ACCOUNTS PAYABLE BEST PRACTICES - IQ · PDF file–For The Adequacy Of A Company’s...

February 2, 2012

ACCOUNTS PAYABLE BEST PRACTICES

IMPORTANCE OF A/P BEST PRACTICES

– After payroll, the largest disbursement of a firm’s funds typically comes from Accounts Payable (A/P)

– Accounts Payable is often the largest single cost in the accounting function

– The typical Accounts Payable process is notorious for its manual, inefficient and error-prone nature, which leads to

• Errors: The average Accounts Payable department has a 1.6% error rate*

• High Cost: The average cost to process an invoice is $16.54*

• Lack of Controls: Clerical staff have broad discretion on how to apply management rules around PO/receipt/invoice matching and payment and invoice authorization rules are not always followed

• Poor Visibility: Financial managers accrue outstanding payables monthly; many of the individual transactions are paper invoices sitting in manager inboxes waiting for approval that financial managers have not seen

• Poor Documentation: The paper-intensity of the process leads to difficulty in locating manually-filed invoice and check documents

• Management Intensity: All of the above contribute to an excessive amount of management time, attention and resources to a non value-added function

2 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.

IMPORTANCE OF A/P BEST PRACTICES

– Best practice Accounts Payable costs significantly less than the typical process

• The average cost to process an invoice is $16.54*

• A/P can be processed as much as 50 times more efficiently than others (32¢)

• Continuous improvement continually reduces cost while improving quality and service levels

– Sarbanes-Oxley Section 404

• Requires Management To Acknowledge Its Responsibility

– For The Adequacy Of A Company’s Internal Control Structure And Procedures For Financial Reporting

– To Assess The Effectiveness Of A Company’s Internal Control Over Financial Reporting, With The Company’s Independent Auditors Being Required To Attest To Management’s Internal Control Report

• Annual reports must contain management’s report on internal controls and the auditor’s attestation of management’s assessment

• Management must evaluate on a quarterly basis material changes in the company’s internal controls

• Quarterly disclosure requirements include effectiveness of controls and procedures and changes in internal controls


BEST PRACTICES: QUALITY

Issue / Description Best Practice

Data Entry Errors

Data Entry Errors Can Occur on Any Invoice Field

and Account for Most of the Errors in Accounts

Payable

Data Entry Errors Average 1.6%, a Very Large

Amount Not Readily Measurable in Most

Accounting Departments

Receipt of Electronic Invoices (EDI, XML, etc.)

Eliminates Data Entry Entirely

Matching to Purchase Orders in an Automated

Accounting System Eliminates the Need for

Much Data Entry

Data Entry by One Individual and Quality Review

by a Different Individual Eliminates Almost All

Data Entry Errors

Double Entry of Invoices with Field by Field

Comparison Eliminates Almost All Data Entry

Errors

Matching Errors

Matching of Invoices to Purchase Orders and

Receipts is Complex and Prone to Errors

Business Rules for Matching are Frequently Not

Documented or Followed by Clerical Staff

Automated Matching in Accounting System

(Typically Found in High-End ERP Systems Only)

Well-Documented Business Rules Around

Matching (What Constitutes a Match, Field by

Field) and Action to Take if There is an Exception

Logs of Exceptions by Exception Type, Sent to

Purchasing Department for Vendor Follow-Up


BEST PRACTICES: QUALITY


Duplicate or Incorrect Invoices

Vendors Frequently Generate Duplicate

Invoices When an Invoice Has Not Been

Paid in a Timely Manner

Accounting System (Or Individual if

Manual Process) Should Check for

Duplicate Invoices by Invoice Number

Accounting Should Check that an Invoice

is For The Correct Company and Business

Unit

Duplicate or Incorrect Invoices Should be

Logged So That the Source of Problems

Can Be Found

Improper Account Coding

Account Coding is Judgmental and Rules

for Coding are Not Well Documented or

Otherwise Established in Most Companies;

