Home » What is AP Automation and How Does It Work?

What is AP Automation and How Does It Work?

September 3, 2024

If your company is still managing its accounts payable (AP) manually, you’re missing out on a chance to save time, money, and frustration. Automating the AP process can help your finance team reduce errors, minimize the risk of fraud, and most importantly, free up time to focus on bigger projects that will drive the company forward.

The traditional manual accounts payable (AP) process often presents significant challenges. Inefficiencies, high processing costs, and the potential for errors are some of the major drawbacks associated with manual AP systems. Tasks such as data entry, invoice approval, and payment processing can become bottlenecks, slowing down operations and affecting overall productivity.

As businesses strive for greater efficiency and accuracy, AP automation becomes a vital solution. By automating these processes, companies can streamline operations, reduce costs, and enhance accuracy, paving the way for improved financial management and stronger vendor relationships.

Table of Contents

What is AP Automation?

AP automation, or accounts payable automation, refers to the use of technology to streamline and manage the accounts payable process. This technology replaces manual tasks with automated solutions, making the AP process faster, more accurate, and more efficient.

AP automation software helps businesses handle tasks such as invoice capture, data entry, invoice matching, and payment processing without the need for manual intervention. By leveraging advanced technologies such as Optical Character Recognition (OCR) and automated workflow management, businesses can significantly improve their AP operations, reduce errors, and enhance overall productivity.

Key Features of AP Automation Systems

AP automation systems come with a bunch of features that are meant to make the accounts payable process more efficient. Some of the key features typically include:

Optical Character Recognition (OCR): This technology converts image invoices into a format that can be read by machines, making it easier to extract data automatically.
Automated Data Extraction: This process retrieves important details from invoices and puts them into the accounts payable system, reducing the need for manual data entry.
Invoice Matching: Compares invoice information with purchase orders and receipts to ensure accuracy before approval.
Workflow Automation: Manages the movement of invoices through the approval process, cutting down on delays and the need for manual oversight.
Electronic Payment Processing: Allows for secure and prompt payments to vendors, minimizing mistakes and delays.
Reporting and Analytics: Delivers real-time insights into financial data, giving businesses the ability to monitor spending and manage cash flow more effectively.

Suggested Reading: The Essential Guide to AP Automation

Why Automate Accounts Payable and Why is it Useful?

Saves Time in the Accounts Payable Process

Automating the accounts payable process brings significant time savings by streamlining various tasks that were previously performed manually. Traditional AP processes often involve a considerable amount of time spent on data entry, invoice matching, and approval routing. These tasks can be repetitive and labor-intensive, consuming valuable time and resources. With AP automation, these processes are handled electronically, which speeds up the overall workflow.

Data Visibility and Transparency

One of the significant advantages of AP automation is enhanced data visibility and transparency. Automated systems provide real-time access to invoice statuses, approval workflows, and payment histories. This increased visibility allows organizations to track the progress of invoices at any stage of the process, providing a clear view of pending approvals and payment schedules.

Enhanced transparency helps in identifying bottlenecks and inefficiencies within the AP process, allowing for timely interventions and improvements. According to a survey conducted by Stampli, 72% of respondents regularly experienced slow internal invoice approvals, with approximately 34% identifying it as their biggest invoice-related issue.

Additionally, automated systems generate comprehensive reports and dashboards that offer insights into key performance metrics, such as processing times, payment accuracy, and vendor performance.

Improved Efficiency in AP Processes

Automated AP streamlines various AP processes, including invoice capture, approval, and payment. By reducing the reliance on manual tasks and minimizing errors, automation improves overall efficiency. This operational efficiency translates into faster processing times, reduced bottlenecks, and a more streamlined workflow.

Reduced Invoice Processing Costs

Automating AP leads to significant cost savings. By eliminating manual tasks and reducing the need for paper-based processes, businesses can cut processing costs by up to 50%. These savings can be reinvested in other areas of the business, contributing to its growth and success.

