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Getting your AP Processing Department to be Best in Class

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As supply chains become ever-more closely integrated, businesses are paying increasingly close attention to the real cost of tracking, managing, and making payments to suppliers.

Many are finding that inefficient internal accounts payable (AP) operations are costing them more than they realized in hefty overheads, poor cash flow management, missed savings, and poor financial decision-making.

We take a closer look at the cost impact of accounts payable AP processing, and how working with a reputable outsourcing partner can help you make the most of emerging automation technologies and AP management best practices while limiting your in-house risks.

How to Unlock Savings With Smarter AP Processing

Your accounts payable (AP) department receives invoices from your suppliers, reviews and processes them, and makes sure payments are made on time.

Businesses have traditionally considered staffing and operating an in-house AP department an unavoidable part of the cost of doing business, even as the expense of hiring, training, and retaining skilled employees has risen amid a long-term shortage of qualified accounting staff.

That has meant ever fewer staff are being asked to handle an ever-increasing number of invoices—leading to errors, late or missed payments, and poor record keeping—all of which affect your bottom line, your reputation, and your relationships with important suppliers.

Despite this, many businesses remain wary of investing in fast-improving document scanning and digitization equipment or have been slow to embrace electronic billing and payment systems because of the often steep upfront costs involved.

This is often because managers fail to appreciate the real value that improved AP processing can bring to their business’s performance and operations. In many cases, the reason is that they have simply never measured how well their AP department is performing.

Measuring the Real Cost of AP Underperformance

How well is your AP department actually doing? Four key metrics can help you get a handle on how much your operation is truly costing. These are:

  • Processing cost per invoice
  • Invoice processing time
  • Invoice exception rate
  • Time spent handling queries

Each of these metrics allows a company’s AP performance to be benchmarked against industry averages and best-in-class performance.

For example, in their annual survey of AP metrics, Ardent Partners found that the average cost to a company of fully processing a single invoice was $10.18. The figure was also 10% higher than a year earlier, driven higher by inflation and competition for qualified staff.

The survey also found that the average time to process an invoice among respondents was almost 11 days. The survey included 184 respondents drawn from a range of AP-reliant industries worldwide.

Investment in automation and electronic payment integration helps to speed processing and lower costs, but this is only part of the solution. The survey found that 22.5% of invoice processes still generated an exception, meaning they needed additional processing or human intervention to complete the process.

In addition, AP staff still spent a similar proportion of their time (22%) handling inquiries from suppliers about invoicing. Together, these indices show that system design, implementation, and staff training are just as important as technology in driving efficiency.

The survey figures did not capture the very real cost of tracing and correcting errors and discrepancies. Neither do they capture the cost of late payment fees or lost interest due to paying bills earlier or money left on the table by failing to take advantage of early payment discounts or incentives.

Barriers to Boosting AP Performance

What are the obstacles to AP performance? The Arden Partners survey found that the transition from paper to electronic records was a significant barrier, with reliance on paper records and manual handling holding many companies back.  While most respondents said they received more invoices electronically, the actual figures slipped to 55% from 52% in 2022.

The problem was particularly stark when it came to B2B payments from suppliers, where automated billing has the potential to add the most value in reducing costs and improving relationships. Here only 60% of payments were handled electronically, despite these being mostly regular payments to established partners.

Bridging the gap between paper and electronic payments, reducing manual handling of invoices, and increasing integration with suppliers were all seen as key to reducing invoice handling time and costs and capturing value from increased payment accuracy and improved cash flow.

Room for Improvement: 7 AP Process Steps

While many companies may undertake an AP upgrade with the best of intentions, the survey suggests many hit a “performance ceiling.” Re-engineering a critical business process to achieve the marginal “per invoice” improvements that are needed to yield real benefits at scale requires a specific understanding of how automation and integration can work to your benefit.

That’s why many savvy companies choose to trust an outsourced AP management partner like ILM Corporation to help deliver key AP efficiencies as a service, rather than taking on the financial and organizational risk of re-engineering a critical business process on the fly. Let’s take a closer look at how the cost benefits of AP outsourcing can add value at each stage of your process:

1. Collecting Invoices

With most companies still running hybrid paper and electronic systems, the first step to improve AP efficiency is making sure you have all invoices in one place whether they come by mail, email, fax, or an electronic billing system—so they can be uploaded securely.

Your outsourcing partner should establish a secure, remote “digital mailroom” tailored to your particular vendor mix. An outsourced digital mailroom helps drive efficiency as the front end of a fully automated, outsourced AP management system.

2. Scanning

The latest scanning technology offers real gains in speed and accuracy by using advanced character-recognition technology to scan your invoices at speed and AI tools to accurately process your data into searchable, usable data.

By outsourcing invoice scanning to a reputable automation partner, you’ll gain access to the latest scanning and processing technology at scale, allowing you to benefit from increased efficiency and speed without the cost and risk of installing this capability in-house.

3. Sorting/Classification

Sorting invoices by vendor and classifying them by budget line item is essential to reconciling expenses to your budget, but requires both accurate digitization and classification using a database indexing system tailored to your specific needs.

An optimized, flexible database indexing system is critical to unlocking real gains in invoice processing speed and accuracy. Only leading AP managed services providers like ILM Corporation provide the skills and broad industry experience to achieve this at scale.

4. PO Matching

The ability to match incoming invoices to an existing purchasing order (PO) generated by your procurement operation is an essential step in improving accuracy and compliance as well as automating touchless “straight through” invoice handling.

Respondents to the Ardent Partners survey reported that 67.1% of invoices were matched to a PO and that these cost less to process and generated fewer exceptions in automated processing systems. Once matched, orders can be processed and approved for payment.

5. AI Powered Data Extraction

Data extraction allows critical insights about your company’s expenses to be harvested from indexed and matched data and delivered to your in-house ERP or accounting systems. While many companies offer off-site invoice processing services, only a few can fully integrate these services with your financial management systems.

ILM Corporation is a leader in developing AI-powered data extraction techniques that provide the critical metrics needed to track spending and deliver valuable insights into how your spending under management can work better for you.

6. General Ledger Coding

As the nuts and bolts of your accounting operation, general ledger coding necessitates that properly indexed information is extracted and entered accurately into your records. With properly implemented technology, GL coding handles tedious ledger work quickly and efficiently, thereby freeing up your accounting staff for higher-level tasks.

7. Upload, Share, Archive

Your invoice and payment data, along with matching GL metadata and images of invoices, are uploaded to your in-house systems or stored in accessible cloud or off-site repositories.

Keeping high-quality data accessible allows it to be shared when needed across your organization and makes it easier and more cost-effective to comply with federal and industry reporting requirements such as taxes as well as safety and data-security protocols.

Your AP outsourcing partner should include secure, accessible long-term storage as part of their services.

Benchmarking Success: AP Efficiency in Action

Leveraging technology to automate and optimize your AP processing operations in this way can trim overheads and limit staffing costs in your back office while removing the need to invest in expensive processing capabilities.

Giving your staff access to accurate, timely invoicing and payment information can also help you add value to operations across your organization from procurement to loss control, while higher quality business analytics can drive better forecasting and long-term decision making.

What does that look like in practice? Here are some key ways that smart companies use improved AP processes to boost efficiency and performance.

Dramatically Lower Invoice Costs: Companies that invested in improving their AP processes and integrating electronic payment systems can see a dramatic drop in invoice processing costs. In fact, the top 20% of respondents to the Arden Partners survey cut the average cost of processing an invoice by $3.20—a savings of up to 76% compared with other respondents.

Shorter Invoice Processing Times: The same companies saw a matching improvement in how quickly they were able to process payments, reducing average payment time to 3.7 days, or 81% faster. Stripping out these high performers saw fulfillment times across the other respondents soar to 19.4 days—or well into two-and-a-half weeks.

Lower Invoice Exception Rates: Technological improvements and better business process design allowed the top 20% of respondents in the survey to lower their invoice exception rate by half to 11.8% compared with the survey average. Lower exception rates are typically driven by better scanning and classification systems, improved indexing, and consistent PO matching.

Less Time Spent Handling Supplier Queries: Money spent on electronic document handling and improved processes was reflected directly in the time AP employees spent handling questions or disputes from suppliers. Among the top performing respondents to the survey, time spent handling queries was 15% compared with 22% across all respondents.

A common feature among all the high-performers was a measurable commitment to electronic invoices and “straight through” or “touchless” processing. The top 20% of respondents reported using an end-to-end “eInvoicing” solution for an average of 88% of their payments, with almost half of the payments being touchless—and that is without any manual handling at all.

Leading companies were also more likely to be leveraging improved AP processes to provide critical business insights into how they could manage their cash better. By automating and standardizing payments, these companies are more likely to keep more cash on hand while still taking advantage of early payment or quick settlement incentives from suppliers.

The ILM Corporation Difference

ILM Corporation is one of the leading providers of end-to-end outsourced AP services to companies, government agencies, and nonprofits. We’ve worked closely with hundreds of clients to develop tailored AP management solutions that help cut costs and reduce risk.

We leverage our skills and experience to help our clients achieve savings and efficiencies in line with the best performers discussed above. These include:

  • Reducing average invoice processing by 88%
  • Approving invoiced payments up to 9 times faster
  • 100% touchless processing requiring no manual entry or reconciliation.

By moving critical processes out of the office, we also help our clients embrace remote or hybrid operations by empowering employees to work from anywhere with 100% virtual access to the information they need.

Talk to us about how we can help you achieve more with smart AP processes that allow you to control costs, leverage capital, and manage your staffing levels better. We offer:

  • Outsourced Systems: including digital mailrooms, invoice processing, and storage
  • Advanced Scanning: indexing and reconciliation systems, powered by optical character recognition, AI technology
  • Value-Added Services: including tailored services, out-of-the-box integration with most ERP systems as well as business process optimization.

Click below to learn how we can help you get more out of your AP operations.

Accounts Payable Outsourcing

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