Mining Your Business

43 | What is Accounts Payable? All you need to know about the AP process!

August 31, 2022 Mining Your Business Episode 43
Mining Your Business
43 | What is Accounts Payable? All you need to know about the AP process!
Show Notes Transcript

Accounts Payable seems like a really simple process, right? WRONG! It is not a simple just pay the supplier process. It is a highly complex business process and in this episode we crack down on AP using the experience and knowledge from our time at Processand and cover topics such as, what is the Accounts Payable process? Accounts Payable & Process Mining, relevant KPI's, main causes for problems in the Accounts Payable Process, how to be pro-active to changes, what you can automate in Accounts Payable, and much more.

Learn more at the Processand website!

00:00

Patrick:

Welcome to the Mining Your Business podcast. The show all about process mining, data science, and advanced business analytics. With me, as always, my colleague Jakub. How are you doing?

 

00:09

Jakub:

Hi, Patrick.

 

00:10

Patrick:

Today's a special episode. Jakub is going to give us A Piece of his mind about the AP process, the accounts payable process. I'm excited. Let's get into it.

 

00:21

Jakub:

Patrick, was that a pun? Let's go

 

00:32

Jakub:

Welcome to next episode. Patrick, how's it going?

 

00:37

Patrick:

Going well. Going fantastic. Tired, but you know how it is.

 

00:41

Jakub:

Yeah. What time is it in Austin right now?

 

00:43

Patrick:

7 a.m. Wonderful. 7 a.m. Yeah.

 

00:46

Jakub:

Wonderful time to start recording. I'll be honest. You know, usually when I start the episodes, I write down a lot of stuff what I want to say so that it's kind of organized and, you know, trimmed. And I don't go around in circles, but I didn't do it this time because I just wanted to talk to you Patrick.

 

01:03

Patrick:

Oh, that's so nice. Are we recording a personal phone call?

 

01:07

Jakub:

No, we're not recording a personal phone call. But we are still recruiting, so I kind of want to use our episode also to do a little promo of our own company. So Patrick is in Austin. I'm in Prague, and we are really, really searching for talent for our offices, for our data science teams. So guys, if you're listening to the podcast and you really want to work with us, well, you have an opportunity. Just go on our website or LinkedIn pages. Drop us an email and let's hit it off.

 

01:33

Patrick:

Yeah. I was just about to say, if you've ever listened to the show and wondering, you know, I wonder what it would be like to work with these guys. You can find out, go to our website and apply. We have applications open.

 

01:45

Jakub:

You can 100% apply. And I have to say, Patrick is very strict when it comes to applicants, haha.

 

01:53

Patrick:

Excuse me? That's never even remotely true.

 

01:56

Jakub:

No, of course not. So, yeah, we would be very happy if you applied and yeah, we've got a lot of data science and process mining jobs to be executed. So looking forward to hear from you. And what I also want to mention is that, you know, in our podcast, process mining field is not as large as you've probably already noticed. And I am more than happy to hear from you who you would like to hear in the podcast if you know about someone who would be inspirational, interesting, or has just a very interesting experience in process mining field. Just again, text us and we would be more than happy to reach out to the person and, and invite the person on the podcast.

 

02:38

Patrick:

How would people go about contacting us, Jakub?

 

02:42

Jakub:

Well, we are always available on LinkedIn page, so either you go to Mining Your Business podcast or you know, we are also people on LinkedIn by itself, Jakub Dvořák or Patrick Bogner, you can always find us there or maybe even the easier ways to drop us an email on miningyourbusinesspodcast@gmail.com

 

03:04

Patrick:

Exactly. We don't accept mail or fax. So if you're hoping to get in touch with us that way. Sorry to disappoint.

 

03:11

Jakub:

Yeah, well, paper, paper. And now we will talk about paper today as well because, you.

 

03:15

Patrick:

Ohh, I'm excited.

 

03:16

Jakub:

Today's episode will be about accounts payable process. And believe it or not, a lot of companies are still processing a lot of paper invoices.

 

03:25

Patrick:

Oh, I can believe it. If I've seen a lot from the processes that I've been involved in, the companies that I've worked at. Yeah. Paper still plays a huge part.

 

03:36

Jakub:

Right. So as I already mentioned, today will be about accounts payable process. If you are with us and you've been listening to us for a long, long time, you know, we go back almost two years and we are on episode 43. So if you tune in to the late ones, I think third and fifth episodes or something like that, we did a little introduction into not accounts payable purchase to pay process and order to cash because at that time those were the processes we knew or we thought we did.

 

04:09

Patrick:

We could, we could do another. We could do a redo of those two episodes, right?

 

04:12

Jakub:

Yeah. Let's see how that would go. However, we did think since it was actually those episodes are ranking pretty well, people are interested, people are listening to it. Maybe they just want to get a little more exposure before, you know, they go on to their own implementation projects to understand what you can focus on, what KPIs to measure, what are generally the problems that companies are trying to solve. And I was thinking since I gained over the last couple of years, a lot of experience actually in accounts payable processes. I did implement that with three different companies in the last two years and had been exposed to this very same topic multiple different times with other projects. I was thinking, you know, what, let's do accounts payable process. Patrick, do you have any experience with accounts payable process?

 

05:02

Patrick:

So believe it or not, I have not implemented accounts payable in the last year with three different companies, so I feel like I'm on the back foot here. For the, not only our listeners benefit but also my benefit, I think this is a really good topic so if you don't mind, do you mind just taking us? I'm going to be on the side of the audience now. Do you mind just taking us through the general context about what AP is and where it sits in enterprises?

