+61 1300 378 836 (Australia) | +44 203 355 1237 (UK) +1 213 291 0523 (USA) | +63 2 817 4901 (Philippines) [email protected]| www.redmap.com Accounts Payable Best Practices Accounts Payable Best Practices Manually coding and approving invoices is inefficient and error prone. The irony is this adds additional unnecessary costs to the existing cost of the invoices. One of the most significant investments any business makes other than its human resources is typically its finance system. Unfortunately these manual processes often throttle this highly capable piece of technology. This document seeks to communicate best practices in the AP department and helps businesses to lay the path to automation. Eliminate the paper shuffling In the 2010 survey into electronic invoicing by Paystream, 60% of the respondents saw paper shuffling as the key challenge to efficiency in their business 1 . Paper in its purest form is an inefficient medium. It is easily lost, be that in the mail or in a stack of invoices on the manager’s desk. The start of this century saw major multi-national businesses implementing Electronic Data Interchange (EDI), which eliminates paper altogether. Basically the servers swap information with each other in a secure environment. However, it is expensive and cumbersome to implement for both the customer and supplier. To date this technology is largely out of reach for the medium business and due to the cost to the supplier for implementation will never be a solution that can be implemented in totality. With ROI in mind a far more cost effective and just as functional method would be to have invoices either emailed by the supplier to a central mailbox. Where suppliers insist on sending the paper invoice the best thing to do with that piece of paper is to scan it. Once the documents are in their digital form they may be read and routed through the business for electronic approval. There is no longer a need to walk between offices distributing invoices and, more importantly, chasing those same invoices for approval. Force process Let’s face it, most AP departments are run on the knowledge in the heads of the AP staff. In most cases there is great opportunity to establish structured procedures for the department to improve efficiency and reduce risk of lost knowledge when the staff member leaves. As obvious as some of the items below sound, you would be surprised how many AP departments have not implemented them. Use Purchase Order’s as much as possible The 2011 study into AP by the Institute of Finance and Management found that on average businesses use purchase orders for 51% of their invoices 2 . This means that at least 49% of all invoices need 1 1 Paystream Advisors, ‘Electronic Invoice Management – No more Recycling: Get Rid of Paper from the Source’, 2010 2 Institute of Finance and Management, ‘AP Department benchmarks and Analysis including special P-cards benchmarks and Analysis survey’, 2011
Manually coding and approving invoices is inefficient and error prone. The irony is this adds additional unnecessary costs to the existing cost of the invoices.
One of the most significant investments any business makes other than its human resources is typically its finance system. Unfortunately these manual processes often throttle this highly capable piece of technology. This document seeks to communicate best practices in the AP department and helps businesses to lay the path to automation.
Eliminate the paper shufflingIn the 2010 survey into electronic invoicing by Paystream, 60% of the respondents saw paper shuffling as the key challenge to efficiency in their business1. Paper in its purest form is an inefficient medium. It is easily lost, be that in the mail or in a stack of invoices on the manager’s desk.
The start of this century saw major multi-national businesses implementing Electronic Data Interchange (EDI), which eliminates paper altogether. Basically the servers swap information with each other in a secure environment. However, it is expensive and cumbersome to implement for both the customer and supplier. To date this technology is largely out of reach for the medium business and due to the cost to the supplier for implementation will never be a solution that can be implemented in totality.
With ROI in mind a far more cost effective and just as functional method would be to have invoices either emailed by the supplier to a central mailbox. Where suppliers insist on sending the paper invoice the best thing to do with that piece of paper is to scan it.
Once the documents are in their digital form they may be read and routed through the business for electronic approval. There is no longer a need to walk between offices distributing invoices and, more importantly, chasing those same invoices for approval.
Force processLet’s face it, most AP departments are run on the knowledge in the heads of the AP staff. In most cases there is great opportunity to establish structured procedures for the department to improve efficiency and reduce risk of lost knowledge when the staff member leaves. As obvious as some of the items below sound, you would be surprised how many AP departments have not implemented them.
