Will the Risk of Recession Kick Off a New Wave of Automation?

Sarah-Jayne Martin | Friday, Oct 28th 2022
hands typing on keyboard showing automation

Earlier this month, the United States Bureau of Labor Statistics reported that the June consumer price index rose 9.1% over the same time period last year. Assessing the situation, James Knightly, chief international economist of ING stated, “With supply conditions showing little sign of improvement…. The recession threat is rising.” It’s this high level of volatility that has led to 3/4ths of CFOs labeling economic uncertainty as the greatest threat to their business.

For accounts payable teams, it’s worth asking how this tenuous business landscape may impact day-to-day work.

The Drive to Cut Costs

One of the first things that most businesses and consumers do to safeguard themselves from the effects of a recession is to reduce unnecessary expenses. In finance, that means taking a close look at processes and assessing where money is wasted.

Teams that rely on manual processes may be paying as much as $35 per paper invoice. That’s on the high end of the spectrum, so let’s go with a more modest estimate of $12. It’s a generally accepted figure that the average accounts payable clerk processes around 1,000 invoices a month. That means a company could spend as much as $12,000 a month on manual AP. By contrast, adopting automation can lower the cost to less than $5 per invoice, which would create savings of $7,000 monthly. Extrapolating that out annually would result in $84,000 saved.

The cost savings of automation extend beyond the amount spent per invoice. Because teams are able to resolve payments more promptly, fees associated with late payments are avoided.

According to Goldman Sachs, 5% of invoices are 30 days past due. This leads to $25bn annually in late fees in North America alone.

Increasing Efficiency

Along with a focus on decreasing expenses, an economic downturn will force businesses to assess where they can perform with greater efficiency. Procedures that take an inordinate amount of time need to be trimmed so that employees can focus on higher-value tasks.

Manual AP requires employees to waste time on data entry, filing, scanning, and photocopying processes. In addition, invoices can languish in the approval process, sitting on desks for days waiting for the appropriate sign-off. Not only does this take up valuable time, but it can cause an erratic outflow of money, with too much being dispersed all at once.

Automation allows organizations to process invoices 9x faster than when performed manually and also facilitates a steady outflow of cash instead of sudden peaks. Because automation also provides full visibility into AP, from the time an invoice is received until it is paid, it also allows your team to hold onto money until it needs to be delivered. As a general rule, and particularly in times of economic uncertainty, you don’t want to part with cash any earlier than is necessary. That means not paying late, which can incur fines and fees, but not paying too soon.

The exception to this rule occurs when there are financial incentives. By eliminating needless busy work like manual data entry, AP employees are free to engage in activities such as identifying discounts for bulk purchasing, rewards for early payment, potential rebates, and trade credit. The end result? Accounts payable becomes a revenue-generating activity, as opposed to just an outflow of cash.

The Need for Security

Though always important, during times of economic uncertainty, the need for security becomes absolutely vital. On average, organizations lose 5% of their revenue to fraud every year. A study by the Association of Certified Fraud Examiners found that small businesses lose an average of US$125,000 annually and that over half of those organizations never recover any of the money.

Unfortunately, fraud tends to climb during recessions. As noted by FICO, “There’s one fraud pattern that’s highly predictable: when the economy goes down, fraud goes up.” From phishing scams to expense violations, businesses will need to be on guard increasingly.

With manual accounts payable, data can siloes develop, especially if information is being stored on multiple systems. This lack of transparency leads to an inability to spot irregularities, making it difficult to catch out-of-policy expense claims or invoices from illegitimate sources.

Adopting automation can add multiple safeguards to the process. Most solutions will allow you to separate duties, so that the person who approves an invoice, and the person who issues payment are not the same individual. It also provides organizations with the option to create tiered levels of approval, such as requiring two separate signatures for an invoice over a certain dollar amount. These features, along with full transparency over the entire AP process, help reduce the risk of internal and external fraud.

Finding Stability with Automation

Even prior to the threat of recession, companies were looking to digitize and automate their accounts payables process, with 70% of CFOs viewing the change as vital to their long-term success. With increasing economic uncertainty, that number is sure to rise, as organizations look to adopt business practices that will help them reliably navigate through a potential recession.