 

05:32

Jakub:

I will do that under one condition, and that is that next time I will put myself in the shoes of our listeners and I will interview you, Patrick, about process that you've implemented three times in the last year. Is there any process like that?

 

05:50

Patrick:

Yeah, I I'll send you a list after.

 

05:52

Jakub:

OK, good. I've heard that you're a big fan of manufacturing.

 

05:55

Patrick:

Oh, yeah, it's my bread and butter.

 

05:58

Jakub:

Cool. But not to go in circles anymore. Accounts payable, one of the core business processes you know, if you're talking, I always love saying the big four, you know, we have accounts receivable, accounts payable and then what precedes it, which is, you know, order to cash, purchase to pay. So accounts payable is really the part when you are buying something for your company, when you need to order stuff for your office, you know, screens, laptops, when you need to buy materials for your production. Doesn't matter whether you are an automotive company or chemical company or where you need to buy some services. You know, if you need to hire Processand to do your process mining implementation, you are buying services and hence you will have to pay for this at some point, hopefully. And what happens is that you buy all this stuff and at some point you will start receiving invoices through different channels. You know, there can be so many channels in which companies are receiving these. And what happens then is that you have your own department, accounts payable department, or Finance. That's also what it's usually called. Or you know, it's also sometimes process in these short service centers, this large buildings of corporations that are kind of working only on these invoice processing and also, you know, whatever they need to pay and they make sure that these invoices are processed, are correct, are approved and eventually paid in time. And as you can imagine, if you are a corporation that is processing hundreds of thousands or millions of invoices per year, this process can get pretty complex. And if you remember the spaghetti, the spaghetti, spaghetti, spaghetti quote from Erik-Jan van der Linden, even in accounts payable process, which is basically handling money, you can see a lot of spaghetti.

 

07:54

Patrick:

Yeah, I can see that for sure happening. So let me get this straight. A company receives an invoice and why not just, OK, I've got an invoice I'm going to pay it. Boom. Done. Two step process invoice pay done. Same day, easy peasy, no fuss. Why is that bad or is it? Why aren't people doing that?

 

08:15

Jakub:

I'm not going to say it's bad or wrong. I don't think we can talk into absolutes here in this context. What you need to do is make sure that the invoice you actually received is correct one and you probably know something that's called two way match or three way match which is basically comparing your documents, whether what you ordered is actually what you received and is actually what you pay for, because if you are a large organization and you have a plant somewhere in Brazil and you purchase 20 tons of wood or something, you know, the person who's probably processing the invoice doesn't even have a clue that there is a plant in Brazil, and then they order 20 tons of wood or some other material. And what the person will see is, ok, here's an invoice for 20 kilograms of wood or 200 tons of wood instead of 20 tons of wood, and they are paying or billing us this much and that much and you know, you could say, ok, screw this, let's just pay for it. I don't really care, it's an invoice, we need to pay for it anyway. But that's not always the case, right? Because you need to make sure that the service provider or material provider the vendor that sent you something is actually charging you for the same thing. And this is the moment where things are starting to get a little bleak and murky because you need to have a very lean process on actually having these checks in place, these approval workflows, making sure that not only it's technically correct that you can actually find out when an invoice has different quantity or different amount than it should have, but also that once this is actually exploited and, you know, you find this inefficiency or inaccuracy in the invoice, that you can go down the stream in the process and have a lean approval process to either done create some denning activity of the vendor. Ok guys, we didn't receive the goods yet we can't pay for the invoice or the invoice is actually incorrect and create this very efficient system around that so that you don't spend too much effort, time and human activity on getting rid of these problems. And that's just the beginning of the process.

 

10:37

Patrick:

I'm starting to notice Invoice comes in and first thing we must do is actually verify that this is an accurate invoice. By accurate invoice you mean, ok, did we order or did we receive the stuff that's on the invoice? Did we actually order it in the first place and did we actually receive it in the warehouse? Like if I paid for ten pipes or something, can I go down to the warehouse and find them?

 

11:01

Jakub:

Actually, Patrick, actually, if you really want to go from the very beginning, it's not the verification of the invoice, it's the processing of the invoice in the first place.

 

11:10

Patrick:

Now define that for me. What is that mean processing of the invoice?

 

11:14

Jakub:

Well, you know, I told you at the beginning that there are still companies that are processing invoices from paper.

 

11:20

Patrick:

Oh, no. Does that mean someone's job is to just read an invoice and type it in hand by hand into the system?

 

11:25

Jakub:

Well, hopefully, hopefully we are a little further away from that. But I don't think that or, you know, ten years back, probably there were people whose only job was to type stuff down into a SAP and you know, put their amounts and quantities and payment terms and oh boy, can you imagine how many mistakes there must have been done at that point? If you had to do that manually. However, luckily we are living in 21st century and we have something that's called optical character recognition also called or you know, abbreviation, OCR, which are these very cool systems. I can name one that I remember specifically from my projects. It's called VIM, Vendor Invoice Management. It's basically like a scanning of the invoices. So you really have tools which work in the way that you can read through the invoice. There's still probably some manual approval at the end or again, depends on the setting of the system. But the system does the heavy lifting, and even Celonis, for whom we implement a lot, they also have this feature where you can actually start with this OCR thing and actually insert documents through Celonis and through this machine learning algorithm that is implemented in there and really work with what do you see on the invoice and then just push it into the system.

