Why Accounts Payable Automation Is a Must for Automotive Manufacturers
To ensure that the Accounting department stays as efficient as possible this year, many automotive manufacturers must consider automating financial transactions. Accounts Payable (AP) is an easy target for automation since these transactions are repeatable and are defined by strict business accounting control processes. This article will discuss the investment required to automate AP processes, as well as both the monetary benefits derived and the solutions available with QAD Enterprise Applications.
Why Automate AP Processes?
Automation drives the cost per transaction down. If your volumes are substantial, automation enables the rightsizing of resources within your accounting organizations. This can enable business management to allocate resources to revenue focused positions within the organization. Automation also increases data accuracy. Transactions created and saved within the business rules defined for the automation process will require little downstream human review.
AP Automation Opportunities
The Accounts Payable team has two main opportunities for automation:
· Supplier Invoice Creation Automation
· Disbursement Processing Automation
Automotive companies’ supply chains require constant inbound materials to meet the requirements of their customers. Because of the constant movement of materials, automotive companies have highly organized agreements with their suppliers. Annual contracts with their suppliers will include pricing, performance requirements and quality levels. This intimate relationship requires performance on both sides of the transaction. The supplier must send material on a defined frequency and the company must ensure timely payment for those materials.
Evaluated Receipts Settlement (ERS) is a tool that converts purchase order receipts to supplier invoices. This tool can be deployed for specific supplier and part combination. The supplier is not required to send physical invoices. Supplier invoices are created once a valid purchase order receipt transaction is completed.
Another option for creating supplier invoices is to convert physical invoices to electronic invoices (through the use of optical character recognition tools) to an electronic file for loading into your ERP system. This approach requires integration effort. There are a number of third-party companies that can provide these services that will result in a faster time to implement with a lighter integration effort.
Disbursement Processing Automation: Automating the issuance of Supplier payments.
Payment automation involves either the automation of an electronic funds transfer process (ACH and Wires) or the automation of a physical check processing. Normally in the check issuing process, the person issuing the check needs to create a payment selection. The payment selection then needs to be confirmed. Then the issuer must print the checks, place the checks into envelopes, and then mail the checks properly. All of these manual steps require an intimate knowledge of the process and the segregation of duties/internal accounting controls to ensure the prevention of malfeasance.
If an accounting team automates the check issuing process, the organization will first need to coordinate with a financial institution. An AP employee will still have to create a payment selection and get it approved; however, an electronic file then automatically generates and gets sent to the bank. Banking services will include the physical printing and mailing of those checks to suppliers.
As a result of automating the check issuing process, the AP personnel no longer has to carry out the menial tasks associated with printing the checks, folding them, placing them in an envelope, etc., and he or she then has more time to carry out value-added tasks.
In the case of electronic funds transfer, vendors are paid through a wire or an Automated Clearing House (ACH). Wires are on-demand requests to the bank to transfer funds from your bank account to the target bank account. The transfer happens immediately, and the cost generally ranges from $25-$50 per request. These are useful when a U.S.-based company sends funds internationally because an ACH is only valid when the target account is also in the United States.
On the other hand, the ACH request involves several payments that are not on demand, and transfers may take up to 3-4 business days to complete. The transaction fee for using an ACH is much less compared to wires—it is usually about $0.20-$1.50 per payment.
Either of these options will eliminate the manual work of mailing a check, reducing the workload of the AP staff. Below is a framework for a return on investment model for the automation of supplier invoice processing. Below are the following assumptions for this ROI model.
- Average Payroll cost for Accounts Payable Processor equals $65K annually.
- Additional Payroll expense and fringe benefits for the resource at 30% of annual salary equates to an additional $20K of expenses for a total of $90K in payroll.
- Additional overhead costs to support this resource on an annual basis includes human resource, technology, management, business process controls and facilities expenses that will equate to roughly $10K in additional human resource costs totaling roughly $100K per year.
- A human resource can process approximately 100 invoices per day.
- Annual invoice volume equates to 24,000 invoice per year.
With these assumptions in mind, the cost of processing one invoice is $100,000 ÷ 24,000 invoices = $4.17. Later, we will compare this to the cost of automating invoice processing.
AP Automation Benefits
Learn the status of an invoice immediately
Personnel with appropriate access can learn the status of an invoice more quickly with software compared to looking through files.
Two-way and three-way matching is completed without human interaction
Two-way matching ensures that the purchase order information corresponds with the invoice information. Three-way matching ensures that the information on the purchase order, invoice, and order receipts all correspond.
The software’s matching process may operate within a certain tolerance, or error margin. For example, assume a company is using a matching system with a 5% tolerance. If the company orders 100 car parts and they are billed for 101, the matching system accepts the invoice, but if the company is billed for 107, the invoice gets flagged. At this point, the system requires review by a member of the AP staff.
Three-way matching is completed by a third-party processor which then sends a file to your ERP.
Avoid overpayment or duplicate payment
Automation software ensures duplicate invoices are not processed. This is to prevent duplicate payments. This digital search process saves valuable time when compared to the manual process of an AP clerk searching through the vendor file and unpaid invoice file to verify that there are no duplicate invoices.
Remote invoice and payment capabilities
Due to the pandemic, businesses cannot rely on in-person activities such as on-site check printing and the usual AP solutions. Therefore, remote systems such as no-touch invoice and payment capabilities are now very important to many businesses.
Lower the time spent on the invoice-to-payment process
Due to the automated matching and payment processes described above, AP staff can reduce the amount of time they spend on the invoice-to-payment process. A 2018 Goldman Sachs report estimated that AP automation can drive as much as 70-80% time savings for AP personnel.
Automation vs. No Automation – What is the Cost?
Let’s compare the cost of manual transaction processing with automated transaction processing. In our example, recall that the fully loaded cost of processing invoices without automation amounts to approximately $100,000 per year.
However, with automation, the cost of processing transactions removes the cost of paying an accountant to process the transactions. Instead, there is a one-time cost of the software and integration. We assume this cost is $50,000. Additionally, there are still expenses arising from bank costs, IT support, and accountant oversight, but the total expenses will amount to significantly less than before. We provide the details of these results in the table below, which calculates expenses over the span of five years.
Earlier, we found that the cost of processing one invoice in our example was $4.17. The table above shows that the total cost, including the cost of software, is $65,000. Therefore, if we assume there are the same amount of invoices processed, the cost of processing one invoice with automation is now $65,000 ÷ 24,000 = $2.71.
Overall, the example illustrates that AP automation is significantly less costly than legacy systems.
AP Automation Solutions With QAD
Automotive manufacturers can utilize the QAD ERP application along with other software to create automation solutions for AP team.
Automotive organizations looking to automate their AP processes should note that QAD Enterprise Edition includes an ERS Module. Payment is based on agreed upon terms between the supplier and the customer.
Organizations can access other AP automation tools by engaging a third-party AP processor service—EasyaccessAP and Medius are examples of third-party software whose solution can be integrated with QAD. In the case of such third-party processors, outbound files of supplier masters, purchase orders (POs), and PO receipts are sent to the third-party from your ERP system. Suppliers send their invoices to the third-party processor, along with an address that represents your business. Third-party processors match invoices to POs to receipts to complete the three-way match. Then the processor integrates a file back to your ERP with the approved invoices.
Financial transaction automation is just one aspect of moving toward a modern and more efficient automotive manufacturing organization. Logan Consulting has helped numerous automotive manufacturers transform their business processes, and they are here to help. To learn more about how they can transform your organization, please click here.
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