AP automation – What is the cost of inefficiency?

AP automation – What is the cost of inefficiency?

Posted by Pete Loughlin in AP Automation, Dynamic Discounting 20 Sep 2011

You have a set of accounts payable processes that would be comfortable in a 19th century setting. Pieces of parchment passed from from the vendor documenting the agreed transaction. An original signature scrawled with indelible ink pen proving the authenticity of the document. And the legislation surrounding the processes – the laws that allow the authorities to be sure that they’re getting their slice of the commercial cake, rely on these paper processes.

Purchasing Insight logoThis is why AP is so inefficient? It’s not because finance people are stupid. It’s not because they’re technophobes. It’s because they have their hands tied by laws crafted centuries ago. And this inefficiency is costly. There’s the cost of paper, there’s the cost of transferring paper based data to an ERP and there’s the cost of archiving. But these costs are insignificant. The real cost of inefficiency is the opportunity cost of not being able to manage AP the way a 21st century organization can.

You could count the cost of processing invoices. You could count the cost of late payment penalties. You could count the cost of contingent labor. All of these cost would improve if AP is automated but to concentrate on these metrics is missing the point. Dynamic discounting for example, gives you a return on capital in excess of 20%. Reverse factoring allows you to double your DPO. Who cares about reducing the cost of your transactions when you can make transformational improvements like that?

AP automaton isn’t about getting better at the paper process – do it right and you can completely reinvent the way AP operates moving away from being a transaction based operational department to a truly strategic function..

  • Robert September 29, 2011 at 3:18 pm /

    Can anyone elaborate on the legislation referenced above which supports paper AP processes?

  • Pete Loughlin September 29, 2011 at 4:16 pm /

    Robert, the laws referenced are those that dictate the format of an invoice for VAT purposes for example in the EU. Each country has its own laws base don their interpretation of the relevant EU directives. Outside of the EU, most countries have regulations about the format of invoices in order that proper audit trials are in place.

  • Nova Cash Flow October 25, 2018 at 11:41 pm /

    I believe that we can all improve into something if we do it right. I also think that if we study or evaluate things out we can do it properly and adopt to new ways or innovations that can improve our business. Thanks for sharing this article.

  • We Factor February 11, 2019 at 11:16 pm /

    Thanks for sharing this article. I am also interested to Reverse factoring. It heard it is really good for business. I will definitely try this out.

  • We Factor February 24, 2019 at 10:59 pm /

    Yes, I strongly agree with what you said. I use reverse factoring for my businesses and I was able to find a fund for my business easily. This article is really helpful. Thanks for sharing this article.

  • Nova Business April 10, 2019 at 12:45 am /

    I also think that reverse factoring is one of the best solution for small business. I think that they will able to get more funds for the business if they use this kind of financing. This article is very interesting.

  • Debtor Finance August 16, 2019 at 9:41 am /

    Great article! I also think that there’s always a room for improvement. We can always excel into something. I think that when we strive or adapt to new technology or software. We can definitely achieve our goals or become successful.

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