The imminent European Union (EU) Late Payment Directive, which the UK Government intends to bring into force by March 2013, seeks to reduce the burden of overdue payments on businesses by giving companies the right to insist on 30-day payment terms, and to levy penalties and interest on overdue payments. It is hoped that this move will provide the catalyst needed to drive changes in payment practice once and for all. Perhaps understandably, organisations situated on both sides of the fence are approaching this with scepticism and caution. After all, how likely are suppliers to start reeling off the terms of the EU Late Payment Directive to their biggest clients if they are a week overdue paying an invoice? But to dismiss this as just another ambitious, but ultimately flawed, piece of legislation would be missing the point of the broader impact of inefficient accounts payable (A/P) processes on organisations of all sizes.
If a supplier’s invoices are consistently not paid on time, they will become increasingly reluctant to offer lines of credit for their goods and services or prioritise certain accounts, because this could have a negative impact on their own bottom line and cash flow. If the EU Late Payment Directive is enforced, certainly organisations will need improved visibility and control over their payment processes to avoid incurring the resulting penalties, and to build their reputation and status as a preferred business partner. But even if it isn’t enforced, for many organisations operating in today’s difficult climate, long-term survival is unlikely to be possible without streamlined and robust A/P processes in place.
Impact of Inefficient A/P
Without appropriate technology to manage A/P processes and track cash flow finance departments risk not only supplier relations, additional costs (in the form of full pricing and interest on late payments), and cash flow bottlenecks, but also internal efficiency. Placing a heavy reliance on manual processes increases an organisation’s exposure to productivity dips. Handling paper also leads to unnecessary duplication of effort, the inability to track down the right documentation quickly, and the need to physically store it all. Not to mention the risk of those documents being damaged, as in the event of a flood or fire.
Any slowdown in workflow or emergence of bottlenecks, as particular documentation is being tracked down, reflects poorly on finance departments and, ultimately, affects a firm’s credibility. Using today’s financial austerity as an excuse holds little water as inefficient manual processes and susceptibility to human error give out the wrong messages to staff, suppliers and customers.
To ensure that payment systems and processes are fit for purpose, organisations need to reassert control of their purchase-to-pay (P2P) processes and systems to improve visibility and be able to follow through the implications of any one decision or action. This then gives finance departments choices about how and when to pay, in accordance with the expectations of suppliers and their own working capital strategies. Contrast this situation with more ad hoc ‘fire fighting’ as finance teams react to new requests and situations, and it’s easy to see where efficiencies can be gained and the robustness of decisions improved by eliminating paper.
Streamlining Invoice Processing
Typically, 80% of the A/P function is associated with invoice processing. However, despite most invoices being prepared electronically, the vast majority are processed by manually keying information from a paper invoice into a financial management system to then process and pay. This represents a considerable waste of time and effort, especially given that the reproduction process can lead to the introduction of inaccuracies. Automating this function not only eliminates these risks, but enables the digitised content to be re-used in a number of efficient and intelligent way. Benefits include improving managerial visibility, accelerating processing, improving reliability, sharpening internal financial controls and optimising an organisation’s most critical asset (other than its people): cash.
To eliminate paper-dominated processes and drive A/P efficiency, organisations should consider implementing document management and electronic invoicing (e-invoicing) solutions tightly integrated into their enterprise resource planning (ERP) or financial management system. E-invoicing removes the time-consuming burden and costs associated with manually processing purchase invoices. For overstretched finance departments who are typically besieged by paper flying around from multiple sites, the advantages are vast. By streamlining P2P processes, organisations can obtain greater visibility of payments and shorten invoice processing times while improving financial control. It also enables organisations to improve relationships with their suppliers and negotiate favourable terms for prompt payments.
The Untapped Potential of the Cloud
Despite the promise of eliminating paper, achieving significant financial savings and improvements in payment efficiency, many organisations are failing to take full advantage of e-invoicing. A survey of finance directors from more than 600 companies by the electronic vendor Tradeshift provides some clues to the present UK situation. The research, which looked at barriers to adoption, found that for many companies up to 48% of invoices still had to be scanned or input manually, due to the inaccuracy of optical character recognition-based (OCR) scanning. Sometimes the technology fails to interpret invoice data correctly – for example, confusing a ‘0’ with an ‘o’. Interestingly, 57% of finance directors participating in the research admitted that e-invoicing would be more widespread if it was free to all suppliers.
Fortunately, a new generation of cloud-based technology offers to address many, if not all, of these concerns. Unlike traditional e-invoicing systems which still rely on a certain amount of manual intervention, cloud-based e-invoicing solutions completely remove the need to ever print off, scan or manually handle paper. They are able to process text PDF invoices sent by email, by automatically extracting data from the PDF itself via a cloud service application. This data is then converted into a standard e-invoice format before it is uploaded into an organisation’s finance system. In addition, unlike OCR, cloud e-invoicing solutions are 100% accurate as they do not rely on ‘interpretation’.
Evidence suggests that a company processing more than 5,000 invoices per year could save between 60-80% of their existing processing costs by switching to a cloud-based e-invoicing solution, although of course you’ll pay for the service. This could translate to something in the region of £30,000 to £350,000 depending on the volume of invoices processed over a three-year period. What’s more, new cloud-based invoicing solutions don’t cost anything for suppliers, which is a big step in the right direction if e-invoicing is to enter the mainstream and fulfil its promise of revolutionising financial and business efficiency. Becoming ‘paperless’ also helps to free-up vital office space that is currently occupied by boxes full of paper and can help meet organisations’ environmental agendas.
The Bigger Picture
For many companies, modernising the vital supporting activities of the finance department is long overdue. The latest solutions, particularly those which harness web-based portal features and cloud-based delivery, are easy and cost-effective to deploy, and offer additional business benefits beyond those associated with the automation of manual processes. These include the ability to share content remotely, get invoices approved when signatories are out of the office, and trigger alerts when bottlenecks to workflow are threatened or when cash flow risks being compromised.
For the sake of a company’s reputation alone, organisations should be looking to dispense with paper and secure a tighter handle on their documentation so they can address queries satisfactorily in a single telephone call or email. For the sake of the on-going fortunes of the business, they should be building a bigger picture of their financial leverage, maximising the company’s ability to invest when banks aren’t lending, and staying the right side of suppliers, especially with new 30-day payment rights coming into force.
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