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The success of businesses depends on profitability, and there are only a few parameters better than RoI when it comes to estimating the net profit an investment brought to the firm.
Return on Investment (RoI) is a financial parameter that is used extensively to estimate the probability of acquiring a return from an investment. This ratio compares the gain or loss resulting from an investment compared to itscost.
Importance of accounting in a business
Accounting plays a pivotal role in managing a business because it lets you track income and expenditures, ensures legal compliance, and provides investors, administration, and government with quantitative financial reports. This information can get utilized in executing business decisions.
Key performance indicators to be tracked by the accounting department
Primary KPIs you might track include revenue, gross profit, cost, processing time, and fraud prevention. Here are other primary indicators that must be tracked, analyzed, and dealt with by the accounting department of your company:-
1. Operating cash flow
Monitoring and evaluating your Operating Cash Flow is pivotal for understanding your financial competency to pay for deliveries as well as routine operating expenses.
This KPI gets implemented as per the total wealth you have in use, an analysis that reveals whether your operations generate ample cash to support your capital investments and advance your business.
2. Working capital
Cash that is immediately accessible is Working Capital. You can deduce your Working Capital by subtracting your business' current liabilities from its prevailing assets.
Cash in hand, short-term investments, accounts receivable, accounts payable, loans, and accrued expenses make up this KPI equation.
This KPI metric educates you about the current condition of your business by informing you about its available operating finances. It does so by revealing the extent to which your available assets can meet your short-term financial liabilities.
3. Return on Equity (ROE)
The Return on Equity KPI tells the total income of your company compared to each unit of shareholder equity (net worth). By juxtaposing your company's net income to its overall wealth, your ROE reveals whether your net income is adequate for your scale.
A high ROE tells your shareholders that their investments are getting optimized to grow the business.
4. Debt to Equity ratio
Debt to Equity is a ratio determined by evaluating your business's total liabilities compared to your shareholders' equity. This KPI reveals how well your business is financing its growth and how effectively you utilize your shareholders' investments.
A high debt-to-equity ratio indicates a practice of burning through funds for growth by accumulating debt. This critical KPI lets you concentrate on your financial accountability.
5. LOB Revenue vs. Target
This KPI juxtaposes your revenue for a chain of business to your estimated revenue for the same. Tracking and analyzing inconsistencies between the gained revenues and your estimation figures lets you evaluate the financial performance of a department.
This factor is one of the two employed when calculating the Budget Variance KPI, which compares the estimated and actual operating budget totals.
6. Invoice processing expenses
Developing value and slashing the net cost of ownership invites some frustrating factors within your business because of technological deficiencies.
One such factor is incremental costs, like those associated with accounts payable (AP) processes that include invoice processing.
There is no specific number for invoice processing costs as it depends on the individual tabulating it. Research firm Sterling Commerce places the average cost of processing a single invoice between$12 and $30, while some firms set it between $12.90 and $15, and some set it as high as $40.
Because Accounts Payable makes a big part of a company's finances, reducing the cost associated with your invoice processing can take down the business expenses significantly. Invoice frauds, error prone AP workflow, slower approval rate, and manual invoice processing adds to the overall business expenses. Let’s take a look at them one by one:-
Accounts payable frauds
Accounts payable fraud is a type of deception that aims at a company’s accounts payable department, which pays suppliers and vendors.
Accounts payable fraud can be carried out internally by employees, externally by vendors, the two parties functioning in concert, or by a third party intending to gain access to the accounts payable systems of the firm.
A typical company loses 5% of its revenue to fraud each year, with a median loss of $125,000, as per the Association of Certified Fraud Examiners (ACFE). Fraud activities often go unnoticed for about 14 months, leading to average losses of $8,300 a month.
How does Accounts Payable fraud work?
Accounts payable fraud deals with fraudulent disbursements, the most common of which include billing schemes, check tampering, and expense reimbursement plans.
An employee might be running a billing scheme by setting up a shell company and submitting fake invoices, a fraud that is easy to commit if the invoices are for things that are not physical commodities, such as consulting services.
In a check tampering scheme, an employee steals and forges checks from the management and steals money from the firm. Suppliers commit fraud by purposefully overbilling or double-billing for services and then stealing additional funds.
Automation to the Rescue
Since an AP automation software centralizes all incoming invoices and internal approvals, the entire process gets streamlined and alleviates the opportunity for fraud.
AP automation software helps you implement additional approval layers. With several levels of approval, fraudulent actions are easier to identify.
