AP has a new Hero. It’s called Lean.
Processes are all the same everywhere and rarely change. How they are managed is what differentiates best-in-class from the rest.
Lean is in. Weight watchers will tell you this, naturally. But there is a whole new segment of prudent inspectors who will vouch for this fact as well—they are your accountants. Closing the books on a monthly or quarterly basis is a daunting task. Ask any accounting executive this and they will nod in quiet agreement. The problems facing the accounting department in any industry vertical are the same:
- Unrecorded or missing invoices where you fail to make payments against an invoice because you do not know of its existence—a fact that could make you look bad before your suppliers
- Do you always know exactly what you are being billed for? Vendor-buyer miscommunication is often cause for erosion of mutual trust and consequently, chances of repeat business
- Incomplete or incorrect data entries that often go unnoticed till very late into the accounts payable (AP) process
These invoice processing discrepancies aside, the biggest downfall of poor AP management is you, as an organization, failing to know how much you owe your suppliers, and accordingly, setting aside funds for that. Timely consolidation of resources is the biggest concern for growing organizations as they look to reduce liabilities and plan for future growth.
“...Most companies are still stuck in their ways and find it cumbersome to introduce reforms into a system that is running just fine. Accounting is one such department that, given its routine functions of routing, approving, and making payments against invoices, doesn’t seem like needing any change. The accounting department was always considered to be somewhat of an operational unit rather than a strategic one...”
Most companies are still stuck in their ways and find it cumbersome to introduce reforms into a system that is running just fine. Accounting is one such department that, given its routine functions of routing, approving, and making payments against invoices, doesn’t seem like needing any change.
Truth be told, the accounting department is one of the traditional cost centers within a company that was always considered to be somewhat of an operational unit rather than a strategic one. Many businesses still believe that a cost center does not contribute towards their overall revenues or profits. Because its main job is to monitor the actual expenses and cash flows, companies have so far failed to recognize its potential as a strategic driver.
However, this is changing, slowly and steadily. The 2019 CFO Pulse Survey confirms this fact—at least 32% of the CFOs responding to this survey have admitted to spending more time in driving strategy while 16% are placing greater emphasis on budgeting and financial planning. What’s interesting is that companies that were previously reserved about introducing disruptive technology in traditional administrative tasks are now finding real value in automating their most repetitive, labor-intensive processes.
How Lean Management can be applied to AP
The transition to a more streamlined workflow through automation of end-to-end processes is a natural progression for growing companies looking to tame their operational expenses and invest more in strategic growth initiatives. The move to a more cost-effective way of managing resources and capital is really one of the philosophies of lean management or Six Sigma.
Lean management makes use of lean principles to develop a more productive work process by eliminating wasteful practices. This work optimization tool is suitable for any end-to-end process that is repetitive, and event based. Principles of lean management focus on process efficiency and optimal output with the end result being continuous improvement.
Can Continuous Improvement be Achieved with AP Automation?
Ideally, continuous improvement is achieved by mapping an end-to-end process and leveraging data obtained from that to make adjustments, improvements, or eliminate undesirable steps along the process chain.
When it comes to the accounts payable process, AP automation can achieve this. AP automation makes use of an intelligent data capture software that helps in the mapping of end-to-end processes.
Here’s how it works:
Firstly, data capture software will do the job of scanning and capturing data using a suitable recognition engine.
- Based on prebuilt knowledge about the document format and structure, certain capture definitions (generic definitions) on how to extract the data is configured. On application of these definitions, data is automatically extracted from the documents.
- Suppose the document is not captured in its entirety, say, due to the document format being new or unknown to the recognition engine (in which case, the existing capture definitions are rendered useless), the operator processes the document.
- After the operator processes the document the first time, the system learns the basic format and structure of the document so that subsequent similar looking documents are processed based on this learning. This is called Auto-Find technology. With Auto-Find, data entry fields on the document will be automatically located and populated. This technology is especially useful when processing a large number of similar looking documents where the fields are always located at the same positions.
- Still, if any data is missed despite using Auto-Find, there are various computer assisted capture capabilities that can be used. These include the Point-and-Click method to extract values on a click, and the Rubber-band method, which is the process of dragging a selection around one or more regions (rows or columns) and then extracting data within that selection on a click.
These Point-and-Click and Rubber-band methods then educate the system for the next time, and Step 4 is henceforth, automated. A system of self-learning is introduced.
“The move to a more cost-effective way of managing resources and capital is really one of the philosophies of lean management or Six Sigma”
Basically, the software reuses knowledge from previous actions to determine and execute the next steps at every stage of the AP process—intelligent bots (RPA) used in conjunction with machine learning and AI (or AP automation) enable this kind of self-learning. This is called continuous learning and improvement—an outcome of lean management.
Lean Principles—How they are Applied using AP Automation
Specific Use Cases
- Value Identification: As a first step when doing any business, it is important to understand what your target audience finds value in the most. This concept is called value identification and can be applied to the AP process as well wherein you can determine the priorities of your target customer, in this case, your vendors. For instance, your vendor may be particular about receiving communication after a payment has been made by you. Using an invoice processing software or AP automation, you can set off automated emails to your vendors upon making a payment.
- Plotting the Value Stream: This step involves recording every step along the process chain and determining whether you can discard a few steps based on the fact that they may not be necessary in achieving the final result. The point is to determine if any of the steps are adding real value to the end customer. In the case of accounting, you can use AP automation to map the entire purchase-to-pay process and effectively eliminate any of the steps that are obsolete or not needed—say, the accounting department had to systematically validate the existence of a particular vendor in the master file before making a payment; with software, vendor lookup is automatically done, greatly reducing the need for manual intervention.
- Creating a Flow: Another fundamental principle of lean management is to create a systematic, end-to-end process chain or flow. Invoice processing software achieves this by automating these steps: data capture, data classification, routing, validation, verification, approval, and export of processed invoices.
- Establishing Pull: The idea of setting up a pull-based system stems from traditional manufacturing where companies would spend immense resources and capital on maintaining inventory. To prevent this and reduce the costs of maintaining a warehouse, manufacturers deployed a system of just-in-time delivery wherein rather than have inventory sitting on the shelves for months together, the production department could now deliver goods as and when demand arose—definition of a pull-based system. The biggest pain point in processing invoices is the time it takes to manually validate, verify, and approve every invoice. With invoice processing software, the wait times to process an invoice is drastically reduced, meaning there will be fewer instances of pending invoices waiting in a queue to be processed. Pending invoices are akin to inventory gathering dust and not only reduce your chances of availing early payment discounts from vendors but also encourage a bad habit of accumulating late payment fees or interests.
- Induce Perfection: With continuous improvement and establishing a smooth process flow, it is easy to eliminate all wasteful practices and reduce errors along the process. This aspect of lean management introduces perfection into the system as there are fewer chances of encountering mistakes or repeating erroneous tasks. AP automation facilitates a system of continuous improvement and in the process introduces perfection along the purchase-to-pay chain. This, it does by reducing chances of processing duplicate invoices or incorrect data entry. Invoice processing software ensures the automatic data capture of bills so there is little scope for encouraging incorrect data entry.
From this, one can see how an invoice processing software can help incorporate all the principles of lean management and facilitate a system of best practices along the purchase-to-pay chain. Not only will the accounting department within your company be able to close the books quickly but you will also be introducing best-in-class practices that will ensure steady and renewed business with your vendors.