 

12:52

Patrick:

Oh, wow. Ok, so even before I get the invoice, I must make sure that the whatever format the invoice is sent in, whether that be paper or PDF or even electronic data, right? So it is essentially just comes and I must make sure that it's also in the system and I mean, more importantly, and I think this is the real crux here, if it were just to scan it and stuff that be fine, but it also must link to what you have inside your system, right? Because if you have something from vendor A, how do you know what purchase order that belongs to or the goods receipt that that belongs to? Right. So how do you do that?

 

13:35

Jakub:

Exactly. And that's where it starts getting interesting. So you can either handle everything in one system or you can have four different systems for just the scanning. And then you somehow push it into different SAP modules or some other alienated or external systems. There's really a lot of solutions and I've been exposed to a couple, obviously not all of them, but the principle they kind of work very similarly. And what happens is then that you have your document in the system and then if it's well, you know, set up in ideal scenario, it just automatically checks for all the all the important stuff is, as you mentioned, is there a link to a PO, or is there even supposed to be a link to PO, do we have a goods receipt, do the quantities match? Does everything that is supposed to match, match? And if that actually falls through, then, you know, the invoice in ideal scenario would be automatically posted. Depending on the quality of the scanning on the quality of the vendor that you are providing you with the goods. Because you know, there are also different I guess everyone works a bit differently and I assume that there will be vendors who are always, you know, up to date or really on time with their deliveries. There are vendors with supply chain issues and their goods delivery probably will be a little problematic depending on all of this. Either your invoice, or is processed through the system effortlessly without any problem and just gets to the end or gets posted to the system or, you know, it's stuck somewhere and when it's stuck somewhere, in most cases, it actually requires manual intervention. And that's where people, the finance people who are working with these systems actually have to step in.

 

15:23

Patrick:

So there's always some sort of manual review. Hey, there's an exception here. This document doesn't look right. Something doesn't match. Someone must review it so they can maybe, there's a smudge on the paper that it was printed on and it just doesn't recognize the characters or I don't know, or it was just misprinted or the vendor doesn't have the right information or something like that. Person comes in, checks it with the system and make sure that then it actually gets posted, the accurate information gets posted to the system.

 

15:49

Jakub:

Could be, because in theory, you shouldn't even be allowed to post something that's fundamentally wrong because once it's posted, you are supposed to pay for it.

 

15:57

Patrick:

Right. And I guess at that point, if you're past the checking process, it's a lot harder to catch.

 

16:03

Jakub:

Yeah, kind of.

 

16:04

Patrick:

So ok, say we have all, we check that the invoice and the paper gets put into the system properly. We check that all these things are there the things that we ordered, we know exactly why we have the stuff, why we have this invoice. Ok, cool, now can I just pay it now or how does that work?

 

16:24

Jakub:

That's another interesting problem, which I can't really answer for you because and I have to say, when I was preparing for the episode, I came across some interesting articles and there was this very beautiful sentence that I'm going to now quote, which is that at any given time, you can trade off between profitability by capturing cash discounts, which you can have in the invoices and liquidity through extended payment terms depending on what your business needs are. And this is a beautiful sentence because if you are looking at the way that you're paying for the company, there's really no way to for an external at least to tell should we pay in, you know, in time or early to get the better price or should we wait and to keep on the money as long as possible? Because imagine, Patrick, imagine that you are a person who let's say that you are doing your own shopping and then you get the opportunity to pay a little ahead of the time and get, let's say, 5% off. Or you can just wait with the money for, I don't know, 60 days and pay later. And in the meanwhile, you might find an opportunity where you can invest this money that you have saved and held for 60 days an eventually gets a bigger return on your money while just keeping the cash a little longer, investing it, getting your return back and then paying at the very last moment so that you have more cash on hand. And this is really something that, you know, you cannot say, nobody can really say what the company's priorities are, but are two different things that the company can really look into, either really optimizing the capital that they have at the hand at any given time, for a lot of companies, that the more is better because then they can exploit these opportunities that they are given or they just say, ok, we want to reduce the costs as much as possible, and hence they focus on capturing these discounts. Because usually if you have a 30 day payment term, that means that within 30 days you should pay for goods. You might have an agreement with your vendor that if you pay within ten days, you know, you will get five or 10% off, which is a standard approach and then it's really up to you to decide what do you want?

 

18:43

Patrick:

I heard a lot of terms being thrown around cash discounts, payment terms and all these things. Let's get into that. So what we're saying is that vendors are providing some sort of payment terms, saying like the example you put, if you pay within 30 days, let's say I buy something for 100 hundred bucks, somebody says, ok, if you pay this within 30 days, we'll give you a 5% off. So you only have to pay €95.

 

19:06

Jakub:

Yes, exactly.

 

19:07

Patrick:

Or we go to 60 days and then you pay the full amount, right? So obviously the vendors themselves have an incentive to get the cash from the invoice quicker because, you know, obviously the quicker you have your cash, the happier you are.

 

19:19

Jakub:

And they are facing then the same kind of problems, right? Also like do we want to get paid in time? Because if we get paid early, we will have more cash now, we can expand and so and so forth. That's more like the accounts receivable part, which probably you know more than I do.

