What happens to accounts payable (AP) when invoices process themselves? Long consumed with the processes of capturing, sorting, routing, validating, matching, coding, fixing, approving and paying a paper invoice, AP can’t continue down that path. Organisations that continue to rely on paper payables will be the high-cost operators, spending too much time resolving invoice errors and exceptions and ignoring activities that help improve financial performance.
Today, smart business networks are making possible a new generation of collaborative payables applications, delivered in the cloud that are changing the face of AP. Problem invoices are automatically rejected without business user intervention and returned to suppliers, so that they can fix them.
At information and analytics specialist RELX Group, formerly Reed Elsevier, the scanning of paper invoices was a first step toward invoice automation, but the company needed to further streamline invoice processing to eliminate exception management and invoice rework. Through electronic invoicing over a business network, the group today drives high levels of straight-through processing (STP).while laying the foundation for contract compliance and the expansion of early payment discounts.
“We no longer have to chase invoices and print duplicates and our suppliers love the new process,” says Ed Aderman, RELX’s financial programme manager, global procurement. “Once they get faster visibility into invoice status and receive payments, they are strong advocates.”
Business networks are also enabling organisations to collaboratively manage more transaction-related documents, including purchase orders, order confirmations and advance ship notices (ASNs), along with invoices. This is key to ensuring STP from procure through pay. To protect against contract leakage, organisations can expand the use of catalogues and even invoice against contracts. For example, the contract matching capabilities of the Ariba network – enabling line-level matching, not just header-level matching – simplify invoice approval and exception management for non-PO invoices.
At North America’s largest manufacturer of roofing materials and shingles, GAF, the ability to match electronic invoices to catalogues, purchase orders and contracts enables a “perfect payable.” According to Patricia Hutton, the company’s vice president of global procurement, this helps GAF reduce rogue spend, enforce contracted pricing on invoices, and maximise spend with key suppliers to lower costs.
AP as strategic resource
Being freed from the responsibility of managing transactions means AP staff is available for higher value activities. These include weaning suppliers off paper, performing root cause analysis of recurring invoice errors, enforcing contract compliance, identifying early payment discount opportunities and driving cheque-to-electronic payment initiatives.
Add to that cloud-based electronic workflow and you can configure workflow routing by spend type or supplier category, and tailor workflows according to business need. This could include adding tax experts in the review of invoices that contain tax estimates.
By overcoming the limitations of legacy processes built around paper, these new capabilities take global business commerce to another level. For companies as diverse as the Dubai-based global conglomerate Al-Futtaim Group (which operates more than 170 showrooms, service centres and warehouses and operates in 14 North American countries, including the US) and a US provider of transportation and supply chain management solutions, a disconnected business process had been the source of many problems. Here’s a partial list of the challenges these organisations faced:
- A tedious purchase order (PO) approval process.
- Field locations easily bypassing the contract process.
- Many invoices with errors requiring extra attention.
- Journal entries to correct and charge back cost centres.
- Inability to control and monitor spend
Simplifying procure-to-pay operations over a business network was key to both organisations. For Al-Futtaim, one benefit was STP of orders and invoices. Before the change, the group would often fix errors relating to prices and general ledger entries. Today, 97% of POs go through without any rework, and the ability to flip a PO into an invoice provides a level of accuracy that it didn’t have before. In addition, users now handle the goods receipt notifications to further expedite transaction processing, and there is better visibility into spend.
Meanwhile, the transportation and supply chain management company reported that 98% of its invoice volume was being processed electronically, with strong validation rules to ensure invoice accuracy. The ability to map commodity codes to the general ledger and automate accruals are other valuable business process improvements. Accruals occur upon goods receipt, not invoice receipt, which is a boon to the finance group. Furthermore, by ordering off catalogue, one negotiated price is enforced at all locations and reports on spend data identify sourcing opportunities that further lower costs.
As another example there’s the case of a leading refinery and chemicals company, which had a recurring problem with a large supplier over invoice-PO match errors. Once the company and the supplier began transacting over a business network, the bottlenecks became clear (they were supplier issues), the problems were solved and these invoices processed straight-through. Since the collaborative process saved the supplier time and lowered billing costs, that supplier reduced its prices for orders flowing through the network.
Delivering value to suppliers
Lower transaction costs from straight-through invoice processing is a major advantage to suppliers on a business network. The ability to convert a PO into an invoice using the tools available in e-procurement or electronic invoice presentment and payment (EIPP) platforms – aka a PO-Flip – helps suppliers to consistently submit clean invoices and eliminate the extra effort often involved with a paper process.
Paper invoicing also keeps suppliers in the dark about when they will get paid, leading to calls into AP about payment status. To eliminate those calls, business networks offer a portal for supplier self-service to view the status of invoices and payments. Helped by the next-generation electronic payment solutions for business, organisations can deliver detailed remittance advice to suppliers with every electronic payment, making it easier for them to apply those payments.
A business network can also serve as an e-commerce channel for suppliers to find new customers, as well as expand business with existing customers. For the transportation and supply chain company referenced earlier, one supplier working with a handful of locations expanded that business by simply offering its catalogue to nearly 1,000 locations.
New ways to manage cash
In today’s low interest rate environment, early payment discounts are attracting attention to lower costs and increase earnings on short-term cash.
With the efficiency of e-invoicing, organisations can capture virtually all of these discounts, as well as a new form of “dynamic discounts” on a sliding scale up to the invoice due date. According to industry studies, average cost savings from these discounts come to US$2m for every US$1bn of spend. The best performers also find that about 20% of targeted suppliers will participate in early payment discount programmes.
Electric utility American Electric Power (AEP), which supplies power across 11 US states, is among the organisations taking advantage of discount opportunities over a business network. In addition to cost savings and cash earnings from discounts, the utility consolidated 150 payment terms down to four and generated a two-day extension of its days payable outstanding (DPO). Another world-class utility experienced costs savings of over US$18m annually from better management of its payables. Much of these savings came from early payment discounts.
Building the business case
If streamlining invoice management and procure-to-pay operations (P2P) remain low priorities for you, it’s likely that key stakeholders don’t understand the true cost of a business transaction. They may not know about the large number of problem invoices requiring rework, or the drain on business resulting from off-contract spend.
In building the business case for AP automation, recognise that the 60%-80% cost savings from e-invoicing is only a small portion of the return on investment. Even greater savings come from expanding early payment discounts, freeing up working capital, and enforcing contract compliance. According to P2P industry studies and SAP Ariba customer results, the savings from these areas are conservatively estimated to be US$10m per billion in spend.
As you embrace a business network to automate payables, you’ll experience a breakthrough in the AP function. There’s more time for business analysis, and less time needed for data entry, exception management and answering supplier inquiries about payments. This elevates the role of AP from a tactical cost centre to a strategic asset, which gets recognised for making valuable contributions to bottom line results.
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