Electronic Invoicing + Electronic Payments = Successful A/P Automation
Over the course of the last 18 months, there has been a tremendous change in the way organisations in the US view the efficiency of the accounts payable (A/P) process. For years, the labour-intensiveness of this function, which was rooted in processing paper invoices, was accepted simply because viable, long-term alternatives failed to materialise. With the evolution of web-based electronic invoicing solutions, however, the notion of a more efficient accounts payable function has become a reality for many businesses around the globe. For organisations in the US, the adoption of electronic invoicing solutions has reduced invoice-processing costs by approximately US$10 for PO-based invoices and more than US$8 for non PO-based invoices according to research published by the Boston-based research firm Aberdeen Group.
To date, much of the conversation with regard to A/P automation has rightfully focused on how to improve the efficiency of process components relative to invoice receipt and workflow. Traditionally, these are the flash points for inefficiency, where the reliance on paper fuels approval bottlenecks, increases processing costs, creates lost opportunities to capture early settlement discounts and often strains business relationships. But what happens after an invoice has been approved?
Too often, discussions in the US surrounding electronic invoicing begin to taper off at the point of payment, leaving the processes tied to the initiation and timing of a payment to be rather ambiguous. If organisations are committed to streamlining the entire accounts payable cycle, the conversation must also include a thorough examination of the payments process. It’s particularly important for businesses intent on leveraging faster invoice approval cycles to be smarter about controlling the timing of the payment, perhaps even capturing early settlement discounts in return for faster payment cycles.
Today, US organisations are increasingly moving away from paper-based payments in favour of electronic payment methods such as ACH and p-cards. In its most recent survey on electronic payment adoption, the Association for Financial Professionals reported that 26% of all business-to-business payments are now electronic. Through the adoption of electronic payment processes, corporate finance departments are becoming a more active participant in their organisation’s strategic objectives for reducing costs, enhancing cash forecasting and complying with regulatory mandates.
For some organisations, however, the paper check still retains a certain degree of prominence within the accounts payable function. While large payments may often be initiated via ACH and much smaller payments handled using p-cards, everything in the middle is often issued on an old fashioned check. While the check isn’t about to disappear overnight as a payment vehicle, its continued use does create a new set of issues for organisations that are attempting to improve the efficiency of the A/P process. For example, communicating to 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. Relying on paper checks 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.
One of the most prominent aspects of the electronic invoicing value proposition is the ability of the buyer to capture early settlement discounts – whether they are set by the supplier or proactively pursued by the buyer. Yet, this benefit is entirely dependent on an organisation’s ability to manage the timing of its payments.
Consider a scenario in which an invoice is approved a couple of days before a sizable discount window expires. Regardless of how fast an organisation can issue a check, the time required to travel through the US mail and be processed, first by the bank, then the supplier’s lockbox, is simply beyond the control of the buyer. In most cases, this ‘payables float’ process can take six to nine days, excluding holidays or weekends, which only lengthen the process. But with a full breadth of electronic payment capabilities, coupled with the appropriate electronic remittance delivery method, capturing that discount suddenly becomes a possibility because the lifecycle of an electronic payment is shorter than that of a paper-based payment. On average, an electronic payment can be issued and made available to the supplier in as little as one or two days.
When used in conjunction with an electronic invoicing solution, a web-based payments platform can offer A/P departments the control and visibility necessary to make payments efficiently and cost effectively. Such an approach to payments allows corporations to manage all of the payments, including multi-currency, from a single platform on a regional and/or global basis. Consolidating different disbursement systems into a single platform offers a whole host of benefits, including an increased ability to prepare, format, validate, approve and release clean payments instructions to their banks, the ability to consolidate payment and remittance files to and from the banking network, and visibility into payment acknowledgements.
At the same time, electronic payments can be used to entice suppliers to support an electronic invoicing initiative. The challenges associated with supplier on-boarding are well documented but by leveraging electronic payments, organisations can offer the up-to-the-minute status reports that so many suppliers deem critical. Keep in mind that for the supplier, automating the order-to-pay process is largely about improving their accounts receivable process, which is exactly what is achieved by providing them with increased visibility into the approval and payment processes.
Any type of conversation about payments in relation to accounts payable inevitably leads to concerns about Days Payable Outstanding (DPO). Among finance departments, the notion of holding onto money as long as possible is the most preferable practice. To some, the idea of marrying an automated invoice workflow with an electronic payments workflow will accelerate the initiation of payments, therefore decreasing their DPO. While leveraging electronic payments certainly can hasten the pace of initiating payments, it’s purely at the discretion of the organisation. Again, with the ability to control the timing of payments, invoiced expenses can be quickly and easily managed for payment tomorrow, next week or next month.
As organisations in the US increasingly weigh the benefits of electronic invoicing, understanding the importance of automating the payments process that completes the invoice-to-pay cycle is critical to ensuring success. By automating payment processes through the use of web-based payments platforms, organisations can leverage new-found control and visibility to maintain their desired DPO levels while capturing early settlement discounts that improve working capital and supplier relationships.