Publication: gtnews.com
Accounts payable (A/P) is an area where treasury needs to increase efficiency, contain costs and focus on compliance. How can you best approach these multiple goals in a way that adds value?
With the global economic problems of last year showing no sign of dissipating any time soon, corporates are looking to their treasury departments to contain costs while at the same time increase productivity and comply with a raft of regulatory initiatives. Efficiency is the watchword across every aspect of today's treasury. This is particularly true within the accounts payable (A/P) function, where the Sarbanes-Oxley Act (SOX) has put a magnifying glass up to the way A/P operations are run.
As Nicole Buehler, from Hyland Software, notes in her article, Accounts Payable: Time to Automate, "SOX has increased senior managers' focus on the A/P function, by drawing their attention to the compliance risks inherent in manual, paper-based processes."
It is not just US corporates that are facing such scrutiny. In Europe, SOX is seen in some corporate quarters as a 'best practice' guide to aspire to, even if their European domicile means that they are not formally bound by it. The focus is also indirectly reflected through the specific regional compliance burdens that European companies face.
So, under such scrutiny, how can corporates make sure that the A/P function not only complies with every legal detail required of them, but also reduce costs and add to the bottom line takings?
Outsource Your A/P?
One option that corporates could choose to take is to outsource the A/P function. Companies and banks that offer A/P outsourcing solutions claim to provide lower costs, observation of strict auditing standards such as SAS 70 Type II, focused expertise and access to the latest technology. The results can enhance your A/P function, as David Schnitt, from IQ Backoffice, explains in his article, Optimising Accounts Payable to Ride Out a Recession. "The average in-house A/P department has a 2% error rate versus a high-quality outsourced provide with a 0.03% error rate." Companies can outsource individual finance processes, such as A/P, rather than outsourcing the entire accounting function. This allows corporates to take a targeted approach to managing the A/P function, meaning that they can quickly improve their cash flow process without over commiting resources.
Outsourcing can also add a new level to the relationships that corporates have with their banks. By providing outsourcing services, banks now interact with procurement managers and A/P managers, a new development that Nancy Atkinson, of Aite Group, describes in her article, The Topsy-Turvy World of EIPP: Embraced by Payables Functions. "Companies provide their payables file electronically to their outsourcer and direct their trading partners to send invoices to the outsourcer's facilities. The outsourcer converts paper invoices to electronic format, accepts electronic invoices, and compares both against the payables file." From here, the outsourcer communicates matched purchase orders and invoices to the A/P system at the corporate. The paying company initiates the payment or schedules it for a specific date. Unmatched items are extracted by the outsourcer, who then sends this to the company for research and resolution.
While outsourcing providers make a convincing case for the merits of optimising the A/P function, how convinced are corporates? According to recent survey results, there is still some way for the providers to impress their potential clients. Drew Hofler, from Ariba, explains in his article, Look to Accounts Payable to Add Value that, while process improvements and better technology are seen by CFOs and treasurers as the best way to boost A/P, "far fewer respondents cite either shared services or outsourcing as the best way to improve A/P performance in any area." But despite this, open-ended responses to the survey found that some finance executives intend to pursue outsourcing as one of a variety of A/P improvement techniques that also include process and technology improvements, shared services and centralisation.
Enhancing A/P Through Automation
As with most areas of treasury, automation is a way to help lower costs in A/P. One example of this is electronic invoice presentment and payment (EIPP). Conceived as a way to benefit supplier's receivables processes, Aite Group's Atkinson points out that it is actually the A/P organisations that are demanding EIPP. "Receiving invoices in electronic formats or converting paper invoices to digital files automates payables processing." This results in a number of benefits - digital files result in fewer misplaced invoices, more timely payments that reduce late fees, and fewer exception items. As suppliers are more willing to lower pricing if the buyer makes payments earlier, applying these factors to A/P can help corporates reduce their overall processing costs.
EIPP can also provide the opportunity for buyers to facilitate trade financing for their suppliers at improved interest rates. In open account trade financing, the supplier takes the risk in terms of finding funding for materials, manufacturing and transportation. EIPP allows the buyer's bank to access the buyer's payments systems and know the approved date and amount of payment to a given seller - something that wasn't previously possible. "The buyer's bank can offer the seller a loan on more favourable terms than even the seller's bank due to the assurance of payment of specific invoices by the buyer," explains Aite Group's Atkinson.
Automating invoices is one thing, but automating payments is also necessary to create a fully automated A/P function. Payables automation still has a considerable amount of work to do to gain full market saturation, especially in the US. In its most recent survey on US electronic payment adoption, the Association for Financial Professionals reported that 26% of all business-to-business payments are now electronic. ACH and p-cards are finding increasing take-up for large and small payments respectively. But in the middle of the US payables landscape between these two electronic payment methods is the paper cheque. This is a big problem for US corporates that are seeking to create efficiencies in their A/P, telling a supplier that an invoice has been approved is one thing, but being able to tell them that a payment has been made is something entirely different. Vince Bahl, from Bottomline Technologies, covers this topic in his article, Electronic Invoicing + Electronic Payments = Successful A/P Automation. "Relying on paper cheques for supplier payments greatly limits an organisation's ability to manage the timing of their payments, and therefore their ability to get the most out of their cash," cautions Bahl.
Another example of the inefficiencies caused by paper processes is given by Sush Koka, from Paystream Advisors, in her article, Strategic Impact of Accounts Payable Automation. She notes that an average organisation is unable to capture anywhere between 50-60% of discounts offered because the A/P department cannot process and pay the invoice within a 10-day discount window.
Basically, the benefits of automating A/P processes can be broken down into four areas: creating efficiency, containing costs, secure invoice storage, and ease of compliance management. It is these linked benefits that should eventually see automation spread throughout your A/P department. Hyland Software's Buehler predicts this is the case, "A/P currently occupies only a small proportion of the massive imaging, workflow and web invoicing automation market, but it is likely to expand rapidly as organisations turn to automation to streamline and optimise their A/P operations and adapt to changes in the regulatory environment."
According to the Ariba survey, A/P professionals tend to agree with this statement. Over the next year, respondents mention plans for automation of processes such as invoice scanning, electronic invoicing and payment, automatic generation of purchase orders, and electronic approvals. The goal of a paperless environment appears to be driving plans for IT improvements that support electronic scanning and processing, such as increasing digital storage capacity. Those corporates that are already operating in a paperless environment are reaping the rewards, which seems like a smart move at a time when every treasury function is under pressure from the knock-on effects of the credit crunch.
