Strategic Impact of Accounts Payable Automation
Who would have imagined that removing paper from the workplace would be more challenging than putting men on the moon? But that has been the unfortunate reality in corporate financial processes, which have long been mired in labour and paper-intensive process. Not anymore. Accounts payable (A/P) departments, which came under renewed scrutiny for their heavy reliance on people and paper, are making great strides in automating their operations by leveraging a variety of technology solutions available in the market today.
Many innovative financial managers now recognise A/P automation as an area offering significant potential for not only generating bottomline improvements, such as cost containment and productivity enhancement, but also delivering strategic benefits around greater ability to monitor and manage spend, capture existing and new discounts and build stronger trading relationships.
Although the current adoption of automation remains skewed toward large corporations, it is exciting to see many mid-sized and smaller companies rapidly moving towards less paper, even paperless environments. These aggressive technology adopters have learned that in many cases automation diminishes the procure-to-pay cycle time from weeks to just days and delivers a rapid return on investment. Given these developments, we estimate that the number of B2B invoices traded within the US in electronic format will surpass paper invoices by 2010.” (See Figure 1 below.)
One of the major drivers for A/P automation has been senior management emphasis on improving working capital requirements with a strong push toward increasing discount capture from supplier for prompt payments (usually on 2%10 net30 terms). And this is probably one of the very few areas where the interests of the accounts payable and procurement departments are in sync. Given this, it is surprising to note that an average organisation is unable to capture anywhere between 50-60% of discounts offered because the A/P department cannot process and pay the invoice within the 10-day discount window.
However, it is not surprising to realise that the enemy of discount capture is paper. A/P departments relying on paper invoices and decentralised receipt of transaction-related documents suffer from a lengthy approval and payment cycle, which could range from 30-40 days or more, according to statistics from PayStream Advisors.
The following section explores three technology solutions that will help eliminate paper and its adverse impact on the A/P process and enable your organisation to enhance its discount capture rate.
Contrary to early excitement, electronic invoice presentment and payment (EIPP) solutions aimed at the supplier side of the equation failed to meet early predictions and the associated hype. We are now uncovering a renaissance of interest in buyer-side, web invoicing technologies, which aim to remove paper from the source. But even these solutions – enhanced with approval workflow and payment capabilities – are facing an uphill battle when it comes to supplier adoption.
Web invoicing solutions have fared very well when it comes to automating the invoices from organisations’ strategic suppliers – typically high-volume or high-value invoices. These suppliers are willing and able to re-design their existing processes to leverage the automated solution. But that still leaves a big chunk of suppliers who cannot, or will not adapt, and continue to send you paper invoices.
Solution providers have come up with an interesting solution to address this issue. Why not offer front-end imaging and data extraction as an outsourced service in conjunction with electronic invoicing? A majority of e-invoicing vendors now operate processing centres – directly or through partnerships – where they will set up a PO box for your paper invoices, receive the invoices and convert them to electronic format – usually in a matter of hours. On the supplier side, the only change required is that they send the invoice to the PO box instead of your A/P department.
The combination of e-invoicing and outsourced imaging enables your A/P department to go 100% paperless from day one and allow you to process the invoices in a quicker and more efficient manner.
As organisations are moving automation to the front-end of the invoice receipt-to-pay cycle, they are also looking to leverage straight-through processing (STP) to the extent possible. The rationale for this is simple. What is the point of getting the invoice to A/P quicker if we cannot reduce the amount of time it spends in A/P? STP facilitates the automatic payment of ‘clean’ invoices – those with no errors or ones that meet pre-defined criteria – freeing up A/P to manage exceptions and accelerate dispute resolution with suppliers.
Whether the functionality is provided by your ERP system, a workflow system or the e-invoicing application, here are some options that enable STP:
Finally, it is important to configure reminders, escalation procedures and out-of-office rules to ensure that invoices that do need approval do not fall through the cracks.
Despite your best efforts, sometimes the invoice does not get approved and paid within the standard 10-day discount period. Why should you lose the discount completely just because you approved the invoice on day 15? Why should the discount rate drop from 10% to zero on day 11? This same logic has led to the evolution of an innovative concept, dynamic payables discounting.
Dynamic discounting enables suppliers to offer and buyers to capture a discount rate pro-rated based on the number of days between the actual payment and the maturity date, on all or any of their invoices – hence the term dynamic. Technology is now available that allows buyers to configure various discount schemes based on their cost of capital and lets suppliers discount any or all of their receivables on an as needed basis.
A simple example would suffice to make this concept clear. Assume that you have negotiated a 2%10 net30 type discount with a supplier and you can pay the invoice on day 20. Under the old scenario, you have lost the discount and now it is in your best interest to wait till day 30, even if the supplier is anxious for payment.
However, with the availability of dynamic discounting, you can still pay the invoice on day 20 and receive a 1% discount on the invoice amount. Or even better, you might be able to take a 2.5% discount if you can pay on day five (see Figure 2 below). You get your discount; the supplier gets paid early – a win-win situation all around.
Two forms of dynamic discounting have gained popularity – automated recurring discounts and one-off discounts. Under the recurring discount scenario, buyers contractually agree to pay an invoice as soon as it is approved and take the discount based on a previously agreed sliding scale. This does not require manual intervention from either party and applies to every invoice from that particular supplier. One-off discounting, on the other hand, involves suppliers picking and choosing only the specific invoices they want to discount.
While technology has become the great enabler of accelerated invoice processing and discount capture, solution providers also play a critical role in this process by educating internal staff and suppliers and bringing everyone aboard the solution.