Enhancing Payment Factory Effectiveness with E-Invoicing
As corporations move to increase efficiency by consolidating and centralising their disparate business functions, they are increasingly turning to payment factories as part of a shared services centre focus. The next level in this streamlining trend is the introduction of electronic invoicing to automate significant portions of the accounts payable process.
A payment factory is a key element in an organisation’s cash management and liquidity strategy. While for many corporations managing payables processes, payments, and banking relationships at the subsidiary or business unit level provides some flexibility, there is a downside to this approach. Among the issues in this distributed approach are increased transaction costs, poor visibility, higher cost of ownership, increased fraud, and a lack of standardisation, with each locality accounting for a fragmented view of cash.
Typically, a company’s subsidiaries manage their own payables and payments processes and banking relationships. This leads to higher transaction costs and banking fees, as each location requires staff and infrastructure to support the operation. The lower transaction volume from each subsidiary can also result in higher bank fees and less negotiation power with banking partners.
Motivated by tighter regulations and a need for better cash management, corporations are becoming far more focused on expanding insight into their cash positions and forecasts. There is an accelerating trend for organisations to look to payment factories to generate all payment instructions for the enterprise. These instructions include standard formats, bulk and high priority payments, and direct debits.
A payment factory is part of an overall shared services strategy, as a solution that focuses on the way that a company executes its payments with the fewest possible release points. Specifically, it is a centralised payables and payment processing system featuring back-end integration with ERP systems (via secure interfaces).
The result is an aggregated and centralised payment processing centre, characterised by workflow management of payment approvals, a rules engine to determine the lowest-cost method of payment and links to multiple banking systems. Increased visibility can also be realised through the use of consolidated account statements and reporting for a more comprehensive view of corporate liquidity.
The payment factory links cash outflows directly with the centralised treasury to offer visibility and accuracy to a corporation’s cash activities and liquidity management. Additional benefits include a stronger negotiating position with banking partners, better visibility into funding needs and liquidity management, and improved control over payment timing.
With centralisation of the payments operation, the full benefits of liquidity management can be realised. Companies gain control and visibility over their cash outflows (payments processing) and cash in-flows (receivables management). This, in turn, gives treasury greater control over cash and risk.
The efficiency gains and additional streamlining that e-invoicing can provide integrate perfectly with the centralisation of payments processing. By receiving invoice data electronically rather than on paper, as much as two weeks can be cut out of the length of the payments cycle. Not only is it much easier to receive invoices in a single location when those invoices are electronic, but if those e-invoices also arrive in a standard format, processing is much more easily automated.
Many corporations already use e-invoicing to some degree, even if it is primarily electronic data interchange (EDI) with major trading partners. Extending e-invoicing across all of a corporation’s suppliers has typically been more challenging, due to the format limitations of some e-invoicing systems. However, a new network approach has eliminated that barrier, by enabling any supplier to submit an invoice online in virtually any electronic format, with the invoice delivered to the customer company in its desired format. The network itself does all the translation and data mapping required to deliver the invoice as the customer prefers.
With standardisation such as this in place, invoices become highly automated and are far easier to integrate into the workflow system. In addition to the efficiency gains realised by less need for staff to open mailed invoices, key in data, and respond to payment status queries from suppliers, the availability of invoice data within minutes of its submission by suppliers increases the visibility that an organisation has into its financial obligations.
The ability to enhance cash flow management and cash forecasting is one of the most compelling arguments for e-invoicing. The level of real-time awareness made possible by e-invoicing gives an organisation the ability to make optimal decisions about the timing of its payments, balancing the potential for early payment discounts and the risk of late payment fees against its cash flow.
From a best practices standpoint, the payment factory should be highly configurable and entirely modular, allowing seamless integration within the existing infrastructure. Sophisticated solutions are specifically designed to integrate with any ERP system or treasury management solution, covering both outbound and inbound payment flows.
It should also be able to consolidate data from disparate sources for increased visibility and reporting. This includes account statements, balance and transaction reports, and settlement advice. Further, it is critical that a solution offer the ability to capture and disseminate this information, preferably in a web interface.
The payment factory system should be agnostic, in the sense that it does not require the use of a specific bank, or that the payables come from a specific ERP system. The use of a format-agnostic e-invoicing network in this instance furthers this goal, since it inhibits no suppliers from becoming part of the network.
The payment factory also needs to be capable of managing the entire life cycle, including the collection of bank statements, transmission of payment instructions, validation, enrichment and repair, payment approval, and routing. It should also have the intelligence to determine lowest cost routing, which automates the decision process surrounding the appropriate payment channel for each transaction.
A payment factory is especially effective when the payables systems of multinational subsidiaries are centralised, as cross-border banking fees can be significantly reduced. For example, it can automatically offset payments due between company subsidiaries, resulting in smaller cash transfers and reduced foreign exchange charges, wire costs, and lifting fees (a fee charged by the bank for receiving a payment). Also, the payment factory can provide the needed functionality to route payments through in-country accounts, thus avoiding high international settlement fees.
In this regard, e-invoicing can be particularly useful. With a global e-invoicing network in place, the network itself has the intelligence to determine and apply VAT and other tax information to each invoice, based on its originating supplier’s location, the country of the customer corporation’s relevant facility and the location of the corporation’s headquarters.
With a payment factory and the use of e-invoicing, standard accounts-payable files are consolidated from the operating units and payment instructions can be prepared in one process. The end result is that a single payment file can be sent to a global or regional bank, with the payments in relevant local clearings. This enables a company to achieve local pricing on payments that started as cross-border transactions and gain visibility into payment flows and supplier activity.
The pace of business globalisation requires that corporations everywhere enhance their ability to deal with trading partners in every corner of the world. While solutions such as centralised payment factories have global-reach and e-invoicing capabilities are helpful today, they will be all but required in the near future if organisations expect to conduct global business effectively.
A payment factory provides a centralised platform for straight-through processing of payments to simplify corporate-to-bank connectivity. The connectivity to banks or payment networks such as SWIFTNet streamlines the payments cycle and delivers interoperability with major worldwide payment and bank statement formats. By using regional payment factories to feed into a centralised operation or shared service centre, it automates treasury, payments and receivables processes, to improve liquidity and reduce operational costs.
The underlying goal of a payment factory is to successfully execute payments on an enterprise-wide basis. With an increased push to consolidate treasury activities to a smaller number of locations across the globe, payment factories can offer the required combination of localised flexibility with centralised control and visibility. A centralised treasury and cash management function in tandem with a payment factory enables companies to attain cost benefits and improve visibility of cash and risk.
With a payment factory, the goal is a single point of payment execution. Streamlining the entire process – from e-invoicing optimising the incoming invoice flow, the workflow system handling the internal approvals and payment preparation, and the payment factory system optimising the outgoing disbursements – not only meets the goal of efficient execution, but does so in a way that is extremely cost-effective.