 

19:33

Patrick:

I've dabbled. But so essentially what you're saying is that we have the opportunity now to choose, right? Either we can pay 95 but lose that 95 within 30 days and not have that after that that I could potentially do something with, you know, like invest it somewhere and maybe get, get a higher return. Or I could just, you know, ok, I can actually do that strategy I can actually take my money, have more cash on hand for a longer period of time, but eventually pay more for the invoice. So I guess this kind of dwells deeper into company strategy, really. Maybe I'm running short on cash at this particular moment. So I'm going to prioritize paying later because I want more cash on hand for the time being.

 

20:19

Jakub:

Yeah, I'm going to say that these are the only reasons why you should choose the other or the later because again, the companies and the business owners might have different initiatives, different incentives to run and to decide by and you know, having cash as long as possible has to do a lot with liquidity, but not maybe exclusively only with liquidity. There might be also other goals that the companies might have to choose one or another.

 

20:47

Patrick:

OK, so what you're saying is that there's definitely strategies involved here, but is it ok if some people or in the organization just pay for the cash discount and others are just waiting as long as possible? Could it be that there's like regional differences and things like that?

 

21:01

Jakub:

100%. What you could do, you could even go as simple as just decide by what the amount of cash discount is and if it's even worth the money and effort you put into paying early. You know, just to pay and get 2 euros off, that probably doesn't make sense. When either BI reports or process mining really comes in that can create some prioritization system that you can imagine as a basically a Kanban board or just some board where you prioritize that the invoices that are due today or tomorrow with the highest amounts and you say, ok, this is really helpful because in order I you know, I can either leave this and be paid on time or I can really pick this invoice up because I can and we can get 1000 euros back by just paying this in time. So then it's really up to strategic decision on which way you want to really go. And I also like this use case because it's one of the easiest one to realize some value, realize some savings if it is in the interest of company to do so.

 

22:05

Patrick:

Right. So you, you could say, well, in the last year, if you would have prioritized cash discounts, you would have probably saved this much. And if you prioritized holding on to your capital, there's an opportunity cost of I don't know, so much.

 

22:18

Jakub:

Yeah, exactly. And I like this use case especially because, first of all, it's super easy to implement. And second of all, it's also very easy to quantify what the value is.

 

22:29

Patrick:

Yeah, that's really good. So ok, I feel like I'm getting my head around the whole process. But I feel like there's something missing, right? Sometimes invoices slip through and sometimes you know, you just don't pay them on time. What happens in those cases?

 

22:47

Jakub:

Yeah. So once the invoice is posted, there are still a lot of things that you can do. You know, you still find out that there is a mistake and you can actually block the invoice for payment. Something that happens very often. It's called the payment block for various reasons. You know, the payment blocks usually have some reasoning behind them why they occur, because you want to then maybe explore why you are blocking certain types of invoices after they are posted into the system. Or you can also reverse the invoices should you find out that this is actually incorrect. You know, you will probably want to get the money back or prevent it from the paying in the first place. And then you can reverse. It happens all the time. You pay for something and then you actually realize that you paid twice the amount or that you should have paid less or something. So you just reach out to the company and they either reverse it, you know, cancel it, cancel the invoice, cancel the payment and send you the money back. It can be something as banal and as easy as ordering a train ticket, that can happen. Or what happens is also that they can give you credit memo, basically, they say, ok, we already paid for it. It costed 200 euros, but, you know, we kind of want you to stay with us. And instead of giving you our money back, which we probably already spent elsewhere or haven't even processed yet, here's a credit memo, which means that with your next purchase, you can save 200 euros and you can just use it as a I don't know, as a coupon for something more.

 

24:16

Patrick:

So it's essentially saying, ok, we're just going to hold your cash because we know you're going to buy from us again. And you can just use that cash you have with us as credit.

 

24:26

Jakub:

Exactly. Exactly. In the accounts payable process, is actually the credit that you are getting from the other company. I would even say and I'm going to use a term that one of my clients would always use, it's basically free cash because once you get the credit memos from the companies that are supplying you that you already paid, that usually means that you are getting money from them, that you can just collect either from new purchases or actually as a form of real cash.

 

24:54

Patrick:

Hmm, ok, interesting. But again, what happens when I don't pay my invoice?

 

25:00

Jakub:

Well, what happens if you don't pay your invoice? If you don't pay your invoice, you're in big, big trouble, Patrick. Nobody cares about Patrick Bogner, and if you don't pay for your cell phone or for your rent, you're probably going to live on the street without a cell phone.

 

25:18

Patrick:

Yeah, that's not going to happen.

 

25:19

Jakub:

However, if you are a large corporation that is an important customer for someone who's supplying them with goods, if you don't pay your invoice on time, well, your vendor will probably not like you, but it's not like they're going to stop supplying you. But you are making their life incredibly difficult, which can result in multiple negative outcomes. First of all, you know, your vendor is not going to like you and you don't want to have a reputation of a poor customer who pays late or doesn't pay at all. Second of all, if it reaches a certain threshold, they will probably stop supplying you. And, you know, there's a competition. We are in a free market, but sometimes you are in a such a business where you cannot afford to lose your best vendor to stop supplying you things, or they just give you worse conditions. You know, they give you higher prices, they give you shorter payment terms, you just become a worse customer of theirs in a way that they just don't prioritize you anymore and a lot of things can unfold just by this simple fact.

