Maximizing value and optimizing financial results
For businesses of all sizes optimizing Accounts Payable (AP) operations is paramount for sustainable growth and success. Implementing a new AP solution can be the catalyst for streamlining processes, reducing costs, and enhancing efficiency; however, determining the return on investment (ROI) of such a significant undertaking can be complex. In this blog, we’ll explore the steps to effectively calculate the ROI when evaluating a new AP solution:
- Define Objectives: Before diving into ROI calculations, clearly define the objectives of implementing the new AP solution. Are you aiming to reduce processing time, eliminate errors, improve supplier relationships, or all of the above? Understanding your goals will guide the evaluation process and help measure the success of the implementation.
- Know Your Current Costs: In order to truly evaluate your return-on-investment you need to know what your costs are. Both hard and soft costs should be evaluated. Direct labor (AP staff), indirect labor (supervisory/management, reviewers and approvers outside of AP, overhead, discounts, working capital, materials, etc. should also be factored into the total cost of your operation. The impact of the new solution on all the costs mentioned above should be part of the ROI evaluation.
- Identify New AP Solution Costs: Start by identifying all costs associated with implementing the new AP solution. This includes software licenses, hardware upgrades, implementation fees, training expenses, and any other direct or indirect costs. Be thorough in capturing all potential expenditures to get an accurate picture of the investment required.
- Estimate Savings: Next, estimate the potential savings and benefits that the new AP solution is expected to deliver. Consider factors such as:
- Time Savings: Calculate the time saved in processing invoices, approvals, and payments with the new system compared to the previous manual or outdated processes.
- Time Savings: Calculate the time saved in processing invoices, approvals, and payments with the new system compared to the previous manual or outdated processes.
- Cost Reductions: Identify potential cost savings from early payment discounts, negotiated supplier discounts, reduced late payment penalties, and decreased paper and postage expenses.
- Error Reduction: Quantify the cost savings associated with reducing errors such as duplicate payments, incorrect data entry, and missed discounts.
- Enhanced Efficiency: Assess the productivity gains and efficiency improvements achieved through automation, streamlined workflows, and real-time visibility into AP processes.
- Strategic Benefits: Evaluate the strategic advantages of the new AP solution, such as improved cash flow management, strengthened supplier relationships, position for growth, and better decision-making capabilities.
Once you complete your initial evaluation, you can begin to calculate the return on investment:
- Calculate ROI: Once you have gathered the relevant data on costs and estimated savings, calculate the ROI using the following formula:
[ ROI = \frac{(Net Financial Gain – Investment Cost)}{Investment Cost} \times 100\% ]
Where:
- Net Financial Gain = Total savings and benefits derived from the new AP solution (time savings, cost reductions, error reduction, efficiency gains, strategic benefits).
- Investment Cost = Total costs incurred in implementing and maintaining the new AP solution.
- Measure Intangible Benefits: In addition to tangible financial gains, don’t overlook the intangible benefits of implementing a new AP solution. These may include improved employee morale, reduced stress, enhanced compliance, and better risk management. While challenging to quantify, these intangible benefits contribute to overall ROI and should be considered in the evaluation process.
- Monitor and Adjust: After implementing the new AP solution, continuously monitor its performance and ROI. Track key metrics, conduct regular audits, and solicit feedback from stakeholders to identify areas for improvement. Use this information to make adjustments and optimizations to maximize the ROI over time.
Calculating the ROI of implementing a new AP solution requires a comprehensive analysis of costs, savings, and benefits. By defining objectives, identifying costs, estimating savings, calculating ROI, measuring intangible benefits, and monitoring performance, businesses can make informed decisions and unlock the full potential of their AP operations. Remember, the true value of a new AP solution extends beyond dollars saved – it lies in driving efficiency, innovation, and strategic growth for the organization.
Contact ICG Consulting today to start a conversation on how ICG’s comprehensive AP Automation solutions can deliver immediate value and a compelling ROI to your accounts payable operation. You can also request a demo of one our AP automation or related solutions and see for yourself how your company can increase the value and deliver a ROI of your companies back-office processes. For a quick view of ICG’s solutions view this short video.