Reduced Losses Due to Human Error

Human error is a common issue in manual accounts payable processes, leading to financial discrepancies, missed payments, and compliance risks. Errors can occur during data entry, invoice matching, or approval routing, resulting in inaccuracies that can have significant financial implications. Furthermore, Automated systems can flag duplicate invoices or mismatched data, reducing the likelihood of costly mistakes by up to 37%.

Streamlined Invoice Management

Streamlining invoice management is a key advantage of AP automation, as it simplifies the entire process from invoice receipt to payment. Traditional invoice management involves multiple manual steps, including

Receiving Invoices
Sorting and Categorizing
Matching with Purchase Orders
Routing Them for Approval

This process is time-consuming and prone to errors. AP automation transforms this process by providing a centralized platform for managing invoices electronically.

Strong Internal Controls in AP Departments

Strong internal controls are essential for ensuring the accuracy, compliance, and security of financial operations. AP automation enhances internal controls by providing standardized processes and automated checks that reduce the risk of fraud and errors. Automated systems enforce consistent application of business rules and approval workflows, ensuring that all invoices are processed according to company policies. This can reduce the risk of fraud by up to 75%.

Improved Financial Visibility and Reporting

Improved financial visibility and reporting are key advantages of AP automation. Automated systems provide

Real-Time Access to Financial Data, including
Invoice Statuses,
Payment Histories, &
Processing Metrics

This enhanced visibility allows organizations to monitor and analyze their accounts payable activities more effectively.

Reduced Costs in Accounts Payables

Automating accounts payable processes leads to a reduction in overall costs associated with manual AP operations. Such as those related to paper, storage, and manual labor. By optimizing the accounts payable process, businesses can achieve significant cost savings and improve their overall financial efficiency. A report found that automated AP processing costs are just 33% of manual costs, resulting in significant annual savings.

Built-in Compliance for Tax Reporting

Compliance with tax regulations is a critical aspect of accounts payable operations. AP automation systems often include built-in features to ensure compliance with tax reporting requirements. These features help organizations manage tax-related tasks such as,

Generating Tax Reports,
Tracking Tax Codes, and
Ensuring Accurate Reporting of Sales and Use Tax.

Automated systems can also handle tasks related to 1099 compliance, such as tracking and reporting payments to independent contractors and vendors.

Maintaining Good Relations with Vendors

Maintaining positive relationships with vendors is crucial for successful business operations. AP automation plays a key role in fostering these relationships by ensuring timely and accurate payments. Automated systems streamline the invoice processing and payment cycle, reducing delays and ensuring that vendors receive payments on time.

Audit Trail for Future Purposes

An audit trail is a critical component of financial management, providing a detailed record of transactions and activities for future reference. AP automation systems generate comprehensive audit trails that track every step of the accounts payable process, from invoice receipt to payment. These audit trails include information such as invoice details, approval workflows, payment records, and any changes made to the data. An automated accounts payable solution is the best way to build and maintain an accurate, complete, and up-to-date AP audit trail.

How Does Accounts Payable Automation Benefit Businesses

Operational Efficiency

AP Automation brings substantial benefits in terms of operational efficiency. By automating routine tasks such as invoice capture, data entry, and approval workflows, organizations can streamline their AP processes and reduce the time and effort required to manage invoices. Automated systems integrate various functions into a unified platform, enabling faster and more accurate processing of invoices.

This integration eliminates the need for manual handoffs and reduces the likelihood of errors and delays. The result is a more efficient AP operation that can handle higher volumes of invoices with fewer resources. Improved operational efficiency also translates to better resource allocation, as finance teams can focus on strategic activities rather than administrative tasks.

Cost Savings

The cost savings associated with accounts payable automation are significant. Traditional manual AP processes involve various costs, including labor expenses for data entry and invoice processing, costs related to paper and printing, and expenses associated with managing physical documents.

By automating these tasks, organizations can reduce or eliminate many of these costs. Automated systems streamline invoice processing, reduce the need for paper-based documents, and minimize manual intervention. This results in lower operational expenses and more efficient use of resources.