 

26:40

Patrick:

So essentially what you're saying is that if we have a customer or a vendor let's say that gives us some sort of rates and these rates aren't really like fixed for every single one person or company they supply, it's kind of by company by company pays system depending on what you negotiate with this vendor? So this relationship that you have with them is incredibly important because it can affect the rates that you're getting from them, right? Because they could say, you know, we like you, we give you a 5% discount on everything. And if you become a worse client for them, they might not be inclined to give you that discount.

 

27:17

Jakub:

Exactly. And that's maybe something where there is a lot of friction between departments, especially when we are talking about the accounts payable process and about finance they always complain about purchasers, about buyers and vice versa. You know, finance is complaining about purchasing department that they are sending them crap really, the purchases are not maintained properly and the information that they get are poor and hence it results in their late payments. On the other hand, purchasers are then complaining to finance that, listen guys, you didn't pay for our invoice in time again. And because of that we are getting worse rates. And this is actually a very good point that you just brought up, and that's the interconnection between processes. And I think we had a guest on our podcast in one of the previous episode that I just cannot recall who exactly said that. But he said that he knows that organization is not working as a one unit the moment he asks them about whether they separate purchase to pay and accounts payable departments.

 

28:25

Patrick:

I think that was Erik-Jan van der Linden.

 

28:27

Jakub:

I think so too. So is the second quote from him already. And this is a very, very interesting and big thought, to be honest, because these departments should work as a one system because, you know, it doesn't end the moment you create a purchase order. It should actually ends the minute where you pay for the invoice. And if you are a large organization, these tasks are separated and then you create a lot of unnecessary friction by these constant conflicts about one department complaining about the other one. While they don't really have any, a lot of times they have very little platform on or very few platforms where they can actually cooperate in and, you know, insert process mining. And while you can't really merge the processes into one which are one of the reasons which Wil van der Aalst said in one of our previous episodes because you know, in purchasing you would be following a purchase order while in invoicing or accounts payable, you would be following an invoice. However, in process mining, you can kind of create this platform where you have a clear clarity on when the AP ends or where the P2P ends and starts the AP and even track the purchases, then later in the accounts payable process and just create this user interface where the teams can come together and work together as a team and, you know, work on resolving different items one at a time.

 

29:54

Patrick:

So essentially what you're saying is that we have two sides of the same coin, right? One on the purchasing side and one's on the finance side here on the accounts payable side. I'm glad you bring this up because listening to this, I'm sure a lot of you listening also have the same question. When we start talking about, you know, getting invoices, paying invoices, making sure we got the right orders and things like that, this is starting to sound like purchase to pay, right? A lot of these activities are very, very similar. So you already mentioned that we have a difference of case, right? In the purchase to pay we look at the purchase order item, right? That's the thing that we track and the on the other side, we have the invoice that we track. Now, why aren't these interchangeable? Can you talk a little bit about the main differences between the two and why they don't always cover the same topics?

 

30:45

Jakub:

Yeah. So if you follow us for a while, you already know that in the process mining, you really need something that's called a case ID, that's a unique identifier to, you know, to follow certain item within your process that's interchangeable and every activity can be somehow linked and tracked down to the single item. If we're talking about purchase to pay and accounts payable process, what happens is that in purchase to pay process, you're really interested into your purchases. That means, what do you buy? And you know, how is it delivered, how is it invoiced? What are the buying channels? What was the purchase requisition that actually requested you to buy something? Do you have a contract existing in place to actually create a purchase order out of and, you know, do you actually follow the prices that you have in contract? Did you consume the contract or and so on so forth. So many things that you can track there, however, once you get into accounting, you don't necessarily care about these things, although it really depends because it's still as you mentioned, it's still 2 sides of the same coin, but in accounting, you really care about a single invoice and single invoice item and how is it processed and how is it paid? And the reason why these things are different is that if you order, let's say, 50 screens and your vendor only has 20 of them in stock, the vendor will send you 20 screens, you know, you will have a goods delivery for 20 screens, you will get an invoice for 20 screens and the vendor will tell you, ok, the remaining 30 screens will be delivered next month and the next month you get another 30 screens, another delivery and another invoice. And this is the problem which suddenly happens is that for one purchase order you will have two different invoices and that's, you know, a normal state. But what can also happen is that in one invoice you would have two different purchases from, you know, with different history, different kind of buying channels, different vendors, because you can unite multiple items, multiple purchase order items into one invoice, then pay for it all together and you know, in process mining, this is kind of a problem because then you are getting this problem of tracking things at the same time, which have multiple relationships to one another. And you create this complexity that so far the process mining tools are not really able to handle in a way that would be consumable for the end users.

 

33:20

Patrick:

So what you're saying is or what I'm getting here is that if we look from the purchasing side, we could receive as you've just described from multiple invoices which means we would see in the purchasing process multiple receive invoice and clear invoice activities, which could happen after each other. And if you're looking for throughput time, you know, this would kind of be one of those outliers or weird variant of your process where you know, it doesn't follow the traditional purchase to pay process as in create PO, you know, send PO, receive goods, get invoice, pay invoice, done, right? So it would follow like a weird variant even though it would be completely legitimate, right? Since we're looking at the AP process this time, we would have individual cases for all these three invoices.