This May Lead to Inconsistent Coding

Across Departments or Manipulation for

Budgetary or Other Purposes

Well Documented Business Rules Around

Coding

Review of Coding by Managers to Ensure

Business Rules are Followed

Greater Use of Purchase Orders Eliminates

Need for Account Coding by Managers


BEST PRACTICES: CONTROLS


“Disappearing” Invoices and Unapproved

Invoices

Invoices that Come Directly from the

Vendor to a Business Unit Manager or

Location Other than Accounting Tend to

Get Delayed (Sometimes on Purpose) or

Lost Due to the Many Opportunities for

Paper to Get Lost

Unapproved Invoices (Not Yet Received by

Accounting) are Not Known to Accounting

and Therefore Company Liabilities are Not

Truly Known or Reflected on the Balance

Sheet

All Invoices Should Come in to a Central

Location and Scanned or, at a Minimum,

Logged Before Being Sent for Approval

Logging of Invoices Provides the CFO With

a True Picture of the Liabilities of the

Company

Invoice Images Should be Routed

Electronically for Approval to Track

Invoices at Each Step of the Process and

Eliminate Managers “Sitting” on Invoices

in Their InBox




Lack Of Well-Defined and Documented

PO-Receipt-Invoice Matching Business Rules

In Most Companies, Matching Business Rules are

Not Documented in Writing or in Complete Detail

and Accounting Systems are Incapable of

Matching Automatically Using All Necessary

Rules, Forcing Accounts Payable Staff to Apply

Rules Manually

Document All Matching Business Rules in

Complete Detail

Automate Application of Business Rules Utilizing

a Combination of Accounting Systems, Third-

Party and Proprietary Software Solutions

Excessive Use of PO-Receipt-Invoice Matching

Tolerances

Many Accounts Payable Departments Use

Matching Tolerances to Reduce the Effort to

Resolve Unmatched Items, But Are Often Set Too

Loosely (to Reduce Effort), Allowing Dollars to be

Lost

Low to No Use of Tolerances

Analysis of Effort in Resolving Unmatched Items

vs. Dollars Lost to Determine the Proper

Tolerance Levels




Broad Discretion of Application of PO-Receipt-

Invoice Matching and Approval Level Business

Rules by Accounts Payable Staff

Accounts Payable Staff Apply Rules Manually

and Generally Have Broad Discretion on How to

Apply Business Rules; Few Companies Audit

Rules Compliance

Document All Matching Business Rules in

Complete Detail

Train Management and Accounts Payable Staff

on Business Rules

Audit Compliance of Business Rules

Return Invoices without Account Coding or

Improper Coding to Approver/Buyer for Correct

Coding

Automate Application of Business Rules Utilizing

a Combination of Accounting Systems, Third-

Party and Proprietary Software Solutions

Approval of New Vendors or Update of Key Vendor

Information

Careful Controls Should be Placed On Who Can

Approve the Establishment or Revision of

Vendors to Prevent Fraud

Purchasing Department Should Approve All New

Vendors and Changes to Existing Vendor Records


BEST PRACTICES: VISIBILITY


Financial Management Does Not Know the True

Picture of Outstanding Company Liabilities

Many Invoices are in Manager’s InBoxes or

Remote Locations at Any Point in Time;

Financial Management Has No Way of Knowing

the Dollar Value and Due Dates of These

Invoices

Centralize Receipt of Invoices at a Central

Location and Route Electronically for Approval

Using Workflow Technology

Develop a Report at the End of the Month for

Financial Management to Accrue All

Outstanding Liabilities Accurately

Managers Keep Invoices in Their InBoxes Too

Long or Misplace Them

Managers Inadvertently or Deliberately (to Avoid

Costs Hitting Their Cost Center) Do Not Approve

or Reject Invoices on a Timely Basis or Lose

Them; Financial Management Has No Way of

Knowing the Dollar Value and Due Dates of

These Invoices

This Also Leads to Poor Credit From Vendors,

Late Charges or Inability To Take Advantage of

Discounts


Location and Route Electronically for Approval

Using Workflow Technology

Set Business Rules for Managers to Approve or

Reject All Invoices within 2 days of Receipt or

Less


BEST PRACTICES: DOCUMENTATION


Difficult to Find Invoices and Checks After

Processing and Document Storage is

Expensive

Paper Documents are Difficult to Locate

After Accounts Payable Processing Due to

Filing Errors and Are Expensive to Store and

Locate

Many Companies Store the Invoice, a Copy

of the Check and Purchase Order Together

for Ease of Retrieval, But This is Extremely

Expensive

Utilization of Imaging Systems Integrated

into Accounting System

Elimination of Paper Files


BEST PRACTICES: MANAGEMENT INTENSITY


Accounts Payable is Management

Intensive, Complex and Voluminous

Accounts Payable is a Transaction

Processing Function, Not Really an

Accounting Function

This Means that Accounts Payable

Requires More Management Time and

Employee Supervision (“Fire Fighting”),

More Technology and Capital Than Other

Financial Processes

Management Techniques for Accounts

Payable Also Differ Markedly From

Accounting Functions and Requires More

Management Training

Outsourcing of Accounts Payable

Processes



Accounts Payable Process Efficiency and Cost

Some Firms Employ Best Practices That Reduce

Accounts Payable Processing Costs To As Low As

$0.32 Per Invoice

Detailed Matching and Approval Business Rules

No Invoice Accepted Without A Purchase Order

No Invoice Accepted On Paper; All Invoices Must

Be Electronic

Scan All Remaining Paper Invoices

Evaluated Receipts Settlement (Disbursement

Made Upon Receipt Of Goods Based On PO

Pricing; Invoices Irrelevant)