Account Payable Approval
The Accounts Payable approval process facilitates businesses to supervise and manage their cash outflow via the A/P system. Approval controls can help determine the Approval Status for various vouchers entered or modified.
These controls are set up as per the voucher's gross or taxable amount, document category, business unit, firm, or any combination. When A/P Approvals get activated, the system prevents payment on any voucher that lacks Approval Status regardless of its payment status.
Here is the summary hierarchy implemented to assess the vouchers -
Business Unit/Document Type/Company
Business Unit/Document Type
How does invoice approval procedure work
Businesses typically have a rational process set up to deal with incoming invoices. While the processes differ from one company to another, they can be classified generally into two -
Invoices with a purchase requisition or purchase order
Invoices with no associated request or purchase order
Check out these steps that organizations can implement to ensure quicker and more systematic approval of invoices -
1. Capture an invoice
To process invoices within time, all crucial information in the invoice must get captured or entered manually into a company's invoice approval loop.
2. Validation/PO matching
The second step of the process is categorizing the invoice. It deals with the process of spotting and linking other related purchasing documents such as purchase orders, purchase requests, order receipts, and more.
3. Establish exceptions
When invoices fall short in the validation stage because of discrepancies or void information, they should get forwarded to certain people who can correct errors and reroute them for approval.
4. Route approvals
After validating and matching invoices, they get routed to the appropriate approvers as per the information mentioned in one of the shopping documents (PO number, requester name, department).
5. Payment processing
If an invoice gets approved, it must get forwarded automatically to the finance department for payment processing. After the processing of a payment, an invoice can be closed.
Best practices for approval channel
Approval channels are rules concerning invoices, expenses, purchase orders, and payments to managers or team leaders for approval.
Check out these best practices for swift and secure AP approvals -
1. Multi-level approvals
Consider setting up at least two levels of approval. One way is to categorize this by establishing a dollar threshold; for instance, invoices above $1,000 will go through two different approvers. Some systems let you modify this flow so that an invoice only proceeds for payments after seeking approval from both approvers.
2. Different approvals for payments and invoices
The manager who approves invoices must be different from the one who authorizes payments. This gesture will boost your risk prevention strategy of business funds getting crippled fraudulently.
3. Formalize your approval matrix
Devise a formal organizational framework of your approval channels and adhere to that. Your defined structure must precisely define the approver, their delegated timeline to complete the approval, and the person to be the secondary approver in their absence.
4. Segregate duties
GAAP (Generally Accepted Accounting Principles) proposes the segregation of duties for best practices in accounting. Dividing duties restrict the acquisition of financial decisions by a single person.
5. Develop a purchase order approval workflow
Establish internal rules to purchase before ordering. Build a requisition for internal approval that receives authorization by a manager or finance department and then gets sent to the supplier. Several workflow management systems enable setting up trigger-based actions to regulate purchase orders.
Automate invoice approval solution
Traditional invoice approval processes comprise several process gaps and inefficiencies. Companies that employ manual and semi-automated invoice approval procedures encounter more delays than those who use digital invoice management software.
Digital invoice approval solutions involve data capture, contract management, automatic routing, and integration facilities in a unified platform.
Automation software lets you cater to invoice approvals, eliminates paperwork, alleviates manual error in data collection and retrieval, stimulates the approval cycle, and promotes straight-through processing.
Enterprises and SMBs alike enjoy several benefits that include -
The advent of paperless invoicing has become a convenient substitute for manual invoice approvals and payments. In most companies, the Accounts Payable process is time-consuming and requires you to pass hard copy invoices across your workspace.
However, with AP automation, you can make your workflows entirely electronic, making the process faster and boosting reliability.
How does it work?
Paperless invoice processing removes manual touchpoints from your Accounts Payable workflow. Rather than entering each supplier invoice into your accounting program, invoice OCR software lets you capture and import the information automatically.
You do not have to search your office for the corresponding purchase orders and receipts, as the automation system provides each document at your fingertips.
Return On Investment is a key performance indicator (KPI) used by businesses to determine the profitability of an expenditure. By deducing RoI on your accounting process, you can better know the progress and shortcomings of various implementations.
There are specific parameters mentioned above that you must track to monitor your RoI efficiently and make crucial decisions for your company. To gain the most out of an investment, resort to automation to save invoice processing costs, steer clear of accounts payable fraud, streamline the process of invoice approvals, and avail of other benefits.