The Hidden Cost of Accounts Payable

05.12.18 05:19 PM Comment(s) By Eoin Doyle

Accounts Payable (or AP) is one of the less exotic functions of a business.  I definitely don’t recall it ever being top of the career’s list at high school!  It’s the business function which everyone wishes would just happen by magic. It’s typically not seen as fun or exciting, even by finance professionals.  Every business’s primary focus is on making money, not so much on seeing it leave their accounts. However, at Lightyear, we think rather differently. We love AP, and the Bookkeepers and Accountants who perform this crucial business function are our best friends.  


It still amazes me how many businesses have no idea of the cost of AP to their business.  You’ll never see AP as a row on a Profit & Loss account, but the process of managing AP certainly impacts the P&L.  Typically, when I discuss this with a finance team, the staff wages are top of mind, but what about all those hidden costs?  It can be easy to forget that there are costs associated with running a business department that aren’t always visible and tangible.

  

The average cost to process a bill is varied but various sources of research have shown that when you work backwards, it costs on average £15/ $20 USD to process 1 bill.  And with the average SMB processing 2,000 bills per year, the cost to them is somewhere in the region of £30k/$40k.  I’m sure if that was on a P&L forecast at the start of a year, some serious questions would be asked.  But it isn’t. The overall cost is buried in amongst wages & salaries, outsourced bookkeeping, office space, office supplies, overcharging, statement checking etc., and it creeps up on you.  Businesses (on average) spend more on AP processing that they do on marketing. Crazy!


The Manual Accounts Payable Process

Let's start by taking a look at the typical manual Accounts Payable process for an SMB purchasing goods.

  • Typically a bill is posted out to the purchasing company which incurs a cost on behalf of the supplier and it takes several days for the bill to arrive. 
  • The bill then needs to be checked and sent to the relevant person in the company for a first line of approval. 
  • In a product-based business, the process is to manually enter the products and quantities into an inventory or POS system, updating inventory levels. 
  • The bill is then sent back to the accounts department and another round of data-entry begins, this time with the accountancy software. 
  • The bill requires managerial approval before being posted to the general ledger and payment is then made. 
  • The bill is filed in physical filing cabinets, and then in storage rooms, and has to be retrieved when it comes to audit time. 
This is a process ridden with hidden costs and inefficiencies.

Staff salaries
The first big cost is the staff salaries. An Accounts Payable person in London earns on average £20,000 per annum and an Accounts Payable clerk in Sydney can earn as much as $50,000 per annum (source - payscale).  With an average of 5.5 people (source - epayables) employed in Accounts Payable, this can add up to £110,000 per annum in the UK and $270,000 in Sydney.

Fees
According to Xero, it takes on average 40 days in the UK, and 36.4 days in Australia for an SMB to make a payment. That means businesses, on average, are paying their bills late and incurring late payment charges. Of course, this is a balancing act with cash flow forecasting, but we’ll talk more about that in a bit.

Overcharging on bills
Mistakes happen, our own staff may input the wrong data in the accounting software and sometimes the supplier doesn’t update their bill price with their agreed price lists. So that great new price that has been negotiated on the crate of Coke isn’t actually what's being charged. Who really has the time to check 50 line-items on a bill?

The dreaded duplicate bills
The pain in every AP department. No matter what, you just can’t completely eliminate paying for a bill twice. Accounting software, even the leading cloud providers, don’t flag duplicate bills and there is a whole industry that exists to reclaim these payments - AP audit recovery. It is estimated that as many as 3% of bills get paid twice and this drops to 1% for best-in-class AP teams.

Inability to take advantage of settlement discounts
Many suppliers offer a couple of percentage points of settlement discount for early settlement, but when the process of getting a bill ready for payment is longer than that early settlement period, the option of discount is lost.

So that is the hidden financial costs to Accounts Payables departments. But what about the inefficiencies and drags on productivity that are being created at each stage of the journey?  

People make mistakes
They just do. The consequences mean wrong inventory levels or incorrect widgets being receipted, wrong payments being made and the accounts don’t reconcile. There is also the task of having to go back and correct these errors (if or once they are realised) which takes further time.

Hunting for that signature
Above, I’ve mentioned that it can take up to 40 days in the UK and 36.4 days in Australia for a bill to be paid. Is this purely down to cash flow? According to a report commissioned by the CIMA, up to 15 people are involved in processing a bill. How many people do you think are involved in hunting down that signature..finding the person to approve the bill?  This process can often take weeks in companies with bills arriving at head office, then shuffled out to multiple sites or departments, and then back again. Don’t forget the part where they lie on someone’s desk until the accounts departments is all over the phone, email, Skype or Slack or whatever their new communication tool is. In today’s digital world, I wonder how a piece of paper can survive this journey, intact and without going…

Missing!!
When a bill goes missing it creates confusion in departments. Everyone has to look at each piece of paper in the office, look in bins and retrace their steps to try and locate the bill. The process of getting a bill reissued is time-consuming, and it can then cost money in late payment fees.

But that's the normal order of things.., right?
Well, yes, but it shouldn’t be, and it doesn’t have to be. Accounts Payables is one of the last business functions to truly experience disruption, but it’s time has come.

With 5 steps we’ve cut out all the problems and changed Accounts Payable forever.
We have built Lightyear to increase speed, accuracy and collaboration between suppliers, businesses, bookkeepers and accountants.

Receive

You sign up for a dedicated Lightyear mailbox (such as yourco@lightyear.cloud), to which you simply ask suppliers to email their standard bill.

Extract

Lightyear’s intuitive system instantly extracts line-by-line data from electronic bills, right down to line-item & unit-price level.

Approve

Bills are then routed to departmental managers for approval as part of a robust approvals workflow, before being presented to finance teams for sign-off.

Export

One-click export to accounting, ERP & inventory systems makes data-entry a distant memory.

File

And to cap it all off, bills and statements get stored in your dynamic Lightyear filing cabinet, searchable for the regulatory period from anywhere in the world.


In short, Lightyear is,

The world’s fastest Accounts Payable software with real-time line-by-line data extraction, offering price-checking within a customisable approvals workflow, and online filingcabinet storage for up to 7 years.


Turning a 40-day process into a couple of hours

The benefits of automating the Accounts Payable process are enormous. With all your data digitised and 100% accurate, our reports can show you the businesses outgoings in a given month or week or quarter or whichever you benchmark on.


Imagine the benefits that this can bring to a business. With the accountant's role expected to change in the next 20 or so years, being able to spend more time on advisory services vs number crunching is hugely beneficial to accountants today as well as tomorrow.


To see Lightyear in action sign up for a 30-minute demo webinar and see how you can automate your clients Account Payables and save them a lot of headaches time and money.

Learn more about Lightyear on a Webinar
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