Use Of Procurement Cards For Low Dollar

Purchases

Utilization of Workflow to Electronically Route

Invoices for Approval

Web-Based Invoice Processing and Payment

Status for Vendor Self-Service

Call Center to Handle Vendor Phone Calls

Short Pay Invoices as Appropriate But Itemize

Deductions to Prevent Confusion by Vendors

Take Deductions Wherever Possible

BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT



Continuous Improvement

Gather Pertinent Data and Analyze It to

Continually Improve the Accounts Payable

Process

Revise the Accounts Payable Process to

Take Advantage of New Techniques or to

Correct the Cause of Problems

Investigate and Implement New

Technologies to Further Enable the

Process

Implement Accounts Payable Reporting

System to Better Measure and Manage

the Process and Report on the Following

in Real-Time: Exceptions by Field, Type of

Exception, and Invoice; Status of Invoices

at Each Step of the Process; Cycle Times;

and Cost

Manage the Process Tightly, Paying Close

Attention to Metrics Gathered in the

Reporting System

Begin the Continuous Improvement

Process Again

BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT


BEST PRACTICES: SARBANES-OXLEY


Sarbanes-Oxley Compliance

Ensure Effective Internal Controls, Allow

Management to Ensure the Adequacy and

Assess the Effectiveness of Those Controls

and Procedures, and Allow the Auditors to

Attest to Management’s Internal Control

Report

Document All Invoice Matching and

Approval Business Rules in Complete

Detail

Utilize Well Documented Business Rules

Around Coding

Utilization of Workflow to Electronically

Route Invoices for Approval

Utilization of Imaging Systems Integrated

into Accounting System


Location

Develop a Report at the End of the Month

for Financial Management to Accrue All

Outstanding Liabilities Accurately

Automate Application of Business Rules

Utilizing a Combination of Accounting

Systems, Third-Party and Proprietary

Software Solutions


EXAMPLE OF ACCOUNTS PAYABLE BEST PRACTICES:

THE IQ BACKOFFICE PROCESS

A BEST PRACTICE SOLUTION

CUSTOMIZED FOR EACH CLIENT

Supplier Provides Good / Service

Supplier Sends Invoice

IQ Opens Mail and Scans Invoices

IQ Indexes & Matches Invoice

& Identifies Exceptions

IQ Performs 100% Audit

Client Manager(s) Approve Invoice & Resolve Exceptions

Online

IQ Vouchers Invoice in Client Accounting System

Client Approves Payments in Client Accounting System

IQ Prints and Mails Checks, Wires & ACH Payments

IQ Answers Supplier and Client Phone

Calls & Correspondence

Electronic Invoice

Shared Service Center Utilizing:

Industry Best Practices

SAS70 Controls

Complete Audit Trail for Each Invoice

Dedicated Client Teams

Real-Time Management Reporting for Complete Control

THE IQ SOLUTION

HAS THE ESSENTIAL

COMPONENTS OF A

WORLD-CLASS

ACCOUNTS PAYABLE

PROCESS:


CONTINUOUS IMPROVEMENT PROCESS

Process ( Re)Design

Application Of

Technology

Process Management

Reduced Cost Higher Quality

Faster Cycle Time Employee Efficiency

Customer Service

Process ( Re)Design

Application Of

Technology

Process Management

Reduced Cost Higher Quality

Faster Cycle Time Employee Efficiency

Customer Service

Accounts Payable Expertise

IQ Accounts Payable Process Virtuous Circle


WEB-BASED A/P REPORTING

• Web-Based Reporting & “Drill-Down” Provides Managers with Greater Access to Information and Control Over the Business Than They Ever Had:

– Customized reports on expenses

– “Drill-Down” to the transaction and associated source document image

– Reports generated real-time, reflecting changes in the business dynamically

– Cost effective – available to all managers, employees, associates, clients and vendors without per user fees

– Easy to use – Web-based requiring one to two hours of training


IQ BackOffice 2121 Rosecrans Ave., Suite 3350

El Segundo, CA 90245 www.iqbackoffice.com

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