For most organizations, purchasing cards (p-cards) have replaced petty cash as the preferred method of purchasing and paying for high volume, low value transactions. Spending on p-cards in 2005 reached US$110bn, a 37.5% increase over 2003, according to the 2005 Purchasing Card Benchmark Survey conducted by RPMG Research.
Paystream Advisors estimates that business-to-business (B2B) electronic payments are growing at a five-year compound annual growth rate (CAGR) of almost 10% and they expect almost a third of all B2B transactions to be settled electronically by 2010. (To put this in perspective, total US B2B spend processed in 2006 exceeded US$5 trillion).
Because p-card programmes are so much better than the alternatives (petty cash, setting up one-time vendors, issuing checks for €10, etc), many of the inherent inefficiencies in the card programme are overlooked which creates barriers to the programme’s perpetual growth. Some of these inefficiencies are caused by the organization’s internal policies; others are inherent in the back-office processes. Individually, none of these inefficiencies would halt a programme; collectively, they can deteriorate the benefits of the card programme.
Internal Policies – Appropriate Limits
When issuing cards, it is critical that the transaction limits assigned to the cardholder are less than the maximum amount of obligations that may be approved by the employee as specified in corporate purchasing guidelines such as a delegation of authority (DoA) policy. The underlying principle of p-cards is that cardholders are authorized and empowered prior to initiating the transaction with approvals (as required) occurring only post-purchase. Organizations that establish transaction limits without considering the DoA create the following problems:
- If the transaction limit is less than the DoA:
- There are additional transactions that could be initiated and managed by the p-card but instead, are left to traditional (i.e. requisition, check, etc.) processes.
- If the transaction limit is greater than the DoA:
- The employee is acting outside the scope of their authorization limits which could raise legal issues in the event of the card being misused by the employee (as well as raising audit concerns).
- Additional review and approval processes may be in place to compensate for the DoA breech. These additional processes add effort and cost to the programme.
Transaction Visibility
“Recent research has shown that 69% of enterprises have little or no visibility into their A/P spend data,” notes Andrew Bartolini, research director at Aberdeen Group. “This means that a significant majority of enterprises lack any opportunity to reference contract pricing during reconciliation and are unable to capture early payment discounts and monitor supplier performance. This affects their bottom line and their supply risk profile.”
One of the biggest inhibitors to expanding a card programme is the lack of transaction visibility. The lack of transaction visibility can be caused by a number of things.
1. Paper-based statements. As a cardholder, paper-based only processes are an opportunity to misuse the card because (typically) once the supervisor has signed the documentation, it gets filed away with only a statistical-random-audit chance of being reviewed again. If past transactions are available for review electronically, the risk of an inappropriate transaction being noticed increases because ‘it is always there’ and thereby encourages proper cardholder behaviour. Paper-based statements can certainly be used to attach the original receipt/invoice but an electronic review system is necessary to increase transaction visibility.
2. Inadequate financial entries. In addition to the appropriateness of the transactions themselves, concern also arises over how the transactions are expensed. It is not uncommon for a financial manager to be reviewing a p-card transaction in the general ledger and all that appears is the card issuer’s name as the merchant name. At a minimum, general ledger entries for p-card transactions should include the following data:
- A unique purchasing card transaction identifier.
- Original merchant name.
- Cardholder name.
- Transaction key (e.g. date, reference number).
With this information, the financial manager has sufficient data to reasonably identify the transaction. Since most financial entries are mapped into the general ledger, formatting this data so that the entries are meaningful is a worthwhile effort.
3. Two versions of the truth. In the event that additional detail is desired by the financial manager or an auditor, data most be sourced from two different sources: raw data or a reconciliation application and the general ledger. This would be adequate (although still cumbersome to have two applications in the process) as long as the two systems were always kept in sync. In reality, when transactions are exported from the reconciliation application and mapped into the financial system, inevitably there will be a transaction with invalid general ledger coding that will need to be resolved. Once the coding has been corrected so that the general ledger document can post, the source system is typically not updated. As a result, the same transaction could have different coding depending on which system is used for the audit.
Back-office Processes – Month-end Posting Process
As discussed above, when the transaction data is exported from a reconciliation application and mapped into the financial system, inevitably there will be a transaction with invalid general ledger coding that will need to be resolved. Even though the reconciliation system is typically importing chart of account data on a regular basis, projects get closed between the time the transaction is approved (and the project number was valid) and the time the transaction is imported into the financial system. Another source of coding errors is the lack of code combination validation (e.g. a certain cost centre is only valid with a specific list of general ledger accounts). Depending on the variability of the organization’s chart of account, the time to remedy these errors can be as little as 30 minutes or as long as three days. Some organizations systematically handle these errors by posting transactions with invalid coding to a high-level overhead account. This can be a valid solution depending on the materiality of the purchasing card spend relative to overall corporate expenditures.
Corporate Statement Reconciliation
For organizations making a single payment to their card issuer, reconciling the corporate statement is relatively simple since most organizations will pay the full balance and resolve any disputes after the fact in order to maximize their rebate. However, for card programmes consisting of multiple business units each making their own payments, the card issuers’ use of balance forward accounting makes it very difficult to resolve any problems if the payment differs from the liability. With balance-forward accounting, payments are applied to the outstanding balance without associating the payments to the individual transactions. Therefore, in the event that there is a discrepancy between the amount due and the payment, identifying which transactions have not been paid for is challenging at best.
To address this issue, two options should be considered. First, consolidate the remittances to the card issuer to a single payment. Second, ensure that the posting detail is sufficient to enable transaction-level reconciliation by your corporation, even if the card issuers can’t.
Conclusion
As this market grows, new and better ways to manage p-card programmes need to be developed. The old saying, ‘that’s the way it has always been done’ continues to prevent card programmes from reaching their full potential. Just because purchasing card programmes are better than the alternatives, this does not mean that the inefficiencies of card programmes can be ignored. By looking to remove those inefficiencies that have always been there, new life can be breathed into stagnate card programmes. In order to do so, corporate policy and back-office processes will need to be examined and changed.