Why Purchasing is on the Cards for Corporates
For decades, company ledgers have been choked with indirect costs such as employee travel expenses and purchasing of office supplies. Taken individually, the cost of a dinner with clients or a carton of printer paper may seem insignificant, yet, after payroll, T&E (travel and entertainment) and procurement are two of the largest indirect expenses that companies incur. However, unlike payroll, these kinds of expenses are rarely managed efficiently.
If your company is like most, as many as 80% of your business purchases are for less than US$1,000, according to a recent study by the research company The Aberdeen Group. Yet, regardless of whether the cost of a planned purchase is US$600 or US$60, the average cost of processing a traditional purchase is US$89.
A well-designed purchasing card program can increase control over the entire procurements process, improve supplier relationships, enhance the transparency of transaction reporting and reduce payment processing costs. Corporate cards, combined with electronic expense reporting, cut the average cost of a paper-based expense report by almost half – from US$22 to US$12.
Is it any wonder then that more and more companies are turning to commercial cards? According to a recent Ernst & Young survey, purchasing card spending in North America is growing at a rate of 20% a year and is expected to reach US$185bn by 2010.
In an attempt to control their T&E and procurement expenses, companies often try to institute purchasing and expense policies. However, paper-based procurement processes can often cost more than the goods and services purchased, and it is not unusual for any savings these policies are designed to produce to be eaten up by the cost of adhering to them.
Corporate and purchasing cards, on the other hand, automate expenses and facilitate compliance with expense policies. These cards remove the layers of inefficiency that are embedded in cumbersome paper-based processes. According to the 2005 Purchasing Card Benchmark Survey by Richard Palmer and Mahendra Gupta, of RPMG Research, purchasing cards result in a 68% reduction in the procurement cycle time and a 31% reduction in the number of suppliers in the average accounts payable master file. Corporate and purchasing cards also allow companies to analyze company spending in detail. Many card programs deliver multiple layers of data that, when linked with sophisticated reporting solutions, enable companies to control spending and initiate cost-effective travel and purchasing policies.
In addition, most card issuers offer a web-based solution for reporting, reconciliation and allocation. These features streamline the accounting behind each transaction and enable transaction data that has been input by the cardholder to be exported for integration into the general ledger. Because workflow rules are embedded within these solutions, management is able to review and approve all transactions prior to posting, providing even greater expense management capability. Another advantage of commercial cards is that they permit highly complex accounting strings to be included in the card transaction information. Cards can be coded with general ledger numbers and other internal identifiers so that payment information can be automatically applied to a company’s accounts payable system.
By automating mapping to their chart of accounts in this way, companies can allocate costs more accurately. By analyzing this information, organizations can identify which vendors they are doing the most business with and then use this information to negotiate volume discounts. One quarter of the card-using organizations surveyed for the Palmer and Gupta report used card data in discount negotiations with suppliers. Of these, 25% obtained card-data-generated discounts equal to 2% or more of their total purchasing card spending.
By providing greater transparency of financial information, and by increasing the level of control over company spending, purchasing cards are playing a key role in another area of concern for businesses today – compliance. Since the passage of the Sarbanes-Oxley Act, corporate governance has become a major focus for US corporations. A commercial card program provides excellent controls over purchasing activities through individual cardholder spending limits, online statements and customizable program level reporting.
With the help of merchant category codes, companies can easily implement restrictions on where cards may be used. In addition, more data can be captured with every card transaction, which in turn gives managers more comprehensive information about what has been purchased. An unforeseen advantage that this greater visibility brings is a low incidence of expenses fraud. According to the study by Palmer and Gupta, misuse of purchasing cards amounts to less than USD 340 for every USD 1 million of card spending. On average, organizations said they experience less than a single incident of card misuse for every 10,000 transactions.
In terms of saving both time and money, the rewards of corporate travel and purchasing cards are well documented. Enhanced card programs combined with web-based technologies can modernize cumbersome administrative functions and can be scaled to size for large corporations and small to mid-size companies alike. While the volume of procurements using commercial cards still represents a small percentage of the total volume of business payments, as commercial cards move into the accounts payable mainstream, companies can expect to see further enhancements to existing card processing systems. Those enhancements are likely to include: