Document Management Automation Key to Efficiency in Finance
Most financial managers will be familiar with the notion that when lines of credit are easy and inexpensive to obtain, then working capital efficiency tends not to be a problem. But in tighter economic times, like at the moment, companies find that lines of credit may dry up, become capped, more expensive, or carry insupportable covenants – and working capital and cash management techniques suddenly rise up the agenda. Indeed, our own research based on 2007 data shows that around £64bn could be freed up by UK companies if they could reduce their days sales outstanding (DSO) to 45 days – a realistic target with an automated and systematic approach to accounts receivable (AR).
But successful cash management is a careful balancing act between prompt collection of outstanding invoices (AR) and the carefully managed payment of supplier invoices (accounts payable AP). Indeed, efficiency in AR is equally critical to efficiency in AP, but in my experience, companies searching for ways of streamlining invoice processing often focus exclusively on the latter. I believe that the underlying technology support is essentially the same (combining workflow, data management and document management), so it is often more efficient if technology investment in the one function is extended to the other. Several well-known firms are realising this and achieving new levels of return-on-investment by taking a holistic approach.
There is, however, good reason for AP to remain a key focus of companies’ efficiency targets. Most firms still receive invoices in paper format from their suppliers and it is surprising how many then retain paper as the primary medium throughout the processing cycle. To implement an efficient and effective AP operation, it is fundamental that paper invoices are scanned as quickly as possible after receipt, then indexed and stored for easy retrieval and processing in a central system.
It is useful to describe a best practice example of an advanced invoice processing solution that was implemented at a liquid propane gas supplier. With over 65 sites in the UK, the firm identified the purchase-to-pay process as a key area for business process improvement. They were processing around 110,000 purchase invoices annually, which were was causing operational bottlenecks and had to be eliminated without increasing headcount.
The firm sought an AP and mailroom solution that would deliver a number of benefits such as: help personnel work more efficiently; improve audit support; achieve greater accuracy; reduce off-site storage; and ensure that discounts offered by vendors for prompt settlement were achieved. Ultimately, they wanted a solution that would allow them to provide superior customer service.
The previous manual processes in the AP function probably ring bells for many organisations across the UK. The process was quite complicated, time consuming and prone to error. Invoices were either sent to the main AP department at the head office, or one of the many retail or customer operations centres across the country. Then they had to be sorted, distributed to the correct member of the AP team at the head office and logged into an Access database. There were frequent problems with the invoices, requiring a query to be sent back to the field locations. They then had to post the response and invoice back to head office for reprocessing. One key change made immediately was that all suppliers should sent invoices directly to one central location – the central AP department.
From a technology perspective, it was imperative that the new invoice processing data capture and workflow solution would integrate smoothly with their ERP system. An integrated automated data capture, workflow and content management solution for the mailroom and AP department was designed, delivered and serviced, effectively integrating with the ERP application. Implementation included installing an intelligent front-end scanning solution that deployed advanced OCR/ICR technologies to identify and extract pre-agreed data from scanned purchase invoices and automatically distribute the data to an automated voucher creation process, both for purchase order and non-purchase order-related invoices.
The invoice processing procedure was transformed. Now invoices that arrive into the central AP department and the corporate mailroom are scanned on the day they are received, entered into the web-based content management system and routed immediately to the relevant member of staff. Nearly 500 employees across a number of departments (including sales, operations, IT, HR and finance) have access to this system, plus a daily email alert is sent by the workflow system to anyone with outstanding items to process. The integrity of the data is significantly better, turnaround time is improved and, above all, customer service standards have been boosted.
In summary, the gas supplier realised substantial efficiency increases thanks to their technology-led invoice processing solution. They are now able to input between 100- 150 documents per day, as opposed to 30-35 previously, and they are scanning around 60,000 documents a month. Paying invoices quicker means that they can take advantage of early payment opportunities, and errors have been minimised. From a direct cost perspective, the number of staff employed to fulfil the account payables role has been reduced by half, and permanent off-site document storage is no longer necessary.
Aside from the type of application described earlier, we are seeing other new developments taking place in AP and AR thanks to technological advances, particularly in the retail sector where there is a very high volume of transactions with key suppliers. For instance, one UK retailer has taken the initiative to create a ‘supplier portal’, which suppliers’ AR departments are encouraged to access to reconcile their payments at the end of the month. Shifting the reconciliation responsibility to the suppliers cuts costs and boosts efficiency for the retailer, as administration calls are reduced and staff can focus on value-added tasks.
Outsourcing is playing an important role in today’s leading AP solutions. To continue with the example of the retailer, they chose to implement an outsourced, hosted model for their supplier portal. The solution goes as far as outsourcing the entry of all paper-based documentation – such as supplier invoices, correspondence and regulatory documents – into the repository sitting behind the portal. The retailer forwards all AP-related mail directly to the outsource provider, who scans it into electronic format and uploads it into the system. The outsource service is effectively providing a digital mailroom.
Cost benefits are also accrued through paperless invoicing. Supplier invoices, remittances and other important documents are delivered electronically, with the system alerting the supplier via email to access the portal and draw down the documents. All transactions are automatically archived for audit purposes.
This route is becoming a popular choice because the benefits of harnessing an outsourced AP or AR document management solution are not simply restricted to accessing the technical capabilities of a market-proven solution. They are also derived from the fact that no capital expenditure, software licence or maintenance fees are required. Instead, users are charged a pay-as-you-use service fee that is highly flexible and allows the organisation to accommodate peaks and troughs of activity. Also, the in-house IT department does not have to contend with the age-old problem of hardware obsolescence or upgrades.
As credit conditions continue to tighten for many firms, the quest for efficiency in the finance department is reaching new heights. For many organisations, the first step is to digitise paper-based processes in the AP function, to take advantage of supplier early payment options and gain greater visibility of their cash-flow situation. We are seeing new developments in the AP automation, as supplier self-service applications start to reap real benefit. As the burden of late payment weighs heavy on many firms, attention is also focusing on AR – but too few firms have yet invested in combined AP/AR solutions, despite the fact that the underlying document-related processes are similar.