Electronic Accounts Payable Reduces Cost and Improves Control over Vendor and Employee Payments
By Jeff Johnson, Senior Vice President/General Manager, Commercial Prepaid, Netspend
Paper checks can be a serious pain point for businesses—and they’re not great for vendors and employees either. So, why is your accounts payable department still relying on checks to pay the vendors you work with and your employees who aren’t receiving their pay and other monetary benefits via direct deposit?
If your business is like most, at least half of your Business-to-Business (B2B) payments are made by check.1 An electronic accounts payable (AP) process can help to free you from paper-bound payments processes, offering a variety of expected and unexpected recurring benefits2 for your business and those you pay.
The problem with checks is first—the paper. It’s expensive and time-consuming to print paper checks, and once they’re out of your hands, they become difficult (or even impossible) to monitor or control. And, that brings us to the second problem with checks—how they’re delivered to intended recipients. Most often, of course, it’s through the mail, which introduces cost and timing variables over which you have no control.
A B2B check can cost a business between $4 and $20, says Bank of America.3 According to multiple sources, that’s about five to 10 times the cost of an electronic transaction.4 So, making electronic checks the bulk, or even a part of your accounts payable can deliver a significant payoff.
Those hard-cost savings are great. But, following these best practices of electronic AP has additional benefits that accelerate workflow and boost performance—potentially delivering more positive impact to your bottom line.
Electronic payments deliver additional cost benefits, too, like reducing the staffing expense to resolve payments issues and replacing lost or stolen checks. According to a recent report from PayStream Advisors, AP staff at half of companies surveyed spend up to 20 hours each week simply resolving payment issues, such as errors, duplicate payments and supplier inquiries.5 Then, there’s the cost of replacing lost checks, which is not an infrequent occurrence, and can cost an average of about $20 per check.6
- Improve transparency, audit and compliance processes. Automating AP payments can increase transparency into the payments process. Each action relating to a payment is captured, recorded automatically and available for inspection. This improves access to data for audit, compliance reporting and exams.
- Qualify for early and on-time payment discounts, and avoid late payment penalties. When you pay electronically, you can time each payment more precisely to qualify for discounts more often. Lacking any sort of automation, the AP process takes nine times longer, at six times the cost, with companies capturing only 18 percent of available discounts.7 On the flip side, precision timing allows companies to benefit from as much as 75 percent of those discounts7, and also helps you avoid late payment penalties when a check is stuck in the mail.
- Use working capital more efficiently with improved cash management. By using electronic payments instead of checks, there’s better visibility into when those funds are removed from your account. By contrast, the amount of float that occurs when you give someone a check is entirely dependent on when they decide to deposit it.
- Enhance decision-making. Good decisions are aided by a combination of sound business judgment and reliable, applicable and current data. With electronic AP, you can gain access to your data in near real time to better support critical business decisions that propel your business forward.
- Reduce human error. Because it’s a manual process, check-based AP introduces the element of human error. And, when errors happen, they’re often time-consuming and costly to correct. AP electronic payments can reduce the potential for human error because there are fewer manual processes and thus fewer mistakes to correct. When mistakes do happen, it’s a simple, more verifiable electronic process to correct them.
- Electronic payments reduce the use of paper. Checks have environmental costs, too. There are the trees used to make the paper, the dyes and chemicals in printing the checks and transportation costs at various points in the supply chain. Although there are still environmental impacts associated with electronic payments, overall paper usage is reduced.
No process transformation comes without tradeoffs. For AP electronification, the first that comes to mind is float—what you earn on funds between the time you write a check and when the check is cashed (and the funds exit your account).8 In this period of sustained low interest rates, this isn’t as much of a consideration as it might be if rates were high. But, even if interest rates rise, the interest you would earn during the float period is significantly offset by the benefit of better overall cash management.
Still, if your organization has not made the investment in modernizing accounts payable payments systems, it may be time to look at how you can overcome the short-term investment of getting a program up and running, including:
Updating internal processes and procedures: Updating payment systems is a great time to revisit related department processes – even if it adds a few extra weeks into your implementation process. Activities should include:
- Ensuring the right employees have access to the right systems, and that no unauthorized employees have access.
- Revisiting work flow checks and balances to confirm proper functional internal controls (such as separation of duties, approving payments and authorizing transactions) are in place and give management better visibility into individual transactions and trends that can reduce fraud and help manage spending.
Doing these things can reduce the opportunity for fraud and can increase operational efficiency.
Training employees: It’s true, employee training requires resources and time from your staff’s already busy schedule, but training can pay big dividends down the road by ensuring that all staff understands the company’s current payment policies and can maximize use of technology tools to reduce manual processes that overwhelm staff and increase the cost of doing business. CFO.com reports that manual processes contribute significantly to labor costs, which consume 62 percent of total AP costs. Reducing manual processes not only saves money, but often reduces errors too.
Integrating with existing accounting and payment systems: Legacy offline accounting systems can be expensive and difficult to maintain and often do not integrate with other tools. Over time this can require extensive manual work just to keep them running, and organizations run the risk of data loss for programs that are no longer supported. But swapping out systems is a big undertaking. As you evaluate cloud-based expense management software, make sure your provider offers turnkey onboarding and robust implementation tools to support a smooth transition; and look for solutions that integrate with your existing banking systems and primary payment methods, giving you and your team one view into all money movement.
With businesses focused on improving their bottom lines, AP electronification is an internal process that’s the equivalent of low-hanging fruit. Direct cost savings alone should be enough to convince any AP executive that optimizing electronification can be the right approach, and the indirect benefits are the icing on the cake. There’s no better time to start than now.
1 AFP, “2016 Electronic Payments Survey,” September 2016.
2 Business.com, “5 Benefits of Automating Your Accounts Payable, February 2018.
3 Wall Street Journal, “U.S. Companies Cling to Writing Paper Checks,” March 10, 2014.
4 Ibid and AFP, “2016 Electronic Payments Survey,” September 2016.
5 PayStream Advisors, “2017 Electronic Payments Report,” January 2017.
6 Nerdwallet, “Stop Payments: The Cost to Cancel Checks at Banks,” January 2016.
7 Paystream Advisors, "Six Questions to Kick-Off a Scalable Accounts Payable Automation Project," 2017
8 The Balance, “How Check Float Works (or Used to Work),” August 2018