Businesses are increasingly focusing on the finance department’s operations, relying on accounts payable (A/P) departments more than ever before to keep the lifeblood of a company – cashflow – circulating. At the same time, companies are looking to align finance functions with procurement and drive efficiencies across the purchase-to-pay (P2P) process to achieve common goals.
Despite the many benefits organisations can gain from automation and tighter co-operation between finance and procurement, many are still finding themselves stuck in ‘old world’ processes, where paper invoices are scanned and processed manually. While many are keen for a move to the ‘new world’ of automation and electronic invoicing (e-invoicing), where companies can have large volumes of invoices pass straight through their system without any human intervention, statistics suggest that this ‘new world’ is far from the current reality.
‘Lost in Transaction’, a new report commissioned by Basware that surveyed 550 A/P departments internationally, found that weaknesses in finance processes, from the ‘old world’ thinking, are actually resulting in additional costs for businesses, and in some cases causing invoices to go wholly unpaid. Without proper controls over what is being paid and to whom, companies are left struggling to manage budgets and consequently meet their business objectives. There is a gap between perception and reality, with 59% of respondents believing that A/P is becoming more strategic, whereas the reality is that invoices are out in the wild, leaving A/P departments to chase them. Only by addressing these process gaps can the A/P department start living up to its more strategic role and be able to focus on more value-creating tasks – such as keeping tabs on expenditure and, in turn, improving the balance sheet. Managing cash and maintaining control of what is bought from whom are areas where the A/P department can act as a strategic partner to the rest of the business.
The research discovered that invoice and cross-departmental errors have caused over a third (35%) of A/P departments to leave suppliers unpaid, and almost a quarter (24%) know that their own invoices have not been settled for the same reason – a substantial weakness on both sides. Perhaps more worryingly, 26% of A/P departments questioned had paid the wrong supplier when processing an invoice. Despite this, 59% believe that the A/P department already has a positive effect on profitability. These figures show that A/P departments are a substantial distance from the automated environment that many are predicting.
Erroneous Factors
The A/P departments surveyed in this research were serving large and busy organisations, processing an average of 93,000 invoices per year, with an average processing time of 18 days. Participants stated that 7% of invoices contain errors, equating to more than 6,000 erroneous invoices per year for a typical enterprise taking part in the study. This is a substantial volume, resulting in significant needless expenditure in time and money for the department, and subsequently the companies themselves.
Previous research in 2010, ‘The Cost of Control’, found that there is an average of 50 days sales outstanding (DSO) before invoices are settled. Long processing times prevent companies from reaping the benefits of early payment discounts and driving cost savings across the business. In fact, 30% of respondents have missed early payment discounts in the last 12 months and 27% have incurred late payment fees. Ensuring that these numbers decrease will hugely help the push towards increasing profitability across the organisation, and be perhaps one of the clearest indicators of A/P department efficiency.
Human errors, by both the A/P and procurement departments, are identified as the biggest cause of A/P errors (58% and 53% respectively). Immediately addressable in the quest to eliminate these errors is the lack of communication between A/P and procurement departments, which was highlighted in the report as a cause of A/P errors in a quarter (24%) of companies.
This significant business challenge can be resolved through increased collaboration between procurement and A/P departments, underpinned by integrated processes and systems. This will also provide greater efficiency between the departments, lowering error levels for processes between the departments as a whole.
Peer-to-peer collaboration is vital for the future of A/P departments. Efficiently sharing knowledge and resources online is key – a process that allows collaboration between all department members, rather than just two people across the water cooler. Through increased collaboration and integration should also come greater communication: in addition to bringing advantages in error reduction and efficiency, there is also a greater benefit to knowledge-sharing between the departments.
Breaking Free from Manual Processes
Sixty-one percent of A/P participants in the survey think that invoice processing could be sped up, and 55% that it could be more accurate. With human error accounting for a large proportion of A/P errors, what should A/P departments do now to ensure greater accuracy? There is an overwhelmingly positive sentiment towards increased automation – two-thirds (62%) believe that moving towards higher levels of automation will improve profitability, and a similar number (60%) think that A/P automation is a reliable method for improving payment and accounting errors from the business. It also provides significant business benefits, and gives A/P departments peace of mind and reassurance through the control that A/P departments can have over the system, and overall increased visibility of the payables process.
