Why It’s Time for Accounts Receivable Automation

A male employee wearing a light blue button up shirt sits at a desk with colorful file folders and completes paperwork.

Every small business wants to get paid faster, but many are still clinging to paper-based processes even as other areas of their operations go digital. Accounts receivable (AR), for one, is a function leaders are often resistant to modernize or transform—in part, because they don’t want to risk disrupting cash flow or diverting resources into new solution investments, trainings and implementations.

But while the risk of embracing new payments solutions may seem high, the consequences of not transforming could ultimately be more costly. As the popularity of check payments declines, small businesses that avoid automating AR and other areas of payments and collections may become more susceptible to fraud and losses.

Meanwhile, overhead expenses for inefficient manual invoicing and mailing processes are already high, and only poised to get higher. According to research from the American Productivity & Quality Center, the cost to prepare and process a single invoice is still $10 or more for a full 25% of companies.

As companies work to optimize cash flow and lower costs, embracing more digital, automated strategies in receivables may lessen expenses while driving additional benefits into back-office operations.

Heightened Risks in Manual Processes

Across all areas of the back office, paper-based process are on the way out. Checks are still the most commonly used B2B payment method, but rank fourth in terms of payment satisfaction; over 30% percent of businesses expect their check usage to decrease by the end of 2021.

Same-day ACH payments are a rising alternative—generating 37 million B2B transactions in the first nine months of 2019, which is 50% more than the year prior. Real-time payments are poised to expand, as well: The RTP Network launched in 2017 by The Clearing House now reaches over 50% of U.S. transaction accounts, and the U.S. Federal Reserve plans to launch a competing real-time payment service (called ‘FedNow’) within the next several years.

As these and other digital payment methods—such as virtual cards (aka ‘ePayables’) and cryptocurrencies—grow in popularity and use, manual AR efforts will fall further behind in meeting companies’ needs.

Collections speed, in the meantime, remains a problem for companies. Research shows that as much as $3.1T net is owed in accounts receivable for U.S. firms across any given day, and that the average business has 24% of its monthly revenue tied up in outstanding invoices.

Lengthy timelines on the receivables side can influence a more systemic cycle of late payments across businesses, as well. (27.5% of firms that frequently receive late payments also pay their own suppliers late, too.)

Slowness on all sides can make it harder to prevent and detect payments fraud and other forms of financial crime. And while the risks of internal “skimming”—fake invoice issuance, or inactive-account fraud—have always plagued AR, continued reliance on outdated technology and non-interoperable ways of doing things can exacerbate the potential for embezzlement and other crimes.

It can also facilitate new security threats—such as the exposure of customers’ bank information or other valuable personal data—due to the reliance on paper documentation for reconciliation. Check fraud, meanwhile, affects an estimated 74% of businesses in the U.S. annually, making it (still) the most common fraud type for businesses to protect against.

Enabling Digital Ways of Doing AR

Clinging to outmoded ways of working in AR can also have indirect costs—like lessening staff morale over time-draining, rote processing work. Reconciling invoices to payments, for example, requires many hours when small businesses rely on many different systems that place different demands on the process.

Errors in AR can also be costly and hard to fix, especially with systems that aren’t synchronized enough to link invoices to accounts and services rendered. (In terms of manual effort and time, Aite Group found that a single exception costs roughly $5 per payment to resolve.) Exceptions can also frustrate payees or worsen customer experience, which can damage business relationships over time.

Making AR more efficient and automatic lessens the potential for such problems, while also improving speed, reducing outstanding payments, and driving up accuracy—supporting better cash application and forecasting across all areas of the finance function.

Forecasting is a more impactful application of staff effort, after all, than invoice creation/scheduling and reconciliation. That’s why automating AR isn’t necessarily about reducing specialized staff in that area, but about better utilizing the organization’s talent in terms of resourcing while lessening manual-processing related costs as a consequence.

The Human Element in AR

Even with auto-created invoices and digital business payments, human expertise and oversight are still important to ensuring AR runs smoothly.

In fact, embracing automated AR sooner rather than later helps make your staff more valuable. In a tight labor market, retaining the staff you have and upskilling them to handle new technology solutions are equally important. Making those technology investments now means your existing team will be better prepared to help your back office succeed in a future of real-time payments and other innovations.

Even as those innovations emerge and expand in use, however, checks will remain a big part of AR (and businesses will accept them for as long as customers and partners still choose to send them). Yet going more digital can also encourage the kinds of behavior changes among payees that create benefits on both sides of the relationship—such as recurring e-billing and convenient, automatic e-payments.

With the faster access to funds that those payment methods enable, companies can pay their own invoices sooner and invest more staff effort into fraud detection and prevention efforts. Modernizing AR may come with substantive upfront investment in training, among other operational changes, but the long-term benefits can make the transformation an impactful one for the back office function’s success.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association, Member FDIC.