Invoice Automation: The Ticket to Greater Efficiency and Savings
In 2011, roughly five million European businesses and 75 million consumers are expected to send or receive more than 30 billion electronic invoices (e-invoices). And according to research from Billentis, they will shave between 60% and 80% off paper-based processing costs.
Unfortunately, far more companies will continue to process invoices manually. And they will miss savings opportunities and lose productivity as a result. Industry analysts estimate that 85% of invoices and payments are still sent on paper, at a cost of more than US$650bn a year.
By automating the invoice and payment process, companies can recapture some of this money and achieve substantial time and cost savings that can improve their bottom line. What’s holding them back?
A major challenge facing many accounts payable (A/P) departments is coping with the rising volume of paper invoices. Companies that responded to PayStream Advisors 2010 invoice automation benchmarking survey indicated that they receive more than three-quarters (77%) of their invoices via paper. Respondents also stated that the high volume of paper invoices was their single greatest source of pain in invoice management.
It’s no surprise then that implementing e-invoicing was the top automation goal, cited by 40% of survey participants. This is a big change from several years ago, when companies were still focused on improving paper processes rather than eliminating paper at its source – their suppliers.
Other research documents the cost savings from getting rid of paper and automating invoice processing. According to a 2010 Hackett Group A/P performance study, a high correlation exists between e-invoice processing, low cost per invoice, and high on-time payment percentages. Organisations with the highest percentage of e-invoice line items (80%) were reported to have a US$2.14 cost per invoice and 92% on-time payment percentage. Bottom quartile companies, with only 2% of e-invoice line items, were shown to have a US$5.22 cost per invoice and 85% on-time payment performance.
As this data shows, eliminating paper invoices gives top performers a distinct advantage over companies still heavily dependent on paper. For example, a global equipment manufacturer dramatically reduced its operating costs on a global basis by transitioning to e-invoicing. Today, the company processes 90% of its global invoices electronically and has achieved an almost 100% touchless process. The company is so efficient that it has been able to reallocate 75% of its global A/P staff from tactical activities to more strategic work such as budgeting and forecasting.
Automating invoice processing can also reduce risk and enhance cash flow management. For example, one major media company used to have as much as US$24m in invoices on a person’s desk, but wouldn’t know of the liability until the invoices were processed. Moving to e-invoicing provided real-time visibility into these liabilities to greatly increase reliability in cash flow forecasting.
While automating the processing of invoices delivers many benefits, challenges may arise when it comes to non-purchase order (PO) invoices. Non-PO invoices result when a supplier has provided goods or services to a buyer without receiving a PO. Because they lack an associated PO, these invoices require far more work to process once they arrive at the buying organisation, creating a host of problems along the way including:
Because of the operational shortcomings of non-PO invoices and lack of spend control over non-PO purchases, many companies are seeking ways to increase their volume of PO-based invoices. With PO-based invoices, approval to purchase the goods or services occurs before the purchase, allowing for faster, better matching to ensure invoice accuracy and fewer errors due to pre-coding.
While non-PO invoices add complexity to the invoice approval process, few organisations will abandon them altogether. In some cases, non-PO invoices are more practical, such as when field employees have good working relationships with vendors and need goods or services ‘on demand’. Moreover, companies must sometimes procure services whose price or quantity cannot be estimated up front – the requester just knows ‘something needs to be done’. With maintenance expenses, for example, they may not know how much labour is involved or what parts will be required in a repair.
Small dollar purchases offer another example, where the expense of approving and issuing a PO can’t be justified. This is especially true if such purchases are a one-time or occasional, rather than recurring, expense.
In addition, companies with a decentralised or weak purchasing structure or remote offices that place orders with local suppliers tend to have a larger proportion of non-PO invoices. Because these invoices by definition lack pre-spend approval, the need to continue accepting them complicates the effort to manage spend and track outstanding liabilities.
