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How to Measure your ROI on your Accounts Payable Automation?
Glad to see that you are actively considering to implement an Accounts Payable(AP) Automation Solution for your company. If you are working to build a Business Case to convince your management to get the project funding for your AP Automation project then calculation of Return on Investment(ROI) is an absolute necessity.
ROI is the ratio of a profit or loss made in a fiscal year expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year in question. The basic formula for ROI is: ROI (%) = Net Profit / Total Investment * 100.
To fully understand the total costs and savings from automating Accounts Payable, you need to consider the entire set of activities that comprise the invoice-to-pay process. Automating AP creates an opportunity to reduce manual labor, improve tracking, strengthen security controls and optimize payment methods. The following high level equation and the detail description thereafter will provide supporting information to help reinforce your decision to automate your Accounts Payable.
Instead of giving a hard coded “ROI Calculator” we thought to give you a broader framework based on which you can do your ROI calculation more precisely for your specific working environment.
How to Calculate the Current Cost of Your Manual AP Process
1.1
Manual Invoice Processing Cost
+
1.2
Manual Payment Processing Cost
+
1.3
Cost of Poor Quality (COPQ)
=
A
Total Manual Account Payable Cost
How to Calculate the Future Cost with an Automated AP Process
2.1
Manual Invoice Processing Cost
+
2.2
Software Subscription Costs
–
2.3
Early Payment Discount
2.4
Implementation Effort Cost
+
2.5
Training and Change Management Effort Costs
=
B
Future Automated AP Cost
Now, once we have calculated Total Manual Account Payable Cost(A) and Future Automated AP Cost(B) let’s go for the ROI calculation. Note that the below calculation will give you a conservative estimate of ROI and hence you will “err in the side of caution.”
ROI (%) = [(A-B)/(B)] *100
With respect to the above Block Schematic, you might have observed that we have indexed each of the Blocks as 1.1, 2.1 etc. The purpose of this is to let you know the important cost components of each of these blocks. So here we go.
1.1 Manual Invoice Processing Cost
Manual time spent by AP staff to receive and sort invoices, enter data, match to backup documentation like Purchase Orders(PO), route for approval, follow-up on delays in approval and vendor inquiries, hardcopy filing and retrieving. Time spent by approvers as the approvers double check manually before approving and this also consumes time.
I have observed some clients following semi automated processes like the approval request is through a system but the supporting hardcopies required for approval being moved manually from table to table. The semi automated process helps a bit but only just. I would also like to capture the handling and printing stationary cost as in case of high volumes this may be a significant amount.
1.2 Manual Payment Processing Cost
If the payment instrument is mainly through Cheque then it consumes time of AP staff in printing and handling the Cheque and the supporting documents required for the authorized signatory. Authorized signatory’s time is consumed for verifying the supporting documents before signing on the cheque. Further manually tracking of remittances and reconciliation also consumes time of AP staff.
1.3 Cost of Poor Quality(COPQ)
This is sort of an invisible enemy in your battleground. Often gets ignored and unaccounted for. Hence, I thought to consider it in our scheme of things.
Imagine data being entered wrongly in the system manually and it does not get detected at several stages. If it gets detected there would be rework hours to fix it. If it does not get detected then the problem gets amplified at a later stage. For example the issue of duplicate invoice payment is always real when done manually.
Imagine the AP staff manually handling a bunch of invoices in a single day. It will be difficult for the AP staff to prioritize the payments based on the payment discounts offered by the Suppliers. What does the AP staff do? The AP staff will move the invoice of the Supplier who follows up more for their payment. After all a squeaking wheel draws attention. One may argue why blame the AP staff, fair enough, you can blame the system which does not support the AP staff to do a quality job. At the end of the day it is a lost opportunity to reduce cost.
In a manual process dealing with hardcopy documents, storage and retrieval of documents consumes staff time. Specially a hardcopy stored in a folder and stacked in a cabinet maybe a year back are sometimes hard to find when you need them. Imagine the AP staff has to match the Invoice against a specific Purchase Order(PO). And the AP staff does not find the PO at the office just because somebody has wrongly stacked the file in the cabinet few months back. What does the AP staff do? Call the supplier and request to send a duplicate PO. I have seen this happen hence I can say it is real. Does this rework hours get captured? Normally it doesn’t.
Further, has your AP department missed to pay the suppliers on time? I am sure it has happened. Is the supplier satisfied or dissatisfied? It’s a no brainer. Have you measured the cost of poor quality here? Probably not, because it cannot be measured. But certainly there is a negative impact on supplier relationship.
Let me give another example. Audit. Just before audit, we start preparing for the audit, collect hardcopy or softcopy “evidences.” What happens after the audit? We get a few Non Conformities(NCs). Then we start working to remove the NCs before the next audit. Do we capture the hours we spend in preparing for the audit and thereafter addressing the NCs? No. Perhaps we blame our existing system for the moment and forget it soon. And this cycle has continued for quite sometime.
Likewise if you get into details of your current manual process you will find various other opportunities where you can identify quality issues and subsequently cost of poor quality- sometimes you can monitize it and sometimes you can’t.
2.1 Software Subscription Cost
It depends on the supplier you chose and the payment terms you negotiate. It may be as simple as an annual License fee for specified number of users or it can be a purely SaaS model of pricing where you pay per use.
2.2 Remaining Manual Processing Cost
Let’s be realistic. It cannot be 100% automated as there still may be some manual intervention be required.
The Optical Character Recognition(OCR) engine may not be able to read 100% of the characters. Hence some manual intervention may be required. You have to design the approval flow process which may need to be changed once in month for all practical purposes. You may need to configure the business rules maybe once in a month for all practical purposes.
You may need to handle exceptions and collaborate with others to resolve issues. For project contracts, milestone based payments may need to have some discussion like before when the process was manual and so on.
2.3 Early Payment Discount
After AP Automation, chances of missing the early payment is almost nil as you will be able to see it in a Dashboard. Hence you are able to avail the early payment discount offered by the suppliers.
2.4 Implementation Cost
Effort hours will be required from your Finance and IT department to work with the Vendor supplying the AP Automation Application. If Out-of-Box integration feature is there to integrate with your existing ERP then the effort is less otherwise it will be high.
2.5 Training and Change Management Effort
Post deployment of AP Automation Application the users have to be trained so that they can maximize the benefits for themselves and the organization.
Change Management is crucial as you are not only dealing with System and Processes but human beings. If not been done correctly the initiative of AP Automation may not yield the desired results. Hence change management needs management attention. Frequent and timely communication about “what’s in” for them and “what’s in” for the organization needs to be done.
Conclusion
Measuring your AP automation ROI helps you understand the financial impact your automated Accounts Payable solution has made on your company.
Whenever you change or update any AP automation process , you should continuously monitor, analyze, and make improvements to make sure you are getting a solid ROI. Start by pulling detailed analytics reports on your Accounts Payable KPIs so you can determine if your automated AP solution is working for you and your company.
If you want to know what are the critical KPIs you need to track to ensure you continue to get your ROI, visit our Blog “How Invoicing Automation helps in tracking the critical Process KPIs?”
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