 

34:09

Jakub:

Yes, and as a process mining architect, you kind of have to ask yourself a question. Do I actually, let's say that you have one invoice, do I actually want to see that this invoice is actually consisting or, you know, covering hundred POs and at the same time, it's also covering hundred purchase requisitions because you just pay for it all at once, which is fine. But then if you inserted into our process mining tool or into your process explorer, you would see that when this one invoice would have at least 200 at one activities, which would be like, you know, 100 purchase requisitions created 100 purchase orders created and one invoice created. And does this information actually help you or would you rather see from the other way that you have here 100 purchase orders and always the same invoice created at the end? And this is something and I've seen this before where companies are speaking about end to end process, which I 100% understand why they want to do it, but it's not as simple as just joining things together which is definitely possible. But reading and interpreting the data after you have it all at 1 pool is just difficult.

 

35:27

Patrick:

Yeah and you also bring up a really good point because we do see this a lot where a lot of people have the opinion that we can just shove as many activities and as much data into these tools as we humanly can. And like you said, you really have to ask the question, is this information useful? If we do see all of a sudden this end to end approach, we would see so much random stuff where the big picture, this end to end process is completely mangled and honestly hard to look at and almost and I can guarantee you, impossible to interpret. So that's the shortcomings of looking at this one process. Essentially this AP and P2P is like one process. You buy stuff, you pay for stuff, right? But just shifting the focus from the purchasing side to the accounts payable side has significant differences in the way that the overall process performs, right?

36:30

Jakub:

Yeah, exactly. Exactly. What then happens is that you are, you know, if you introduce just one extra activity to your process, which is maybe frequent enough, you get just so many variance of your process. And it's not linear, it's really exponential because every activity creates a significant larger number of different variance in your process. And let's say, if conformance of your processes is your priority, the more activities you introduce, the bigger headache you will have to actually make it conformant.

 

37:07

Patrick:

Especially when you're we're talking about activities that are concurrent in nature and not sequential. Right. If they're sequential, A follows B every time. That's super simple. But if A can happen before B and B can happen before A and that across multiple activities, there's so many variances of how that could occur, especially when those activities have nothing to do with each other. So the less and less you have activities that are dependent on each other, the more messy that your process graph gets.

 

37:38

Jakub:

And that actually brings me back to what you were saying at the beginning. You know, you received the invoice, pay for it and you were done, well, if you have a process where you have, let's say, 30 or 40 activities and with various complexity, I've seen numbers that are pretty starking, like you are looking at it and you are wondering how is it possible that you can execute your process in so many ways. And I think I've seen a number of variance that was a lot over 50,000 for one process. So you have, let's say 5 million invoices or even less, 2 million invoices that are processed in 50,000 different ways.

 

38:17

Patrick:

Oh well that seems like a lot, but we know we have to keep in mind that even though there's 50,000 different ways to process an invoice, it doesn't mean that one of them is good and the rest are bad, right?

 

38:29

Jakub:

Yeah, exactly, exactly. And that's why the business process management so called BPM plays such a vital role as well because you really have to design. And the thing about all these variance and what does it actually mean for you is the fact that you create purchase orders for one invoice actually a problem or is it not? And then you feed your conformance checker with this data to actually be able to tell, ok, so it's actually not that bad because we whitelist this activity. It doesn't mean anything to us and we actually see that it has very little impact even though it raises our variant number, it doubles it or triples it or something.

 

39:12

Patrick:

Now you've already spoken a little bit about your favorite use case, right? That's the cash discount. Do you take it? Do you not take it? Do you optimize cash flow, things like that. But if I were in charge of accounts payable and I went to you and said, hey, I want to optimize my process, what would be like the first things you would look at in order to do that.

 

39:32

Jakub:

Well, I would ask the company, what is the biggest problem that they have.

 

39:36

Patrick:

Let's say we have all the problems. We have every single problem you could possibly conceive. Where do you see the biggest advantage in using process mining to fix some of these issues?

 

39:46

Jakub:

Patrick, you know me, when you say everything is priority, I say nothing is priority and you should probably do process mining and focus on actually exploring your processes first. But I understand where you're going with it and I would still probably look at this cash collection site. It's quite easy, you know, pinpointing when an invoice is due and when it's not due and then actually going into the roots and observing the behavior while you can just simply play with your process explorer because in usual implementations, what happens when you're implementing accounts payable is that you have these activities of clearing the invoice and also creating this artificial activity on when the invoice is due. And you can really, in a simple way, just play with the process flow. Is the clearing date before or after the due date? And in this way, you can simply say, ok, these are the light ones. These are the early ones are on time and have a use case. Or you can just say, I want to see invoices that are not paid or that are not paid whatsoever at all. And again, create a very simple use case of your open invoices and then you can just build up on that. So that's an easy way, making sure that you pay in time, making sure that you collect your cash discounts because cash discount is calculated very similarly to your standard payment. And if you build a process mining data model in accounts payable, these are usually the first things that you could observe without really much knowledge or a real effort.

 

41:24

Patrick:

That seems like a perfect use case because for one specific thing that I want to mention, if we have a list of all our invoices, we see all the open ones, we see all the closed ones, and we can see the ones that are still eligible for cash discount. And with this, like up to date view, sometimes real time view, we can alert you know, the responsible people, hey, there's an invoice here where we could get a fat cash discount, right? But there's still a payment block on this. So this is probably priority number one that, you know, we should look into, remove the payment block, pay the invoice so we can collect on this fat cash discount because we're set to lose a lot here. Isn't that some sort of use case that we do?

