Cash & Liquidity ManagementCash ManagementAccounts PayableImproving the Effectiveness of Accounts Payable Invoices

Improving the Effectiveness of Accounts Payable Invoices

Introduction

If the process for handling AP invoices were compared to a modern-day process for assembling manufactured components into a finished product, it would be like comparing the assembly of Stephenson’s Rocket to the production line at Ford or General Motors (GM).

In the case of the Rocket, each component was hand-finished, and all components were hand-assembled and operating performance was established retrospectively through performance trials rather than being predicted in advance. And because of the hand-built nature, no two Stephenson’s engines were identical. Almost the complete opposite is the case with a modern vehicle assembled by Ford or GM mass-produced components, automatic assembly lines and predictable performance.

The difference between the average state of AP invoice handling and those businesses that are achieving world-class performance levels is as dramatic as comparing the assembly processes of The Rocket and a modern-day Ford or GM vehicle in almost all respects. Processing costs are considerably lower (pro-rata), processing times are lower, processing risks are lower, information delivery is more reliable and information quality is much higher. All these lead to a less costly and more predictable outcome.

The following discussion and observations seek to highlight what is needed to dramatically improve the performance of AP invoice handling activities in terms of a more efficient, reliable and cost-effective process.

The role of an invoice

The invoice is the universal financial instrument used to detail the sale of goods or services and to drive payment. Although the Supplier produces the overwhelming majority of invoices, an increasing number of Buyers are producing self-billing invoices using an Evaluated Receipt Settlement (ERS) process. The self-billing invoice is driven by the quality of the buyer’s receipting process whereas the supplier’s invoice is driven by the quality of the supplier’s despatch and billing process. For the purposes of this discussion document we will concentrate on the supplier’s invoice.

The quality of the information and the timeliness of its delivery are crucial if the invoice is to fulfil its primary objective and achieve payment within terms. With this in mind, all aspects of the Supplier’s invoice production process should be focused on achieving this payment objective.

Case scenarios

  • No Invoice is produced: If no invoice were produced at all, it is reasonable to assume that in the majority of cases the Buyer would not pay and the goods would effectively, have been provided as a free gift. Whilst the Buyer benefits from the free use of the goods, the Supplier’s cost-base has to bear the cost of labour and materials whilst cash flow suffers through lack of a collectable debt.
  • Poor Quality Invoices: All parties in the supply-chain suffer through poor quality information. If a poor quality or inaccurate invoice were produced, the Buyer raises a query and in the majority of cases delays payment. The Buyer benefits from the use of the goods but suffers increased administration costs. The Supplier also has to absorb additional administration costs; raising the appropriate credit notes, producing a replacement invoice and also meeting the additional financing costs of an inflated Accounts Receivable (AR) balance and with a short-term cash flow issue to resolve.
  • Late Invoicing: If an AP invoice is produced late, the Buyer will benefit from the use of the goods but may have administration difficulties matching the invoice against older documents for delivery and payment approval. Resolving these issues increase the Buyer’s administration costs including having to accrue for un-invoiced goods. Through invoicing late, the Supplier not only suffers later payment than normal, but also increases the risk of further delays associated with the Buyer approval process. The Supplier’s cash flow deteriorates as the cost of the materials used have been absorbed by the business and probably paid long before the invoice has been raised and the debt collected.

The quality and timeliness of the invoice affect both Buyer and Supplier in different ways, with the Buyer having to absorb higher processing costs and the Supplier having to absorb increases in debt financing and cash flow management on top of additional administration and credit control activity costs. Large proportions of these process costs, additional workload and associated financing risks can be mitigated through the adoption of simple e-Commerce technologies that will deliver higher levels of automation and will result in long-term and sustainable benefit being realised by all parties within the supply-chain.

Reducing process time and risk: A Buyer’s perspective

Each and every buying organisation receives thousands of AP invoices each year, with the bigger businesses handling hundreds of thousands of invoices each month. Their ability to process those invoices depends on several factors, some being dependent on the Buyer’s internal culture and underlying technology, others being Supplier dependent – the quality and clarity of the information, and clear and obvious identification of the order number. On occasions the invoice resembles a document that has been designed to meet either the Supplier’s corporate image guidelines or internal accounting objectives rather than to clearly document what has been sold and to encourage payment.

Who, when designing invoices with efficient handling and prompt payment in mind, produces documents in dark colours; dark green or blue for example. These are difficult to read and impossible to scan or photocopy. Why have a background watermark that manages to blend in perfectly with the description of the goods so as to make that part of the invoice virtually illegible?