Enhanced Vendor Relationships

Enhanced vendor relationships are a key benefit of accounts payable automation. Timely and accurate payments are crucial for maintaining positive relationships with vendors, and automation helps ensure that payments are processed efficiently. Automated systems streamline the invoice-to-payment cycle, reducing delays and improving payment accuracy. This reliability fosters trust and confidence with vendors, leading to stronger business relationships.

Better Financial Planning and Forecasting

AP automation supports better financial planning and forecasting by providing improved data accuracy and visibility. Automated systems generate real-time reports and analytics on key financial metrics, such as invoice processing times, payment accuracy, and cash flow.

This data enables organizations to make more informed financial decisions and develop accurate forecasts. Enhanced visibility into financial activities allows for better tracking of expenses, identification of trends, and assessment of budgetary impacts.

How Does Accounts Payable Automation Benefit Departments?

Accounts Payable Department

The accounts payable department benefits greatly from automation by experiencing a reduction in manual workload and improved operational efficiency. Traditional AP tasks, such as data entry, invoice matching, and approval routing, can be time-consuming and error prone. Automation systems streamline these tasks, allowing AP staff to focus on higher-value activities.

Automated invoice capture and processing reduce the need for manual intervention, while predefined approval workflows ensure timely and consistent processing. Additionally, automated systems provide real-time visibility into invoice statuses and payment histories, making it easier for AP staff to manage and track their work. The reduction in manual tasks and errors leads to increased job satisfaction and productivity within the AP department. Overall, automation enhances the effectiveness and efficiency of the AP function.

Finance and Accounting

For the finance and accounting departments, AP automation provides several benefits, including improved accuracy and efficiency in financial reporting and analysis. Automated systems capture and process invoice data accurately, reducing the risk of errors in financial records. Real-time access to financial data and reports supports more effective financial analysis and decision-making. Automation also streamlines reconciliation processes, ensuring that invoices are accurately matched with purchase orders and payments.

Procurement and Supply Chain

Automation improves procurement and supply chain processes by ensuring accurate invoice matching with purchase orders and receipts. This efficiency supports smoother procurement processes and helps maintain good relationships with suppliers.

IT and Data Management

IT and data management departments benefit from the simplified data management and system integration offered by AP automation. Cloud-based solutions reduce IT maintenance, while automated data accuracy enhances overall data management. Seamless integration with existing systems ensures data consistency and operational efficiency.

How Does AP Automation Work?

Vendor Onboarding

The AP automation process begins with digital vendor onboarding. Vendors submit their information electronically, which is integrated into the AP system. This streamlined onboarding process reduces manual data entry and ensures accurate vendor information.

Invoice Capture

Invoices are captured using Optical Character Recognition (OCR) technology, which converts paper invoices into digital formats. This technology allows for efficient data extraction and reduces the need for manual input, streamlining the invoicing process.

Matching and Verification

Automated systems verify invoice accuracy by matching invoice details with purchase orders and receipts. This matching process ensures that invoices are correct and compliant before moving on to the approval stage, reducing discrepancies and errors.

Workflow Automation in AP

Workflow automation in accounts payable involves automating the routing and approval of invoices through predefined processes. Automated systems allow organizations to configure approval workflows based on various criteria, such as invoice amount, department, or vendor. Once an invoice is received, the system automatically routes it through the appropriate approval channels, ensuring that all necessary approvals are obtained before payment is processed.

Invoice Approval

Invoice approval is a critical step in the accounts payable process, where invoices are reviewed and authorized for payment. Automated systems simplify this process by providing electronic approval workflows that route invoices to the appropriate approvers based on predefined rules. Approvers receive notifications and can review invoices through a user-friendly interface, making it easy to approve or reject them. Automated approval workflows reduce the need for manual handling and expedite the approval process, leading to faster payment cycles.

