Accounts Payable

How AP automation can reduce the effects of inflation

Inflation leaves less disposable income for businesses and individuals, and a looming recession leads to less spending comments Laurent Charpentier, CEO, Yooz.

Around one in five (22%) UK business owners said they weren’t confident they would survive a recession within the next 12 months, with 47% in fear of bankruptcy at some point in the near future.

To address this, many small business owners have the same reflex: raise prices. Raising prices then leads to an increase in inflation’s impact on the economy even more. Around half (49%) of businesses said they felt forced to raise prices due to the economic situation.

While this can be an essential strategy, it’s not a one-size-fits-all approach. Some businesses may be unable to increase prices because doing so could affect sales and negatively impact their bottom line. Instead, many business owners realise they need to focus on the bottom line instead of the top line.

However, what often happens in times of inflation is that we have to spend more to get the same product. Or we keep our spending reined in but get less product than we need due to the higher prices.

The first scenario means our costs are higher, while the second implies we can’t produce and sell as much as before — and both hurt the bottom line.

To help curb the effect of inflation and recession on the bottom line, the key is to challenge the internal costs, more specifically, the internal costs of the purchasing chain and processes. One of the critical areas where we can do this is in our Accounts Payable (AP) process.

Optimise operation costs

A 2022 survey conducted by Yooz, The State of Automation in Finance, found that 44% of UK companies have automated most of their accounts payable processes. Only 7% have eliminated all manual processes, though. This leaves ample room to reduce the costs and errors associated with manual processing.

Every error requires costly manual intervention. That cost can exceed the payment amount, especially with small payments within a complicated accounting system. Automation reduces the number of human errors and manual interventions required.

With AP automation, companies can reduce their invoice processing costs by up to 80%. To process a single invoice can cost an average of up to £15 when done manually, compared to less than £5 for those that have implemented AP automation. The savings can mount rapidly for companies that process thousands of monthly invoices.

Not only do invoices get processed faster, with fewer errors, and at a lower cost, but it reduces or eliminates the need to add staff as the business grows. That’s a substantial benefit as companies face increased hiring challenges. 

Create a profit centre through digital payments

Many businesses still use paper checks to make payments for invoices, paychecks, loan payments, and other financial obligations.

But the checks have additional costs associated with them. Checks require printing and postage, generate pollution, and affect the environment due to tree felling.

They can also be delayed in the mail, especially during heavy usage periods (like the holidays), natural disasters, or even strikes. When that happens, an organization risks late payment fees.

Digital payments alleviate those costs, thereby contributing to internal cost reduction in the purchasing chain. They are faster and allow organisations to take advantage of early product discounts (EPD) or negotiate better deals with vendors for early and regular payments.

Another way digital payments help is through virtual credit cards. Each transaction generates an audit trail that allows the tracking of funds and usually consists of prefunding an account, immediately affecting the company’s account balance.

It avoids situations where a check bounces because there aren’t sufficient funds in an account.

Virtual credit cards are dedicated to a single supplier for a specific transaction and require no sensitive banking information, which makes them more secure than paper checks and ACH payments (automated clearing house).

Furthermore, virtual credit cards offer similar perks to consumers, such as cash back on every invoice paid using this method.

Strengthen supplier relationships

Automated AP processes make it possible for companies to pay invoices accurately and on time, which benefits both vendors and suppliers. If vendors don’t get paid on time, they may not have the funds to pay wages or the higher costs of getting goods from their suppliers.

It will force them to make difficult decisions. They may prioritise clients who pay on time and choose not to serve those who don’t, and you want to be in the first category.

Although a solid connection with suppliers may not have an obvious financial benefit, it has benefits that pay off in trying times.

Businesses with complex processes for receiving or making payments can damage their relationships with suppliers. And when times get tough, suppliers will be less inclined to give better terms to ease the pain of a recession or inflation.

Provide real-time reactivity and visibility to decision-makers

One key to fighting inflation is making informed decisions at the right time.

For example, an organisation may need to look for another supplier if suppliers increase their prices so much that it affects their bottom line significantly.

A real-time AP automation solution can provide the data required to make such business decisions quickly by delivering critical information: funds engaged, budget, cash flow, and more.

Automation captures the data automatically, processes it faster, and creates an audit trail for each step performed on each invoice.

It allows businesses to have real-time visibility and traceability of their finances, leading to faster and better-informed strategic business decisions.

Is AP automation the ‘magic pill’ that cures inflation?

Accounts Payable automation isn’t the only answer to dealing with inflation and recession. But it starts the cycle because companies spend large amounts of significant resources in manual AP processes and automating as much as possible will reduce their overall AP processing costs.

AP automation can allow businesses to reduce their operating costs, potentially create a profit centre, improve relationships with vendors and suppliers, and finally, allow for more rapid and better decisions for the business.

While it won’t fix everything, it is necessary for long-term profitability, especially during inflation and recessions.

Main image: Laurent Charpentier, CEO, Yooz