In a manual world, depending on the Buyers technology base, the paper invoices will be received through the normal postal service. Internal post room staff either include invoices with all other mail coming into Accounts Payable, or there may be a separate function within the post room to remove the envelope and may even include sorting the documents into different groupings prior to scanning, and sometimes the scanning function itself. Where document scanning is not done within the Buying organisation, the invoice ends up being archived in lever-arch files or being regularly sent out for archiving in some form of computer readable media; CD for example. Where attachments to the invoice exist such as time sheets, great care has to be exercised to ensure that these attachments stay with the invoice throughout the process.

Usually the Buyer ignores the fact that the Supplier has spent considerable time and effort creating the invoice document, and purposefully sets about recreating that which the Supplier has already created and in the process, has to convince internal compliance auditors and H.M. Customs & Excise that that the two versions of the invoice, the Suppliers and the Buyers, are the same.

Thinking about this activity, and the fact that millions of paper invoices are following this process throughout the world each and every day – what is the daily cost of recreating what has already been created? What is the risk of getting one or more parts of the re-input wrong? What is the risk of error going unnoticed? And what is the cost of providing the compliance checking activity?

In the world of e-Commerce most, if not all, of these labour-intensive activities are eliminated. The Buyer has the opportunity to remove all of the labour-intensive postal, scanning and filing activities associated with invoice handling by receiving the invoices electronically. At the same time the Buyer can automatically register the invoice details into their AP application, using Supplier created information and enter an invoice in a human-readable form into the Buyers Document Management System (DMS) for archiving purposes. The use of a human-readable form could be considered similar to the way a template is used with a Word document to provide a consistent view and layout.

Reducing process time and risk: A Supplier’s Perspective

Each and every Supplier invests time and money in producing their invoices. Some spend more time and money than others, and some spend more time honing the process than others. The amount of effort spent ensuring that the quality of information is both correct and that invoice production is timely, is directly proportional to the ability to collect the payment.

Invoice Production Timing: Outside of the US, and certainly within Europe, payment is based on Invoice Date. In the US it is based on date of receipt of goods; effectively when transfer of ownership occurs. Ideally, all debt collection and payment transactions should be based on the Transfer of Ownership date rather than any subsequent date when invoices are produced.

Therefore, for those businesses trading predominately within Europe, invoices should be produced as close to delivery/receipt date as possible so as to drive prompt payment. End of month invoice production runs should be avoided as this merely delays ultimate payment. If the invoice is to be effective in driving payment, it has to be produced and delivered in a timely and efficient manner.

Consolidated Invoices: In the past, consolidated invoices were introduced to reduce paperwork and invoice production costs. Consolidated invoices also improved the Buyers efficiency in posting the invoice to the Accounts Payable (AP) ledger, as there were less invoices to handle. There were however, just as many invoice detail lines and just as many deliveries to check and process. When handling invoices manually, these are laudable cost reduction objectives. However, consolidated invoices are not an effective mechanism for delivering prompt payment to the supplier. They fail on two counts: firstly, invoice production is delayed, usually to month-end, which in turn delays payment. This stretches the normal credit terms by the additional days between date of delivery/receipt and the end of the month. Secondly, consolidating a large number of invoices into one increases the level of invoice complexity and therefore increases the complexity of the Buyer’s approval process. This in turn substantially increases the risk of delayed payment as any mistake or error, however minor, will delay payment for the whole invoice. If these invoices were not consolidated, the majority of the detail lines would not have been impacted by the error, and would therefore have be paid normally.

The most effective invoice relates to a single event/delivery; is NOT complicated by other unrelated deliveries; is produced as the delivery/receipt occurs and is handled and managed as automatically as possible.

Invoice Delivery: Having put considerable effort into managing the production of the invoice and ensuring that it is both correct and timely, why not take control of the final part of the process and deliver it directly into to the Buyers business. Given that future income is almost entirely dependent on the Buyer processing the Suppliers invoice, the Supplier has the opportunity to directly influence some of the reasons for delayed or non-payment – to shrink the invoice delivery time, remove the risk of lost invoices and take control of the quality of invoice entry being made in the Buyers AP ledger. There is also the added benefit of the Supplier reducing their process and stationery cost, and removing any dependency on manual labour.

Conclusion

Using e-Commerce technologies benefit all parties within the supply-chain. By working collaboratively with the Suppliers, the Buyers can substantially reduce the labour-intensive activities of handling post, scanning and filing and also the amount of work needed to register an invoice in their AP system. Those companies that manage world-class AP processes do so as a direct result of employing e-Commerce technologies and process AP invoices at a considerably lower cost-per-transaction rate than those who rely on handling paper invoices manually.

It is possible to reduce invoice transaction handling costs by better than 90% using a combination of e-Technologies that together eliminate the labour components of the process and work towards a fully automated, lights-out transaction processing environment.

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