Accounts Payable News^®

Vishal Patel, Research Director, Ardent Partners

Continuing with our launch of the ePayables SMARTset the second tool in the series is an ROI calculator for AP automation. This tool is of course complimentary to the ePayables Business Case Template that we introduced earlier. An ROI model goes hand in hand with a business case and this tool is specifically designed to calculate the ROI for an investment in an AP automation solution.

The case for AP automation although not a complex one, is one that must be made with the adequate supporting information, research and thorough financial analysis. AP automation allows organisations to generate savings and efficiencies by reducing the percentage of invoices that are received, processed and paid utilising manual methods (i.e., paper based systems). Automation also enables the capture of key invoice and payment data to significantly improve the level of visibility, impacting not only AP but procurement and finance. A large part of the initial benefits of AP automation come from a more efficient use of AP staff.  The number of invoices processed per staff member will increase considerably with the use of an automated system. With features such as ‘straight-through’ processing AP’s main function will be to manage exceptions and determining the root cause of those, as opposed to more tactical responsibilities. AP’s role will become more strategic and necessary to the finance and/or treasury groups as they take advantage of the improved visibility into invoices and payments to implement more sophisticated cash management strategies.

These are just some of the benefits of automating AP, so, why are enterprises still utilising manual and paper-based systems? The challenge is that AP automation is probably not the top priority within an organisation, making the need for a solid business case and well thought out ROI calculation much higher.

Ardent Partners ePayables ROI Calculator

In order to calculate an ROI for AP automation, you first need to determine the cost to run an AP department, thereby giving you the cost to process an invoice. This tool helps to determine these costs; the user will be required to input AP staff expenses  as well as other operational expenses (e.g., overhead, AP software and hardware, postage, storage). Although not directly an operational cost, we think it is also important to include the cost of certain AP inefficiencies such as late payment penalties or missed early payment discounts which are often higher in manual environments. All of these factor into the cost to process an invoice. If considering payments in the automation initiative, the average cost of processing a payment must be determined as well. This of course differs by payment type with cheques costing more to process than BACS or card payments.

Once these have been input into the tool, the next step is to input the cost of the solution, whether cloud –based or installed. An installed model will have a larger upfront investment and other ongoing maintenance costs whereas a cloud-based solution is likely to be a subscription and/or transaction or volume-based fee.

The part that impacts the ROI calculation the most is the estimated efficiency gains that are expected as a result of fully deploying the solution. Here, the user will have to make assumptions on how staff and operational expenses will be impacted as well as the impact on AP inefficiencies. The user will have to anticipate the types of payments that will be utilised, thereby impacting the average cost per payment. All of which leads to an estimation of the savings that can potentially be generated as a result of this investment. Assuming all the inputs have been correctly entered, the tool will automatically calculate the projects ROI, IRR, NPV and Payback Period.

The full ePayables ROI Calculator can be accessed here.