Use Purchase Order’s as much as possibleThe 2011 study into AP by the Institute of Finance and Management found that on average businesses use purchase orders for 51% of their invoices2. This means that at least 49% of all invoices need
1
1 Paystream Advisors, ‘Electronic Invoice Management – No more Recycling: Get Rid of Paper from the Source’, 20102 Institute of Finance and Management, ‘AP Department benchmarks and Analysis including special P-cards benchmarks and Analysis survey’, 2011
someone to approve it as part of their processing. The ideal mix of PO/non-PO invoices depends on your business and its purchasing behavior so a ‘best practice’ is almost impossible to provide. Efficient AP departments strive to ensure POs are used as often as possible.
Businesses often site the difficulty of raising a PO as the prime reason for lower PO production. It is not financially feasible to issue a user license for the finance system to everyone, just so they can issue PO’s. Those license’s are expensive to purchase and require both technology and training maintenance.
Further staff cite the delays in having a PO raised as another reason not to use them. ‘I can’t wait 3 days for finance to issue a PO so I do without’, is not an uncommon sentiment in the employee base. There is a simple answer to this all.
Simply publish a form on a webserver, which can be accessed by any browser or even the smartphone, to allow the staff to complete the request for PO and submit it. There are many technology providers in the marketplace today that can offer integration with the finance system and armed with this data and an approval matrix PO requisite and approval can be completed in seconds.
Log on, complete the form and provided it is within your PO authorization limits have you PO back within seconds. The great news for the finance department is that the PO will also be in the finance system meaning surprise invoices at the end of the month and their drawn out approval will be a thing of the past.
Maintain your item ledgersThose businesses that warehouse or trade in some form of physical product need to maintain their item ID’s in the finance system with more care. It is preferable that the item ID’s in your system match exactly to the vendor list as this will lay the foundation for line item scanning in the future. Although not always possible it should be the goal.
Vendors will release a price list on a periodic basis. Don’t ignore that price list. Ensure that it is heavily scrutinized and the finance system is updated. Don’t recycle item ID’s! If the packaging on that product changed by 30mL and there is a new item ID, make sure you update it.
Some industries have as many as 7.4% of invoices with errors. Ensuring that your item lists match the vendor is an excellent measure to identify these errors.
Is your approvals process documented?The chances are it is not. Now in some smaller businesses this is not practical to do, especially if there are a limited number of approvers. However the larger the organization the greater the number of approvers and this creates opportunity for confusion. This is particularly true when bringing new staff to the AP department.
Formally documenting your approvals process will provide two benefits:
It will highlight inefficiencies. Ad-hoc developed workflow processes generally don’t have a grander strategy in place; they are created because there is urgency for a result. Why is the CFO being asked to approve purchases for technology products when there is a CTO? Chances are because the CTO position did not exist when the workflow was created.
It will clearly identify responsibility to new staff and the surrounding business.
Reduce ad-hoc invoice processingThe ultimate goal of forcing processes is to minimise ad-hoc processing. Any time an invoice requires ad-hoc processing the costs to process that invoice skyrocket. Increasing the ratio of PO:non-PO invoices, maintaining better item ID and vendor records and documenting the approvals process will all work towards a business that processes its invoices as efficiently as possible.
Vendor master file‘Where is that invoice from XYZ Corporation?’
‘I coded it to the XYZ Corporation vendor account. You can’t see it?’
‘Ahh OK, we don’t use that one anymore, these invoices need to be coded to *XYZ Corp 1.’
Sound familiar? Unfortunately this happens a lot more than it ever should. The same 2011 study by IOFM found that regardless of the size of the organisation, if there are more than 2,000 vendors in the vendor master file there are duplication problems3. Smaller organisations should have master files that in most cases should not exceed those of hundreds of vendors.
Not only does a smaller vendor master file give clarity to where the invoices should be coded, but it also minimises the opportunity for double payment of invoices.
For information on how Redmap can help businesses deal with their AP processing challenges please visit www.redmap.com.
Accounts Payable Best Practices3
3 Institute of Finance and Management, ‘AP Department benchmarks and Analysis including special P-cards benchmarks and Analysis survey’, 2011