 

42:09

Jakub:

It is. It is 100% because you can then create this notification or alerting systems on top of this. But I think a lot of people, a lot of companies would argue that you don't really need process mining capabilities to do that. That's why I'm saying like it's a very easy use case to build once you have the data in but might not necessarily be the most powerful one or the one that leverages the process mining technology the best. What I would say actual averages it the best are the standard things, the standard approaches that you use when you're analyzing your processes. And that's actually throughput times. I talked about the approvals, approval processes and the ingestions of the invoices. This is actually where basically no company that I ever worked with had any clarity on. They just had some invoice processing system and that was it. They didn't know what was happening. They had no clue about what invoices are stuck, how they're processed. And I give you one example, I implemented that with one of the companies and then they were actually chasing these exceptions, these errors that are coming from the system. And there was one that they noticed that kept repeating over and over and over again. It was something like change bank account or change a payment term or something. And they said, well, you know, you once you are in process mining, you select all the cases that go through this activity and they noticed that the root cause was or they actually narrowed it down to and I don't know whether it was a vendor or a document, they but there narrowed it down pretty significantly and what they found out is that they were actually using this template in the system and they had a typo in a template and whenever they posted an invoice, you know, every time they had to change, every time the person had to log in into the system, change one number to the one that is actually used and save it and exit the system. If this takes you 2 to 3 minutes a day, you probably don't even complain because you don't mind that much. But if you then see the scale at which it's actually operated, then how many people have to do the same thing over and over again, you suddenly realize, by fixing this template, which is a five minute work, I have saved one FTE, which is, you know, full time employee for a year just because this little change.

 

44:31

Patrick:

Oh, wow. So it's really just the smallest things that, you know, the context of process mining, because no one ever says, hey, let's review all our templates in our system. So it's really getting all the steps, all the manual steps that are involved here. We could theoretically with process mining, help narrow down to figure out what the root causes of these issues are. And that's really interesting. So did they end up fixing the template? Do you still see the error?

 

45:00

Jakub:

Yes, yes. They ended up fixing it. And they do have a significant saving in human power in this one. And it also saves a lot of I guess curse words and so on. This is the point, you mine the logs, all your systems, what is happening and especially what shouldn't be happening. You can either then set up some alerts or actually I think the first thing that you should do as a process analyst is actually go into these activities and find out why they are happening. Why do you keep having this issue, this error, be it approval problem? You know, I've also seen use cases where you have this multi-level approval when one person approves the invoice and then it's actually just pushed to another person to approve it again for various reasons. Maybe there are some compliance problems or maybe it's because of the invoice value but it just increases the complexity significantly. And if you have three or four people in such a chain and you know you have one on a vacation, that is responsible for that, you will create these very weird chains that seem to take forever. And by just measuring this you can say, well, maybe these invoices that are worth 5 euros don't need approval in the first place.

 

46:23

Patrick:

Yeah, that might be a bad idea.

 

46:25

Jakub:

Exactly. And you can create this easy change, this easy transition in a way that, you know, in order for our processes to run more efficiently, let's just forget approvals until 5 or 10 euros because it's just not worth the time of the people to work on that.

 

46:42

Patrick:

That's so interesting. So we could really see the employee cost and the manual work that's involved in all these steps. And then essentially we can calculate per invoice how much it took to process it. And with that, we can say, ok, well, maybe we can cut some of these steps out if the value of the invoice actually doesn't even come close to the employee cost that it would take to process this.

 

47:06

Jakub:

Right, exactly. In AP process, almost every activity that you do outside of the standard ones are usually manual and there are teams that consist of tens or, you know, dozens of employees, dozens of workers that work only on AP process that are basically putting fires away just to make sure that their company is solvent and pays for the invoices at some point.

 

47:36

Patrick:

That's really interesting. If we think about the AP process as a whole and I know we just mentioned, hey, we just managed to fix a template somewhere, but that's not the one thing. There's so many different things that you could look at in the AP process that together accumulated all these problems can lead to real gigantic inefficiencies. How do you best set up a company to go about tackling these, like one by one?

 

48:10

Jakub:

And that's a million dollar question, Patrick. And I don't think there is an easy way out of this because again, there will be a lot of initiatives running in every organization to improve this and that part of the process. You know, new systems being implemented, new measures being taken out so that it runs efficiently. So there's really no golden or as it called silver bullet to just save it all. I guess the most important thing is just to establish a strategic goal, strategic indicator for you to say whether you're doing a good job or not. And this can be either, you know, that you pay everything on time and then you just proceed or go from there. You have this goal in mind and everything that you do outside of that, be it, you know, the conformance, be it the automation rate, is revolving around that. Or you actually say that, you know, on time payment is not such a big problem for you and you either focus on manual touches so that you don't want your invoices to end up in this exceptions where a person has to log in and change something and then you exactly go for these things. You go into your process, understand what you are actually visualizing, what you're showing, and really narrow it down to the problems that are happening and shouldn't be happening. And you might be actually just you might be surprised that it's actually the problem that is happening over and over again leads you to incorrect master data or just some discrepancies between one source of master data and the other. And those are very often easy changes, easy fixes, but not necessarily. You can also find out that all your set up or earlier flow is just faulty and you will have to redesign it altogether.

 

49:50

Patrick:

So you can essentially pinpoint or set specific goals that you have in mind. For example, we want to pay 99% of our invoices on time, right? And make these goals for all the different approaches and use cases that we have these KPIs. And we can then see whenever something goes completely awry. Because like you said, there's essentially just teams out there, like setting out fires, you know, putting out fires. So what we're doing here is essentially benchmarking how good we are at containing these fires to and I would call an acceptable level.

