wire, or virtual cards instead of paper checks, which can reduce costs and prevent delays. 

4) Track and Resolve Disputes Efficiently 

Handling exceptions remains a significant challenge for AP, leading to payment delays and considerable time spent addressing supplier queries. Automating the approval process can help, as it sends invoices that match purchase orders directly to your ERP for payment, leaving only exceptions for manual review. Quickly identifying and resolving these exceptions is crucial for maintaining fluid cash flow. 

Improving how you track, and handle disputes not only ensures timely payments, which fosters good supplier relationships, but also helps identify problematic suppliers, potentially prompting a search for more reliable alternatives. Moreover, reducing the time your employees spend on calls and emails allows them to focus more on value-added activities. 

5) Leverage Outsourcing 

Outsourcing accounts payable (AP) processes can significantly reduce costs and improve efficiency. By partnering with top accounts payable outsourcing companies, businesses can benefit from advanced technology and expertise without the need for substantial in-house investment. 

Outsourcing can provide access to best-in-class AP software, streamline processes, and ensure compliance with industry standards. It also allows internal teams to focus on strategic activities by offloading time-consuming tasks such as invoice processing, payment handling, and dispute resolution. Additionally, accounts payable outsourcing providers can offer scalability, enabling businesses to handle fluctuating workloads without the need for additional hires. 

Curious if AP outsourcing could benefit your business? Discover the top 4 signs in our latest blog! 

What’s the Bottom Line? 

Throughout this discussion, we’ve highlighted the crucial role of measuring and reducing accounts payable processing costs. By understanding where inefficiencies lie, organisations can streamline operations, reduce expenses, and enhance overall financial health. 

As a final thought, we urge you to act now. Begin by auditing your current AP processes, identify areas for improvement, and start implementing solutions that can lead to significant enhancements.  

Optimising your AP processes is a journey that can lead to substantial rewards in efficiency and financial performance. Don’t wait to start making these critical changes. Your business—and your bottom line—will thank you. 

Originally published Jul 24, 2024 03:07:49, updated Dec 06 2024

Topics: Accounts Payable Optimisation, Finance and Accounting Outsourcing Services