Payment Gets Sent

Once an invoice is approved, the payment process is initiated. Automated systems facilitate electronic payment processing, reducing the need for manual check issuance and streamlining the payment cycle. Payments can be made through various methods, including electronic federal. tax payment system (EFTPS), automated clearing house (ACH) transfers, or virtual credit cards. Automated payment systems ensure that payments are processed accurately and on time, minimizing the risk of errors and delays.

Reconciliation and Reporting

Reconciliation and reporting are essential components of the accounts payable process, involving the matching of invoices with payments and generating financial reports. Automated systems streamline reconciliation by providing tools for matching invoice data with payment records and identifying discrepancies. This automated matching process reduces the need for manual reconciliation and enhances accuracy.

What Accounts Payable Tasks Can You Automate?

Data Entry

Data entry is a fundamental task in the accounts payable process, involving the manual input of invoice details into financial systems. AP automation systems automate data entry by using technologies such as optical character recognition (OCR) to capture and extract data from invoices.

This eliminates the need for manual data entry and reduces the risk of errors. Automated systems can accurately capture information such as invoice number, date, amount, and vendor details, and input it into the appropriate fields within the financial system. By automating data entry, organizations can improve efficiency, reduce labor costs, and enhance accuracy in the accounts payable process.

Data Validation

Data validation involves verifying the accuracy and completeness of invoice data to ensure it meets company policies and contractual agreements. Automated systems streamline data validation by performing automated checks and validations on invoice data.

This includes verifying invoice amounts against purchase orders, checking for duplicate invoices, and ensuring compliance with tax regulations. Automated validation processes reduce the risk of errors and discrepancies by applying predefined rules and criteria.

Invoice Processing

Invoice processing involves the steps required to manage and handle invoices from receipt to payment. AP automation systems streamline invoice processing by automating tasks such as invoice capture, matching, and approval. Invoices are automatically captured and digitized, and relevant data is extracted for processing.

Automated systems match invoices with purchase orders and delivery receipts, and route them through predefined approval workflows. This automation reduces the need for manual intervention, speeds up the processing cycle, and improves overall efficiency.

Invoice Approval Workflows

Invoice approval workflows are the processes through which invoices are reviewed and authorized for payment. Automated systems enhance invoice approval workflows by providing electronic routing and approval features. Invoices are automatically routed to the appropriate approvers based on predefined criteria, such as invoice amount or department. Approvers receive notifications and can review invoices through a user-friendly interface, making it easy to approve or reject them.

Payment Processing

Payment processing involves the steps required to issue payments to vendors or suppliers. AP automation systems streamline payment processing by facilitating electronic payments, such as electronic funds transfers (EFT) or automated clearing house (ACH) transfers.

Automated systems handle payment initiation, execution, and tracking, reducing the need for manual check issuance and paper-based processes. Payments are processed accurately and on time, and payment statuses are tracked in real time.

1099 Compliance

1099 compliance involves the management and reporting of payments to independent contractors and vendors for tax purposes. AP automation systems support 1099 compliance by automating tasks related to tracking and reporting payments. Automated systems capture and validate payment data, ensuring that it meets IRS reporting requirements.

They also generate 1099 forms and electronic filings, reducing the need for manual preparation and submission. Automated compliance features help organizations avoid penalties and ensure accurate reporting of tax-related information.

Record Keeping

Record keeping involves the maintenance and organization of financial records, including invoices, payments, and related documentation. AP automation systems enhance record keeping by providing a centralized digital repository for storing and managing records.

Invoices and payment documents are captured, indexed, and stored electronically, reducing the need for physical document handling. Automated systems also provide search and retrieval capabilities, making it easy to access and manage records.

Insights and Analytics

Insights and analytics involve analyzing financial data to gain valuable insights and support decision-making. AP automation systems provide advanced reporting and analytics features that generate detailed reports on key AP metrics, such as processing times, payment accuracy, and vendor performance. These insights help organizations identify trends, track performance, and make informed decisions.