 

50:23

Jakub:

Exactly. And that's what it is about. And process mining as a tool can help you pinpoint the pain areas and you know, drill down into the root causes. So look under the hood, understand what is happening, where is it happening? And then it's up to you and your team to kind of find out the actual reason and why is that happening? Because very often it's really something simple, something I want to say dumb even.

 

50:51

Patrick:

Fixing a template, something as stupid as that.

 

50:53

Jakub:

Like fixing a template, exactly. And so before you, you know, before you go about let's automate everything, let's put these problems away, you should really X-ray your process for these type of exceptions, these type of problems and understand why they are happening and whether they can be prevented in the first place. Because, you know, what you ultimately do is that you take your subset of your invoices that are going through this exception. What you do then is that you look. Is there some dimension, be it the vendor, be it the document type, be it some amount where this is happening the most. So you kind of narrow down the problem to a certain area and then you can actually go into single documents and like find out in the system what happened. Did the vendor deliver the goods too late? If so, why is that the case? Is this happening over and over again? Is it the repeated pattern? If so, what can we do to actually prevent it or to improve it? And this is exactly the mindset that you should bring on the table working on accounts payable, but actually on any other process as well that you accept the fact that it takes some analytical effort from your side, that it's not just given that you will see all the problems once you feed your process or for your data model with the data and just accept that there is still a lot of work to be done.

 

52:14

Patrick:

I keep going back to this template because I think it's a really good example. And also, you wrote in the notes saying that process mining won't just automate all the jobs away specifically because, you know, if you see this error popping up that there's something there's a mismatch, you know, the automation responses well, you know, let's just automate so that inputs the right stuff. Whereas if you just look a little bit closer and you say, we could just fix a template, you know, and then, you know, then we don't have to automate anything, you know? So it's like really thinking about the proper solution to these inherent fundamental problems inside this process and not just to put Band-Aids on it with automating the mistakes away.

 

52:57

Jakub:

They would be happy hearing this. You just keep repeating this word over and over again. But you're absolutely right. Understand your processes first before thinking about automating issues away and taking the time and effort to actually really analyze it and not just say ok, we have this problem. Let's get rid of it by setting up automation or some action flow or whatnot or RPA.

 

53:26

Patrick:

Well Jakub, I feel like I have learned a lot from this episode. Dear listeners, I hope that if you're still with us at this point, you have too. Any other final thoughts on the AP process from your side, Jakub?

 

53:41

Jakub:

Well, my final thought is that if you asked me a year ago or two years ago if I was able to speak so long about accounts payable process, I would probably laugh at you, but here I am speaking.

 

53:51

Patrick:

That's why we didn't do this episode two years ago. 

 

53:54

Jakub:

Speaking for almost an hour about accounts payable and yeah, it's a super interesting process. There are a lot of different things and focus areas that you can really go into, be it at the invoice ingestion, be it at the workflow approvals, which can get very complex and complicated, not to analyze and read, but also to recreate in process mining because very few people actually understand them usually. All the way to, you know, the invoice postings and then how do you pay for it. And I didn't even go into the topic of actually payments and payment trends because there's one thing is the cleared the invoice in the accounting, but the other thing is to actually pay it. And there are some other procedures and some other parts of your modules where somebody is actually triggering a program in SAP or in some other system which then triggers some payments from your bank. And then you have another set of problems and another set of use cases that you could really focus on.

 

54:55

Patrick:

So it sounds to me the AP process and I mean, we've seen this happen as well with a lot of clients. It's a very popular thing to implement because you're very, very close to changing your behavior that directly affects your cash and how good you are in your savings. It's a very, very good use case to get immediate results because the change in behavior that you do in the AP will have direct results fairly quickly, depending, of course, on the use case. But, you know, you get what I mean.

 

55:26

Jakub:

Exactly, because if you think about it, if you work in processes such as supply chain or something else, it's not always, you don't have it as strongly in your hands as your own accounts payable. And that's why it's probably one of the use cases that a lot of companies start with. It's fairly standardized, fairly easy to implement and you can get some fruit out of it pretty soon. And I can tell you that sometimes it's very juicy and very sweet and I didn't even cover the duplicate payment checker, that I think we covered also in one of the previous episodes when we were discussing the personal success stories, and that's a whole another topic and that's actually checking for compliance, you know, on a continuous basis.

 

56:11

Patrick:

Yeah, that's a topic we should cover in another episode of the Mining Your Business Podcast.

 

56:17

Jakub:

Cool. Patrick, do you have any further questions about accounts payable?

 

56:21

Patrick:

I have three, three bajillion other questions, but we can do that after the call.

 

56:25

Jakub:

Yeah, we can do that afterwards. Cool, cool. Then I guess that will be it from our episode about what is accounts payable. And I hope that now you know everything you need to actually start with the implementation. You know, we are here always to help. So if you have any questions or if you're looking for a skilled partner that will help you with the implementation. Reach out, if not, well, we are still happy that you listened all the way through and that you are here with us and we will be looking forward to hear from you and talk to you in our next release of Mining Your Business Podcast. Patrick, thank you very much. Dear listeners, thank you for listening.

 

57:01

Patrick:

Thank you, Jakub.

 

57:04

Jakub:

If you like us leave us in review on any platform that you usually listen to podcasts and bye bye. Enjoy your day.

 

57:10

Patrick:

Adios.