Switching to automatic recurring payments can save your business more than 80% on processing costs.
While it’s easy to see expenses flow out the door in any business, you could be paying for invisible payment costs behind the scenes. Tasks like opening envelopes, entering invoices, getting approvals, printing and signing checks, and herding the operation through the office from end to end likely costs a lot more than you realize. Keep reading to find out how much automating might add to your bottom line.
What are recurring payments?
Recurring payments are automated payments for purchases you expect to make again and again. If you get a bill in the mail and write a check or enter a manual payment online, that is an example of a one-time payment.
At home, you might have your cell phone or TV subscription setup for automatic recurring payments with your credit card or bank account. Businesses can take advantage of the exact same thing, but with scale, this type of automation can save a lot of money and add to the bottom line.
Modern business systems allow automating payments by purchase order, vendor, or other criteria. This saves your staff precious hours opening envelopes, reviewing paper invoices, and writing paper checks. Instead, with better tracking and faster processing, the recurring charges can happen on their own based on the rules and criteria you set. That’s a huge win for back-office efficiency.
Businesses that can benefit from recurring payments
Nearly any kind of business can find savings and improve operations by automating payments, but a few types of businesses offer a very natural fit.
Subscription and membership-based business models do very well with recurring payments as both the customer and provider know exactly how much is going to be billed on a very predictable schedule. For instance, companies like Netflix and Spotify use monthly recurring charges to help retain customers and project expected monthly revenue. It also works well with utility, tax, and government payments you know you’re going to have every month, quarter, or year.
Service businesses like cleaning, teaching, tutoring, childcare, and fitness trainers should all utilize automatic recurring billing for any willing client.
Financial services businesses that send funds for investment and other financial transactions are also prime for automation.
How to Set Up Recurring Payments and Invoices
You may be very familiar with the steps required to pay a paper invoice. If you are new to digital invoicing, here’s a quick primer on how digital, automated invoicing and payments work.
- Create a purchase order in your bookkeeping system that includes a maximum or expected payment amount. This is sent automatically to your vendor on creation or can be sent later.
- Receive an invoice from the vendor electronically at billing-dedicated inbox. Payment software analyzes the emailed invoice, matches it to the vendor and purchase order in your bookkeeping system, and queues for approval or automatic payment. If the invoice doesn’t match a purchase order, you get an email for manual approval.
- Once automatically or manually approved, the payment system will create a payable to be sent based on your instructions. That could mean an early payment to get a discount or payment on the due date to preserve cash. The vendor can log in at any time to update their bank account information so you never have to worry about where the payment is sent.
- Invoice is marked paid and payment is automatically recorded in your bookkeeping and accounting systems.
This takes just a few minutes of work. Most systems allow you to create approval rules that will decide if payments are sent automatically or require manual review. You can even designate approval levels for different employees that require a manager’s review based on the dollar amount, vendor, or other criteria.
What Are the Benefits of Automating Recurring Transactions or Payments?
Paper invoicing is popular because it’s easy and any business can do it. But like many other parts of the office environment that have gone digital over the last few decades, it’s time for invoices to follow suit.
According to the 2017 State of ePayables report by Ardent Partners (PDF), the average paper invoice costs $22 to process manually. Once you factor in the time you or your team has to spend on each invoice, postage is the least of your concern.
If you can upgrade to electronic processing, the cost savings are immense. The same report found that best-in-class purchasing and accounts payable processes lower the cost to just $2.74 per invoice. That’s an 87.5% savings on average!
Smaller businesses may think that it isn’t worth the hassle or cost to upgrade their invoicing process, but that is usually far from the truth. If your business processes 10 invoices per month and can go from a cost of $22 to $2.74 per invoice, you’ll save about $2,300 per year automating. If you process 50 invoices per month, you’ll save $11,500 per year.
In addition to the cost savings, recurring charges and payments make cash flow more predictable, which can be a huge benefit with some business models. Unlike manual payments that can hit your bank account at any time, automatic subscription payments are easily budgeted and forecasted.
How Much Does it Cost to Automate Recurring Payments?
Accounting and bookkeeping upgrades are not free. As a business owner or manager, you have to make the call on a wide range of costs and investments. Never make this kind of decision based on your gut instincts alone. Putting together some estimated numbers will tell you the right choice. Here’s a quick example of how it could work.
Let’s say you have a bookkeeper that charges you $25 per hour. Each invoice that comes by mail takes about 10 minutes to verify and enter. Printing and mailing payments takes another five minutes each. That makes your cost per invoice $6.25 for bookkeeping plus another 60 cents for postage, envelopes, and supplies. That is a total cost of $6.85 per payment, not including any time you or other team members put in.
After shopping around, you find a payment system that will automatically match invoices to approved purchase orders and send electronic payments to vendors based on your contract terms. This costs $70 per month.
If you send just five invoices each month, you’re probably better off sticking with paper. But once you exceed ten invoices per month, you are better off automating. Any additional invoices beyond the break-even point translate to more money that you get to keep!
Recurring payment providers and solutions
There are a wide variety of recurring payment software providers that include dedicated payment systems and accounting programs that support payment features. Leaders include Stripe, PayPal, Square, QuickBooks Payments, and Bill.com.
Your bank likely offers recurring automatic payments as well through online bill pay. Don’t overlook this easy, free option that works with any biller or lender. Even if the biller isn’t a listed company, you can add any business or individual and the bank will send a paper check.
Both accounts payable and accounts receivable processes are easily automated using modern banking, accounting, and other technologies. Whether you are the only employee or work in a company with dozens or more workers, there’s almost always an opportunity for savings through process improvements.
Automated payments are easy to activate and manage, and it’s clear to see how much you can save. That translates to bigger profits, more cash to invest, and ultimately a bigger paycheck. That is a big business accomplishment no matter how you look at it.
This article was first published on September 20, 2019. It was updated on
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