Latin American e-invoicing: Focus on Cost or Cash

Unlike the US and Europe, Latin American countries including Brazil and Mexico have forced through the adoption of electronic invoicing (e-invoicing). Experience has shown that most individuals working within treasury are daunted by the work involved in e-invoicing once they appreciate its complexity. Nonetheless, there are huge benefits for treasury departments and accounts payables (A/P) organisations that are driven by these mandates.

Straight-through processing (STP) is a topic that has been much written about, especially in an age where corporations are looking to technology to drive process efficiency. STP, by definition, takes electronic data from the invoice and automatically matches that data to a backing document, such as a purchase order and goods receipt. Where the match is exact, or within tolerances set by the business, the invoice is processed and made ready for payment without manual intervention. This enables individuals to focus their energies on those invoices which are more problematic, which in turn allows companies to become more profitable and streamlined. Capturing the line item data electronically from an invoice is the major hurdle for STP. Countries such as Brazil and Mexico have eliminated many of the traditional roadblocks that have plagued e-invoice initiatives in both the EU and the US for the past decade. 

The benefits of the e-invoicing process in Brazil and Mexico are as follows:

  • The dreaded scanning and optical character recognition (OCR) technologies are removed, as each country’s government has mandated the use of e-invoicing.
  • Multiple invoice formats are dispensed with, as they have also standardised the invoice extensible markup language (XML) and data format.
  • Supplier rollouts and conversion to e-invoice are simplified as the government mandates that the XML invoice, which is what matters fiscally, be made available to buyers.
  • Many accuracy issues are reduced, as what is on the invoice will match what is on the truck. Part of the process mandates that a truck cannot leave the warehouse without being accompanied by a special printed version of the invoice. 
  • Time constraints shrink because the XML invoice can be made available to the buyer even before the goods arrive at the unloading dock, enabling it to run through the majority of matching even prior to the truck arriving. This accelerated matching and time savings make the Latin America market an opportune target for supply chain financing (SCF) and reverse factoring.

Shared service centres (SSCs) wishing to focus on simplifying their operations, could do worse than to focus on the Latin American operation. Most of the projects that I’ve been involved with over the past four years have always had a focus on Europe. However, European e-invoicing is hampered by the fact that organisations usually have to convince suppliers and customers to move to an e-invoice. This is either done through internal resources, or outsourced to expensive supplier networks that tout their supplier base coverage. Often there is a goal to get a base of suppliers on-board over a three year period. Unfortunately, the reality is that most organisations struggle to reach more than 25% of their suppliers on-boarded by the end of that three-year period unless they are able to mandate the use of e-invoicing – and relatively few companies can do that without suffering repercussions from the supply base.

Focus: Cost or Cash

Latin America allows finance executives the opportunity to achieve operational cost savings, while the process also provides the right environment for strategic working capital optimisation programmes. This is a different way of thinking about invoicing as many organisations only look at e-invoicing, especially in the realm of A/Ps, as a purely ‘operational cost savings’ issue. But in the current global economy, the operational issues have a direct effect on the strategic issues.

Most common requests by the payables team include:

  • Help in eliminating paper processes for invoicing and payment (cheques).
  • Ways to automate expensive manual reconciliation processes.
  • Ways to shorten long cycle times of 45 to 60+ days, so that full-time equivalents (FTEs) are more efficient.

These requests always come down to a fundamental dollar savings, regardless of whether the subject is phrased as efficiency, time, or restructuring through the use of shared services or business process outsourcing (BPO). While these cost savings must justify an automation project, they should not be the only concept scrutinised because when discussions switch to the office of the chief financial officer (CFO) and treasurer so the requests change. 

The common issues move from operational to strategic, including:

  • Solving the inability to optimise cash flow; for example missed discounts.
  • Addressing liquidity concerns for mission-critical supplier operations.
  • Exploring options for short-term investment of cash.

In short, it is difficult to achieve the strategic working capital optimisation objectives without an automated process. So rather than spending years trying to enable your trading partners to switch to e-invoicing, you should go to where the government has already solved those automation issues.

Summary

A number of countries in Latin America have figured out how to set up the perfect technical environment, and look beyond basic compliance as the objective. There are business benefits beyond STP of invoices. Automated matching is only the first step of automation – there are huge advantages to be gained in the form of cost reductions in inbound receiving and, more importantly, in financial supply change management. Being able to accurately state that the invoice is approved for payment, in some cases as soon as the goods arrive from the supplier, creates the perfect environment for dynamic discounting and SCF.

Brazil’s government went a step further to promote SCF by establishing the Fundo de Investimento em Direitos Creditórios (FIDC) which is a financial instrument widely used in the Brazilian credit markets. A FIDC is a type of fund composed of receivables (direitos creditórios) from different types of issuers.  Additionally, they are afforded beneficial tax treatment compared to traditional securitisation vehicles. Many companies are taking advantage of the FIDC in multiple ways:

  • Corporates with large volumes are establishing their own investment fund (FIDC) where they actually manage to concentrate monetary flows between subsidiaries using non-taxable trade instruments to net their financial position.
  • Corporates are creating their own FIDC to factor their own receivables.
  • Corporates are sponsoring supply chain finance opportunities in conjunction with a FIDC to offer their suppliers access to capital at a lower cost. This is a win-win-win scenario for the buyer, the supplier and the FIDC.
    o Buyers want to extend working capital to their suppliers to address liquidity concerns.
    o Suppliers need access to capital at lower costs and can utilise the buyer’s credit rating to obtain capital.
    o The FIDC needs to maintain a certain investment baseline of ‘direitos creditorios’, or receivables, in order to maintain their preferred tax treatment and having a revolving line of investment grade opportunities from within a buyer’s supply chain is critical.

The environment is set for cost savings and cash management in the economies of Latin America. More and more countries are adopting these e-invoicing models, so ensure your financial team is involved in the selection of your Latin America e-invoicing provider. Most companies limit the discussion to basic compliance and information technology reviews. And most finance executives will miss the opportunity to optimise working capital in this region of the world.

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