Despite the apparent benefits of automation and subsequent improvements to control over the A/P processes, only an average of 39% handle invoices automatically with an electronic invoice workflow solution. Twenty-nine percent use non-automated accounting software, but over a third (34%) still handle invoices manually or through a spreadsheet – perhaps a surprising number given the technology available. Many companies use a combination of methods to handle invoices, which one could argue is likely to lead to an increase in handling errors. Given the added time and cost as a result of these errors, it is understandable that there is a positive attitude to change.
While there is a positive view of automation and the related benefits, businesses aren’t putting their money where their mouth is, creating a stark ‘reality gap’. Businesses are open to automation processes, with 44% believing that e-invoices will replace manual, paper-based handling in the next five years. However, given the high levels of manual processes at the moment, it seems unlikely that there will be the stampede towards a brave new world of full automation that would be required – currently, less than 10% of all business-to-business (B2B) invoices in Europe are transmitted electronically. In the US, research company PayStream Advisors estimates that the number of e-invoices traded within the US will overtake paper invoice volume by 2011.
The adoption of end-to-end P2P automation is still low (5%) and automation is partial in most areas, but is highest in issuing purchase orders (POs) (47%), tax accounting (47%) and approving payments (45%), and lowest in supplier transaction (29%) and contract management (31%). However, just 40% of invoices are based on POs, and where POs do exist, a third (32%) of finance departments have difficulty reconciling invoices against them. There is a high reliance on manual methods to match POs against invoices – only one in four companies use specialist invoice processing applications. By making the switch to e-invoicing, and coupling that with invoice automation, companies could accelerate payment times and reduce errors, as well as speed up processing and improve productivity by reducing manual workloads.
A/P Perception
Almost half (48%) of A/P departments think that A/P performance is being monitored more closely than a year ago, which bodes well for the future of A/P departments, as a positive view of the department will only aid its cause in bringing new processes into the business.
By working on removing the process errors and late payments, A/P departments can fulfil their potential by effectively bring their processes under control. This then results in the wider organisation seeing improvements in terms of cost savings as well as improved business processes and capital management, and shows the importance of the department itself. A/P departments need to step outside their comfort zones – many departments are used to ‘old world’ thinking, but ‘new world’ processes can ensure a much slicker and effective processing function. In today’s business environment, companies simply cannot afford to leave these processes out in the wild.
Pursuit of Profits
Recent research from Basware, ‘The Cost of Control 2010’, found that business focus had shifted from extreme cost cutting to an increase in revenue growth and profitability in the coming years. Against this backdrop, it is vital that all elements within the finance function work together to streamline processes, minimise error and optimise profitability.
The survey highlighted that there have been some finance process improvements over the past 12 months – 56% of processes surrounding spending are now automated, against 50% in 2009, and 46% of indirect spending is now captured in PO systems, up from 42% last year.
However, the ‘Lost in Transaction’ survey shows that the engine room of corporate cashflow is some way from the automated, error-free status it desires. There remains a reliance on manual methods of invoice processing leading to significant amounts of time and money being wasted when pushing cash through the business.
Tipping Point
The finance department is often overlooked as a business function with the potential to truly influence a company’s financial performance. The research shows that finance departments are reaching a tipping point – as focus has shifted from cost cutting to maximising profitability and revenue, costly errors and inefficiencies will no longer be tolerated.
Despite huge advances in invoice processing technology, many companies have been slow to adopt end-to-end tools, opting instead for operational systems that still rely on considerable manual processes. With the large proportion of errors in A/P departments coming from a human factor, companies should be looking to increase the speed with which they adopt automation, to increase accuracy, and save time and money through fewer errors.
Cash constantly flows through organisations, and mirroring this, finance departments need to be dynamic and flexible in their processes. Against this backdrop, finance automation should not be avoided because of the perceived cost, but instead regarded as an ongoing evolutionary investment that brings order to chaos, and ensures finance is concerned with profit margins and not inhibited by avoidable margins of error. It is not a ‘big bang’ initiative, but instead a migration where people, processes and technology combine to enable finance departments to set a best practice example to the rest of the organisation.