So how can an organisation effectively manage and track its spend and outstanding liabilities against non- PO invoices? One good rule is never to enter a non-PO invoice directly into your enterprise resource planning (ERP) system without first performing some kind of validation or having the invoice go through an approval workflow. Today, electronic workflow is part of many e-invoicing solutions, making it easy for end users to code and approve invoices in tools such as email or with a mobile device.
When non-PO invoices represent a large volume of spend, automation provides an opportunity to capture the spend for analysis, streamline accruals, and eliminate manual touchpoints. The right automated solution can break down the non-PO invoice processing problems, apply technology and enforcement procedures to improve controls and visibility and increase straight-through processing (STP) rates.
Another good practice is to require vendors to enter the requester’s email address on all non-PO invoices. An automated workflow solution can detect the email and route the invoice directly to the business unit that ordered the product or service. Non-PO invoices without an email address can be rejected and returned to the supplier. This approach helps suppliers to quickly resolve the problem, avoiding further payment delays.
The best automated solutions also make it possible to preserve line-level details on non-PO invoices, including commodity codes, so procurement has visibility into vendors and spend details. In fact, some companies have justified e-invoicing projects based on the ability to capture line-level data alone. By making procurement aware that a purchase may be a good candidate for PO spend or that one-time vendors may be creating leakage in negotiated pricing for a given commodity, organisations gain a strategic benefit.
An often-overlooked benefit of automating PO and non-PO invoice processing is the opportunity to expand early payment discounts and optimise working capital. Nearly a third of respondents to PayStream Advisors 2010 e-invoicing benchmarking study listed the ability to capture discounts as a priority for their organisation, while another 49% described the ability to capture discounts as “somewhat important”. However, just 27% of respondents said they “always” have the ability to capture discounts, while 14% said that they “never” capture discounts.
In most cases, companies fail to capture discounts available to them because they can’t process the invoices fast enough. According to the PayStream Advisors study, the top reasons cited for missed discounts were:
E-invoicing dramatically compresses the invoice approval cycle – reducing it from 23 days to as few as five, according to PayStream research – and eliminates much of the friction associated with paper-centric invoice processing. It also enables companies to take greater advantage of early payment discounts. In addition to maximising the capture of standard discounts, such as 2% 10 net 30 terms, some e-invoicing solutions present ‘dynamic discounting’ opportunities, where discounts can be captured on a sliding scale based on payment timing after the standard discount date.
With all the benefits that e-Invoicing can deliver, why are so many companies still clinging to inefficient, paper-based processes? Because change is never easy. Particularly when you must convince external parties to make it with you.
Supplier participation is a key driver of success in any e-invoicing initiative. And many companies frankly fail to invest the time and resources necessary to target, on-board and maintain their partners. In addition, country-specific regulations in the EU have resulted in leaders and laggards. This is primarily driven by different levels and treatment of VAT taxes and requirements related to the storage of paper invoices.
But a new breed of solutions make these challenges easy to overcome. Such solutions attack the inefficiencies that exist between companies – such as sending and receiving invoices and payments – to enable more effective collaboration. Delivered in the cloud, they require no special hardware or resources to run and can be easily shared and accessed among trading partners, allowing for common business processes in areas such as billing, treasury, and A/P.
And they’re delivering results across several fronts. The bottomline impact of leveraging e-invoicing solutions delivered in the cloud comes through efficiency gains in A/P processing. It simply takes fewer staff to process invoices with technology in place. There are also strategic gains driven through more on-time payments, shorter approval cycle times, early payment discount capture and the maintenance or extension of days payable outstanding (DPO), among other things.
A lot of companies claim to offer cloud-based technologies to streamline and enhance the invoice and payment process. But not all solutions are created equal. When evaluating an offering, be sure that it:
With the right e-invoicing solution in place, companies can revolutionise an ancient business role and take their organisations to new levels of efficiencies and deliver improved performance and ultimately, profits. So what are you waiting for?