Accounts payable (A/P) departments are wondering where the future of payments will take them. As they look to modernise and update their systems, change is already underway with customer/vendor/supplier demand as a powerful driver. Companies and individuals are also embracing mobile technology and developing new uses for smartphones and tablets.
Yet there is still a long way to go. The typical organisation makes 57% of its business-to-business (B2B) payments by cheque, according to the Association of Financial Professionals’ (AFP) 2010 Electronic Payments Survey.
Given the many benefits that a payments system update could bring to the A/P department, companies should strive to be at the forefront, not trailing the payments revolution. The time is right for a change. Electronic payments (e-payments) that would have been either difficult or impossible just five or 10 years ago are now feasible, due to a fast-growing technology infrastructure and expanded transaction capabilities.
Geographic and other boundaries are being eliminated. Eliminating paper is also in line with corporate and individual commitments to environmental issues. Finally, and among the most compelling reasons for the shift to electronic transactions, most businesses are under pressure to work smarter and reduce costs.
STP Case Study
For Willbros Group, a global pipeline contractor specialising in energy infrastructure, the transition from paper to e-payments has produced clear benefits.
“We’ve streamlined and built automation into our e-payment processes,” says Patricia Maldonado, director of treasury services for Willbros. “We now have a seamless straight-through method of paying our vendors electronically from our accounts with Capital One Bank that is fully integrated with our ERP [enterprise resource planning] system. This saves us time, money, eliminates human error and is more secure.”
Capital One Bank treasury management services helped design and implement Willbros’ disbursement processes in 2010. “We always strive to use the best technology available,” says Maldonado.
Willbros is one of many companies upgrading and modernising their payments systems. In the 2010 Association for Financial Professionals (AFP) Electronic Payments Survey, which included 484 respondents with the titles of cash manager, director, analyst and assistant treasurer, 67% of organisations reported they had integrated automated clearing house (ACH) into A/P systems, while just 42% had integrated ACH into their accounts receivable (A/R) systems.
Seven Reasons to Go Electronic
While each company will assess what benefits it is most interested in achieving, the following seven benefits are likely to accrue to any business as it shifts from paper to electronic transactions.
1. Cost savings
Once the electronic system is established, the return on investment (ROI) can be significant. Typically, disbursements might include payroll, employee expense reimbursement, taxes and vendor payments. The savings can be substantial, particularly when multiplied over hundreds of thousands or millions of transactions.
Traditional paper payments are expensive at approximately US$1.25 per cheque, compared with less than US$0.15 for ACH transactions, and virtually no cost for paying by credit card. While it may be true in some cases that the float on a cheque offsets this cost, there are new regulations coming into play that will potentially put an end to this source of income.
2. Streamlining and efficiency
A well-designed electronic system can streamline and accelerate disbursements, significantly reducing time spent on administrative tasks. The reconciliation of e-payments over cheques is measurably simpler and, if a company is currently paying for additional account reconcilement services, these costs can be reduced or eliminated.
3. Enhanced visibility
An electronic system also offers better transparency and visibility, including the ability to access real-time information about a company’s financial status, such as cash on hand, and a detailed look at current and expected payables. Having a comprehensive financial view facilitates dealings with partners such as lending institutions.
4. Improved compliance
In response to the current focus on regulation and accountability, from healthcare privacy to financial reforms, electronic systems offer improved capacity to simplify, monitor and improve compliance.
5. Fraud reduction
A measure that helps to control and uncover fraud is also a huge benefit. Once a customer or vendor has been identified and approved, the risk of fraud is minimised. The resources that are freed up can be used to implement additional controls and systems.
6. Business continuity
One benefit that may not be top of mind for executives but is important nonetheless is the business continuity advantage. If a catastrophe occurs, most of a company’s important data can be retrieved from cloud storage, offsite facilities or other locations. Losing access to paper records and even desktop and laptop computers, which can be destroyed in a fire, flood or other disaster, can be less disruptive if there are electronic files.
7. Data analysis
As ‘big data’ aggregation and analysis become a major tool for business operations, competitive analysis and customer relationships, having comprehensive, centralised data can be a major resource and business benefit.
Establishing a Baseline and Goals
While the benefits are compelling, A/P professionals may be unclear about how to make changes at their own companies, or even how to find resources. At one time, very few independent companies and even fewer banks offered paper to electronic conversion and vendor management services. Today, corporations can tap into many more offerings. First, however, they must define their corporate objectives, analyse current systems and assess in-house and other resources.
Once a company’s project leadership team is in place and members understand the interrelationships, it can take on essential tasks, such as researching best practices from financial institutions, industry organisations and other specialists. The research and development of a strategy should address the following five questions:
- Have we delved into our current and projected systems to determine where the company can find efficiency and cost savings?
- Do we have the tools and resources to perform a cost/benefit analysis? If not, how can we harness those resources?
- Do we know what costs are involved in making the transition and creating a usable, sustainable system?
- Do we have sufficient IT support in place to develop, implement, execute, troubleshoot and maintain internal systems? What technology is in place? What upgrades and changes are needed?
- Have we considered and carefully mapped all the points of intersection with financial partners, vendors, customers and others affected by our financial system? Do we have all their financial/banking information we need and do we have transactions protocols in place?
Finding the Right Partner
The above issues are clearly complex and multifaceted, typically requiring input and expertise from across the organisation and from outside experts. Most companies, with the possible exception of very large businesses with a deep bench of internal financial technology experts, will need to look outside for assistance.
For many, partnering with a bank or other financial institution that takes a consultative approach to working with clients is very helpful. With much of the electronic transfer technology and infrastructure developed by or for banks, financial institutions have been on the frontlines. That deep and broad-based knowledge can play a major role in helping companies understand and assess available services and solutions.
Even with detailed, comprehensive preparation, implementation can be challenging. The 2010 AFP Electronic Payments Survey found that the top barriers to adoption of e-payments include:
- Difficulty communicating with suppliers during the process of gaining acceptance for e- payments (83%).
- Inability of trading partners to send or receive automated remittance information with e-payments (77%).
- No standard format for remittance information (72%).
- Shortage of IT resources for implementation (70%).
Among the main foundations for a new system is a secure online platform and a comprehensive technology infrastructure that can process all electronic transactions and transmit information. The interfaces must be easy to use and requirements and procedures need to be clearly spelled out far in advance of the system going live. This will require notifications, instructions and timelines for creditors, as well as a way for them to get help if needed. Extensive testing and refinements should always be factored into the implementation.
While organisations are at different points in their transition from paper to electronic records, it is clear that the trend is only going in one direction. While the US has no fixed date to phase out cheques, the benefits of electronic transactions for A/P professionals are significant. Developing and implementing a new system or updating an existing system is a complex undertaking. The change is inevitable, however, and offers a great opportunity for A/P professionals to lead their organisations as they make the transition.
Six Steps to Automating Your A/P Department
However, overwhelming doesn’t mean
1. Identify core areas to be automated
2. Understand which departments and people are affected by the change
3. Analyse the current process
4. Assess available technology
5. Prioritise and create a roadmap
6. Aim high and create a firm foundation
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