Why Accounts Payable Is The ‘Lost Child’ Of Finance

All too often, firms eye their top lines and growth to the exclusion of most everything else — a mono-mindedness that can have negative repercussions. Operational pain points are often not addressed until they have to be addressed, then, because of that neglect, they suddenly require all sorts of investments in terms of time and money. So it is with accounts payable (AP), as Chen Amit, CEO of Tipalti, told PYMNTS in a recent interview.

“Accounts payable is the ‘lost child’ hidden in business workflows,” said the executive. “I think, naturally, companies put more attention on customers, and receiving revenue from those customers, than they do on managing payments to suppliers. … That’s especially true for companies that are growing quickly, where resources are constrained, and executives want to devote resources and time to building the company, growing the revenues and investing in marketing and sales.”

The Limitations Of Manual Labor

However, against the backdrop where such investment is limited by human capital and financial capital, the end result is that a wide range of accounts payable processes are manual. As Amit recounted, surveys of CFOs and controllers have consistently noted that AP is the most time-consuming function in finance today.

There is a broad range of manual components at simultaneous interplay in accounts payable management — “everything from onboarding the supplier and making sure you have the right tax info to making sure you have the right payment methods in place for suppliers, which is especially important when a firm operates on a global basis, where payments can be by wire, a check, Global ACH or even PayPal, depending on the country or the size of the transaction.” In addition, local regulations may govern the particulars of a transaction, said Amit, mandating the types of information that need to be included.

Of accounts payable in general, he said, “it’s a cumbersome process. … There are so many bits and pieces, and it is executed manually and poorly. Not everyone closes the books in a timely way, and not everyone complies with all the regulations.”

The Ripple Effect And The Gig Economy

Amid all these manual and error-prone processes, noted Amit, the ripple effects are significant, magnified in a world where commerce is increasingly digital and far-reaching, and where supply chains cross borders, especially with the gig economy.

“In the gig economy, interesting things happen,” he explained, “because, in the gig economy, the supplier, many times, is the source of revenue.” He offered the example of Airbnb, which makes its top line through homeowners renting their properties via the platform.

“But if you mistreat your supplier, your renter, the website that hosts an ad for you, the gig worker that does work for you … they will go to a different service, and you will lose revenue,” said Amit. The gig economy, he continued, “is very social-network connected, so if you mistreat one supplier, it will have ripple effects across social networks, and that can be painful.”

AP As Strategy — And Science, Not Art

He noted that Tipalti has been seeing an acknowledgement of the power that suppliers wield in the gig economy, manifested in faster payment terms (with more payment options), and a move by its customers to adopt AP automation. With automation, AP management can become a strategic advantage.

“The serious players make investments in AP,” said Amit, “and you can improve your relationship with the suppliers while improving efficiencies because, when you are working with a [tech-driven, automated] solution, you can save 85 percent of the labor that you had to invest before. You’ll improve communications and offer more payment methods, and if you want to keep cash the longest, make sure that the payment execution is the shortest.”

That’s because the manual process of sending out a check, and waiting for it to clear, can take weeks — and, as a result, finance professionals must “earmark” the cash (eventually) being paid out as a reserve that cannot be used. If an electronic payment can be sent instead of relying on checks, where payments can be assured of clearing in just a few hours, there is much more visibility into the daily cash balances that can be used strategically and proactively.

Cash management becomes less art than science. The tech part of streamlining AP is made a bit more intuitive and easier with the advent of the cloud, said Amit, even for smaller eCommerce teams.

“Before the cloud, you needed to have infrastructure and data centers, and, today, it’s rather easy to start a business with the aid of the cloud. … It makes operations more scalable for both smaller and larger organizations,” he said. “One upshot is that financial inclusion improves, too, as flexibility of payments across time zones and currencies means that people in less-developed economies can join the gig economy.”

The verticals most urgently in need of automated AP come where there is disparity between the (smaller) firm and the number of payments it needs to make (a large tally) to its suppliers, said Amit. An example here can be seen with online ad networks, “where there can be a couple of hundred people [among suppliers], but they are making 10,000 transactions a month, and the transactions are global,” he said. “Everything that is a friction or pain point about accounts payable — well, add ‘global’ to that, and the friction or pain points are multiplied. It’s an order of magnitude in terms of complexity.”