Look to Accounts Payable to Add Value
Although improvements in accounts payable (A/P) are often measured by their contribution to overall efficiency, a recent study from CFO Research Services, in collaboration with Ariba, reveals that finance executives’ interest in A/P management extends beyond process efficiencies to issues such as cash management, contract compliance, and supplier management.
The survey of 186 senior finance executives from a cross-section of companies in North America explored their interests, problems and plans in the management of A/P. The results demonstrate that the finance function’s priorities over the coming year reflect the desire to increase its support for the bottom line.
Regarding companies’ plans for improvement in finance over the next year, the study found that activities that contribute directly to the bottom line – cost management and decision support – are top priorities. In contrast, respondents listed regulatory compliance as the lowest priority for improvement. Due to heavy investment that companies have made in this area in recent years, they are now free to explore value-adding activities.
Respondents also said that reducing the cost of A/P, improving A/P processing efficiency, and increasing control over A/P are high priorities, citing process and technology improvements as the best ways to advance these performance dimensions. While in most areas respondents said that process improvements are the best way to improve A/P performance, a substantial number of respondents said that better technology is 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. However, open-ended responses show that finance executives intend to pursue a variety of A/P improvement paths including process and technology improvements, outsourcing, shared services and centralisation.
Regarding plans for improvements in A/P over the next year, respondents often mention automation of processes such as invoice scanning, electronic invoicing and payment, automatic generation of purchase orders, and electronic approvals. Many respondents say that their organisations are working towards a paperless environment – especially with processes involving outside vendors – mentioning plans for IT improvements that support electronic scanning and processing, such as increasing digital storage capacity. However, responses indicate that enlisting vendor cooperation in the movement to paperless processes may be an obstacle. Respondents also cite continued efforts to improve A/P technology systems such as ERP, but hint at organisational and other challenges.
Finance executives frequently cite the need to avoid duplicating weak processes or controls in new technology systems as a reason why companies are pursuing process improvements. In most cases, these upgrades are discussed as a precursor to automation, outsourcing, or shared-services initiatives. Respondents also refer to standardisation of IT systems as an important precursor both to further automation and to a migration to shared services.
Notwithstanding the overwhelming emphasis on technology improvement initiatives, many respondents take a broad management perspective. Respondents mention plans that include issues customarily under the umbrella of procurement such as optimising information for management decision making, improving payment terms, and reviewing high-frequency vendors to assess their strategic importance. This may be evidence of a movement towards a more integrated procure-to-pay environment.
Generally, companies are executing basic A/P activities well. But finance executives see room for improvement in their companies’ A/P performance not only in higher-value initiatives such as producing information to support decision making and optimally timing payments, but also in activities such as documenting transactions, matching payments to contract terms, and directing payments to the right places.
Regarding frequency of problems in A/P, respondents say that the reporting they receive from A/P is at least occasionally ‘insufficient’ to support decision-making. An unexpectedly high number of respondents say their A/P departments at least occasionally have problems with poor transaction documentation (43%), misdirected payments (39%), and overpayment against contract terms (37%). Other frequently cited problems include insufficiently transparent external reporting on payables and difficulty reconciling payments with purchase orders. The survey results show room for further automation at many companies.
Many A/P departments have relatively little technology support when interacting with outside suppliers. Only 14% of respondents say their company’s IT systems for A/P processes are automated to the highest degree – and 49% say at least some of their processes are manual. Highly repeatable, internal A/P activities are most likely to take place in a paperless environment, but outward-facing A/P activities, such as receiving invoices and dispute resolution, are likely to be performed manually with primarily paper-based documentation.
Most respondents report ‘adequate’ performance regarding A/P support of cash management objectives that require control, precision and visibility into broader transaction patterns, though relatively few say their A/P departments are performing ‘exceptionally well’.
Additionally, respondents identify room for improvement in ‘securing discounts from vendors by documenting early payments’, suggesting that many companies may be able to increase their return on short-term cash and realise hard dollar savings through vendor discounts and rebates by refining reporting, control, and communication. Interestingly, though respondents see room for improvement in securing discounts, they report excellent performance in taking advantage of those discounts once secured.
Risks appear to be particularly acute when dealing with external suppliers. Forty-one per cent of respondents report at least some risk of losing favourable payment terms with suppliers due to late payment or non-payment of invoices – and 39% report at least moderate risk of disrupting the supply of key inputs. Other areas of concern include systematic error in tax payments and fraudulent activity.
Plans to mitigate A/P risks most often focus on simplification and automation. Respondents emphasise hiring and developing highly seasoned and skilled employees, not overextending workloads, and establishing accountability. Broader organisational changes such as centralising A/P in a single corporate office may also help to reduce risk, according to respondents.
Respondents also describe a wide variety of process improvements to stave off risk in accounts payable, such as standardising processes across the business, reviewing and strengthening controls, stringent variance reporting, hand-signed checks, and multiple levels of approval for payments. Respondents recognise the need for intensive oversight on tasks that are primarily manual. However, whether processes remain manual or automated, finance executives stress the importance of strict adherence to process. Emphasis on process improvement, however, seems to anticipate that changes will serve as a basis for further automation.
While some respondents warn against sacrificing control for cost savings, others assert that complete control comes at the expense of efficiency. These dual warnings are evidence of the complex balance that many accounts payable departments seek to strike between low cost/high efficiency, on the one hand, and high control/low risk on the other.
In order to preserve that balance, executives plan to pursue a combination of process and technology improvements – improving processes enhances control and reduces risk while automating them creates efficiency and reduces costs. Many plan to alternate between process and technology improvements, and many organisations are currently improving processes in preparation for new technology systems. Additionally, priorities for improvement in A/P are in line with finance’s overall priorities: reducing costs, improving A/P’s contribution to working capital management efforts, and increasing control over A/P.
The study shows that priorities for improvement in A/P are in line with finance’s broad objectives. Finance executives plan continuous improvement, even in light of a generally positive view of their companies’ accounts payable performance. The pressure to make progress in these areas will only increase as finance takes a broader view of A/P’s contribution to its objectives.
Companies seeking to further their goals through improvements in A/P should build a business case based on all the opportunities presented by A/P automation such as dramatic reduction in invoice and payment processing costs, gains in productivity, an end to savings leakage, and the ability to unlock cash confined in payables. Here are some of the steps that best-practice companies take to improve accounts payable:
By promoting alignment between technology and stakeholders, and between internal as well as external processes, companies will realise the greatest possible gains through their A/P improvement efforts.