Automation of Contractor Payments 101: A Step-by-Step Guide The question is not 'if' but 'when' to automate contractor payments to drive efficiencies and scale European businesses faster.

Managing contractor payments efficiently is crucial for maintaining a healthy cash flow and ensuring payments are made on time. Traditional methods, such as manual data entry and paper bills, are prone to errors and delays, causing operational inefficiencies. Automating contractor payments not only streamlines the process but also reduces errors and improves overall operational efficiency.

According to the Institute of Finance and Management, automating accounts payable can reduce processing costs by up to 80%. Research from Ardent Partners shows that automation can cut the invoice processing cycle from 20 days to just five, which is vital for ensuring timely payments. A customer survey conducted by Transformify, a vendor management system and contractor payments automation provider (for which I am CEO), reveals savings of 60% on average.

The market was valued at $5.38 billion in 2023 and is expected to reach $17.05 billion by 2032, growing at a CAGR of 13.9% from 2024 to 2032.

The European market, as a stand-alone, was valued at $910 million in 2023 and is forecast to reach $2.04 billion by 2031, growing at a 10.6% CAGR.

If saving time and money by automating contractor payments is something you're considering, here's a quick rundown of what we'll cover in this article:

• Understanding the traditional process
• What is contractor payment automation?
• The pain points of manual contractor payments
• Types of automated payment services
• Why automate contractor payments?
• How automated payments work
• Common misconceptions
• How to set up automated payments
• Choosing an automated payment provider
• The future of automated payments

1. Understanding the traditional process

Before diving into automation, it's essential to understand how contractor payments are typically handled manually:

• Invoice receipt: Contractors submit paper invoices or send invoices via email.
• Data entry: Invoice details are manually entered into accounting systems.
• Approval workflow: Multiple layers of approval are needed.
• Check generation: Payments are made by cutting and mailing checks.
• Reconciliation: Payment records are matched with bank statements.

This manual process is time-consuming, prone to errors, and inefficient.

2. What is contractor payment automation?

Automation of contractor payments refers to using software to streamline processes traditionally managed manually. This includes invoice processing, approval workflows, payment execution, and recording transactions.

By automating these tasks, businesses can save costs, improve cash flow management, and reduce manual data entry errors.

3. The pain points of manual contractor payments

Manual payment systems come with several challenges:

• Time-consuming and labor-intensive processes
• High potential for human error
• Delayed payments leading to strained vendor relationships
• Inefficient cash flow management
• Increased risk of fraud and security breaches

4. Types of automated payment services

Automated payment services come in various forms, each tailored to specific needs. Some of the most common types include:

• Direct debit: Automatically withdraw funds from clients' accounts.
• Recurring credit card payments: Automatically charge a customer's credit card for ongoing services.
• Electronic funds transfer (EFT): Digital financial transactions, like direct debits and payroll distributions.
• Automated clearing house (ACH) transfers: Used for payroll direct deposits and bill payments.
• Mobile payments: Consumers pay via smartphones using services like Google Pay or Apple Pay.
• Digital wallets: Store payment information and make transactions through PayPal, Apple Pay, or Google Wallet.
• Cryptocurrency payments: Accept Bitcoin or other cryptocurrencies as payment.
• Payment gateways: E-commerce services that authorize and process credit card payments.

5. Why automate contractor payments?

Here are key reasons to automate contractor payments:

• Efficiency and speed: Automation speeds up the entire payment process, reducing manual tasks and increasing staff productivity.
• Cost savings: Automation reduces the need for manual data entry, cutting processing costs.
• Reduced errors: Automation minimizes the risks of human error, ensuring accurate transactions.
• Improved cash flow management: Automated systems allow for real-time payment tracking, helping businesses maintain healthy cash flow.
• Enhanced security: Automation systems offer improved security and compliance features to safeguard sensitive financial information.

6. How automated payments work

Here's a step-by-step breakdown of how contractor payment automation works:

• Electronic invoicing: Contractors submit invoices electronically.
• Approval workflow: The system routes the invoice for approval based on predefined workflows.
• Payment scheduling: Once approved, the system schedules payments based on the company's policies.
• Payment execution: Payments are transferred automatically through ACH, wire transfers, or digital platforms.
• Integration with accounting systems: All transactions are recorded in real time, updating the accounts payable ledger.
• Compliance and security: Automated systems ensure compliance with standards like GDPR or PCI-DSS, encrypting sensitive payment information.
• Reporting and analytics: The system offers real-time insights into payment status and financial metrics.
• Notification and Confirmation: Contractors receive automated payment notifications, providing transparency and easy record-keeping.

7. Common misconceptions about automated payments

Here are common misconceptions about automated payments and the reality behind them:

• Misconception 1: Automated payments are less secure than manual transactions.
  Reality: Automated systems offer enhanced security features like encryption and fraud monitoring.
• Misconception 2: Automation is too expensive.
  Reality: Initial costs may be high, but long-term savings on labor and errors outweigh the investment. Some contractor management systems offer Open API which streamlines integration and cuts costs.
• Misconception 3: Automation is difficult to set up.
  Reality: Most platforms are user-friendly and offer step-by-step guidance.
• Misconception 4: Automated payments only work for fixed payments.
  Reality: Many systems handle variable payments, such as utility bills and milestone freelancer payments.
• Misconception 5: Automation is for large enterprises only.
  Reality: Cloud-based automation solutions are accessible to small businesses and contractors.

8. How to set up automated payments

Setting up automated payments typically involves:

Choosing a payment provider: Select a system that fits your business needs.
Integrating with accounting software: Ensure seamless data flow between systems.
Configuring approval workflows: Set up approval processes based on your internal policies.
Scheduling payments: Define when and how payments will be made.
Testing the system: Run a test to ensure everything is functioning correctly.

9. Choosing an automated contractor payments provider

When selecting a contractor payments provider, consider:

• Compatibility: Ensure integration with your current accounting software.
• Security and compliance: Look for robust security features and regulatory compliance.
• Cost: Evaluate setup fees, transaction fees, and ongoing costs.
• Scalability: Choose a system that can grow with your business.
• User experience: Opt for a user-friendly platform with real-time reporting.
• Vendor management system (VMS): Opt for a platform that handles both vendors and independent contractors and offers contractor self-service portals.

10. The future of automated payments

Automation in contractor payments is the future of financial management. As businesses strive for greater efficiency and reduced costs, automation solutions will continue to evolve, incorporating advanced features like artificial intelligence and machine learning to further optimize the payment process.