Automated systems also offer dashboards and visualization tools that present data in a user-friendly format. By leveraging insights and analytics, organizations can optimize their AP processes, improve financial planning, and enhance overall operational performance.

How to Choose AP Automation Software

Understand Your Requirements

Start by understanding your specific requirements for AP automation. Identify the features and functionalities that are essential for your business and determine how automation can address your needs.

Prioritize What You Want Out of AP Automation Software

Consider your goals and priorities when evaluating AP automation software. Whether you need improved efficiency, cost savings, or enhanced reporting, ensure that the software aligns with your objectives.

Evaluate Software and Vendors

Research and evaluate different AP automation software solutions and vendors. Look for solutions that offer the features you need and assess the reputation and support provided by the vendors.

Cloud-Based vs. On-Premises Solutions

Decide between cloud-based and on-premises AP automation solutions. Cloud-based solutions offer scalability and reduced IT maintenance, while on-premises solutions provide more control over your systems.

Integration Capabilities

Ensure that the AP automation software integrates seamlessly with your existing systems, such as ERP and accounting software. Integration capabilities are crucial for maintaining data consistency and workflow efficiency.

Customization and Scalability

Evaluate the software’s customization options and scalability. Choose a solution that can be tailored to your specific needs and can grow with your business.

User Experience and Support

Consider the user experience and support provided by the software vendor. An intuitive user interface and reliable support are essential for successful implementation and ongoing use.

Role of Artificial Intelligence in AP Automation

Artificial Intelligence (AI) plays a significant role in advancing AP automation. AI-powered solutions enhance automation by providing advanced data extraction, predictive analytics, and intelligent decision-making capabilities.

AI can automate complex tasks such as invoice categorization, fraud detection, and anomaly detection. By leveraging AI, businesses can achieve higher levels of accuracy, efficiency, and insight in their accounts payable operations.

Best Practices for Implementing AP Automation Software

Planning and Evaluation of Existing Systems

Start by evaluating your current accounts payable processes and systems. Identify the areas for improvement. Develop a detailed plan for implementing AP automation, including goals, timelines, and resource requirements.

Choose the Right AP Automation Software

Select AP automation software that aligns with your business needs and objectives. Consider factors such as features, integration capabilities, scalability, and vendor support. Ensure that the chosen solution meets your requirements and can be effectively integrated into your existing systems.

Training and Change Management

Provide comprehensive training for staff on the new AP automation system. Address any concerns and ensure that users are comfortable with the new processes. Effective change management is crucial for a smooth transition and successful adoption of automation.

Data Migration and System Integration

Ensure that data migration from existing systems to the new AP automation software is accurate and seamless. Integrate the automation solution with other systems, such as ERP and accounting software, to maintain data consistency and streamline workflows.

Testing and Feedback

Conduct thorough testing of the AP automation system before full deployment. Gather feedback from users and address any issues or concerns. Continuous testing and feedback help refine the system and ensure its effectiveness.

Continuous Improvement and Monitoring

After implementation, continuously monitor the performance of the AP automation system. Identify areas for improvement and make necessary adjustments. Regularly review and update processes to ensure that the system remains effective and aligned with business goals.

The ROI of AP Automation

Calculating ROI

To calculate the return on investment (ROI) of AP automation, consider factors such as cost savings, efficiency gains, and error reduction. Compare the costs of implementing and maintaining the automation system with the financial benefits achieved through improved operations and reduced processing costs.

Case Studies and Success Stories

AP automation significantly boosts efficiency and reduces costs. Automated AP departments process 16 times more invoices per FTE monthly compared to manual processes, handling 22,756 invoices versus 1,350. This leads to substantial cost savings, with automated systems averaging 23,333 invoices per FTE annually, compared to 6,082 manually.

Automation also minimizes errors, common in manual processes, and reduces labor costs by streamlining tasks like invoice processing and approvals. Additionally, it offers scalability, allowing businesses to grow without a proportional increase in labor costs.

Long-Term Benefits

The long-term benefits of AP automation include sustained cost savings, improved financial management, and stronger vendor relationships. Automation provides ongoing value by continuously enhancing efficiency, accuracy, and operational effectiveness.

Save Time and Money by Automating Your AP

Cost-Saving Strategies

Automating accounts payable helps identify and implement cost-saving strategies. By reducing manual tasks and minimizing errors, businesses can lower processing costs and allocate resources more effectively.

Time-Saving Techniques

AP automation introduces time-saving techniques such as automated data entry, streamlined approval workflows, and electronic payment processing. These techniques enhance overall efficiency and allow staff to focus on more strategic activities.

Zenwork Payments – The Best AP Automation Software with 1099 Compliance

Zenwork Payments is a modern AP automation platform designed to streamline vendor and 1099 contractor payments while ensuring robust compliance with tax regulations. With a user-friendly interface and comprehensive functionality, Zenwork Payments offers businesses of all sizes an efficient solution to manage accounts payable, automate federal and state 1099 eFiling, and enhance overall financial operations.

Key Features and Benefits

Comprehensive Vendor Onboarding: Simplify the process of onboarding vendors and 1099 contractors with multiple methods including manual entry, self-onboarding links, Excel imports, and system integrations.
Automated Bill Creation: Leverage OCR technology to extract invoice details, import invoices from accounting software, and allow vendors to upload invoices directly.
Customizable Approval Workflows: Tailor approval processes to securely authorize payments efficiently, minimizing delays and errors.
Payment Flexibility: Choose from ACH, checks, or instant push-to-card payments. Bulk payments can be conducted instantly as needed, with card payment options coming soon.
AR Automation: Seamlessly synchronize payments with accounting software, calculate sales tax, manage invoices via a dedicated vendor portal, and offer early payment options.
Recurring Payments: Schedule and manage vendor payments on a bi-weekly, weekly, semi-monthly, or monthly basis, and set up recurring bills.
Integrated Tax Compliance: Automatically generate and eFile 1099 forms, handle federal tax withholdings and ensure compliance with state regulations.
Vendor Portal: Provide vendors with tools to create sales tax-compliant invoices, estimate and pay federal taxes, access 1099 forms, and manage payment preferences efficiently.
AI Co-Pilot: Utilize AI-driven insights to streamline workflows, automate routine tasks, and enhance decision-making for CPAs and businesses.
Visit Zenwork Payments and it’s features for more information.

AP Automation FAQs

How Does AP Automation Improve the Invoice Approval Process?

AP automation improves the invoice approval process by streamlining workflows and reducing manual intervention. Automated routing ensures timely approvals and minimizes delays, enhancing overall processing speed.

How Does AP Automation Software Help Prevent Invoice Fraud?

AP automation software helps prevent invoice fraud through features such as automated data validation, fraud detection algorithms, and secure payment processing. These features reduce the risk of fraudulent activities and ensure accurate payments.

How Can AP Automation Assist with Preventing Duplicate Payments?

Automated systems detect and prevent duplicate payments by cross-checking invoice details and payment records. This reduces the risk of overpayments and ensures accurate financial transactions.

How Can AP Automation Improve Document Management?

AP automation improves document management by digitizing and organizing invoice information. Digital records are easily accessible, searchable, and securely stored, enhancing overall document management and reducing paper-based processes.

How Much Does the AP Automation Process Save Time?

The AP automation process can save a significant amount of time by automating repetitive tasks such as data entry and invoice approval. Businesses often report reductions in processing times by up to 50%, leading to enhanced operational efficiency.

How Much Does AP Automation Save Cost?

Conclusion

Implementing AP automation is a strategic move that can transform the accounts payable function. With improved accuracy, reduced costs, and enhanced efficiency, automation provides a competitive advantage and supports long-term business success. To maximize the benefits of AP automation, consider exploring advanced solutions like Zenwork Payments. Embrace automation to streamline your accounts payable processes, reduce costs, and improve financial management.

Start your journey towards a more efficient and effective AP function today.

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