Automating the AP Process
From an AP standpoint, the process starts with receipt of the invoice and capture of the invoice data. There are three main methods to receive and load invoice data into the AP system
Scanning and data capture technology: Scanning and data capture handle incoming paper, fax and email documents, creating or receiving an imaged document. Simple imaging systems then require manual keying from the image to capture the data into an AP workflow system. While the elimination of paper is a significant step forward, savings are limited given that classification, separation, and keying still must be handled manually.
Broadly speaking, “OCR” technology has developed to automatically read and capture document information. Data capture technology has progressed significantly in recent years, and the leading systems today are quite advanced. They can automatically execute document classification, separation, extraction validation to transform an imaged document into structured electronic information.
There are two key benefits to scanning and capture. First, it is easy to implement in that it requires no change on the part of a company’s vendors – the vendors continue to send invoices via paper-based processes.
The low cost and functionality of modern scanners allow distributed scanning. For example, a remote location can scan receiving documents or packing lists directly into the system to allow for faster, more accurate matching. In a cross-border situation, the invoices themselves can be scanned remotely.
Once scanned, the best document management systems, which manage all kinds of incoming documents from structured forms to unstructured letters, use sophisticated technology to automate processing. A leading supplier has coined the term “digital mailroom” to describe the broad application capabilities of its automated solution. It automates the capture of all incoming mail, whether it is delivered on paper, in an email or via fax, and delivers structured electronic information to workflow processes, business systems and content repositories.
It automates incoming document processing, handling the four key stages:
- · Classification – is this an invoice, a sales order or compliant letter?
- · Separation – where does this document end and the next begin?
- · Extraction – extracting the pertinent data from a document needed for workflow processing.
- · Validation – verifying the correctness of extracted data through application of business rules, plus database and human interaction.
It then communicates with applications and devices to receive and deliver alerts, notifications and updates to employees, customers and suppliers; and delivers extracted information into any workflow, business system or content repository.
The technology enables touch-less processing by reducing the effort to understand incoming documents and information and decide where to send them within the organization.
Structured electronic invoices through EDI or XML: EDL, or electronic data interchange, has been available for many years. Its roots are in the transportation industry, but EDI spread rapidly with the introduction of the ANSI X12 standard in the mid 1980’s. Early adopters were the large retail and manufacturing companies, with the initial focus on direct material POs delivered to vendors.
Although traditional EDI documents still make up the largest volume of business-to-business (“B2B”) documents, few users are adopting the standard. Today, extensible markup language (“XML”), and the internet are a more attractive option than EDI’s older technology, high cost of set up and maintenance, and the dominance of the necessary third-party service providers.
The key benefit of XML is that is an open standard that can be read by both man and machine. The documents can be transmitted point to point through the internet, allowing for a fast, low-cost method of delivering documents.
Web-based portals: The internet has also allowed for the development of web-based portals. These portals have become a critical method of trying companies and their vendors (and customers) into a seamless purchase-to-pay process. There are two types’ portals. The first is the company-sponsored portals. These have been developed by large companies like GE or General Motors. The second type of portal has been developed by software supplier, such as Kofax, that are open to multiple companies, in a many-to-many model, rather than the company specific one-to-many model.
Portals perform multiple functions. POs can be delivered to the vendors, and can be converted or “flipped” to create invoices; invoices can be uploaded at the portal; invoices can be created on a form at the portal; and finally, remittance details can be delivered to the vendor. One key benefit of portals is the reduction in support costs for AP, since vendors can make online inquiries on the portal for invoice or payment status, eliminating the costs associated with phone-based inquiry methods that are often the consuming and disruptive.
In reality, many companies employ all three methods. They may use EDI for direct material purchases and a combination of scanning and a portal for indirect purchases.
The heart of any system is workflow that allows for the complete automation of the approval and matching processes. Once the invoice has been entered into the system, workflow automation is leveraged to complete the approval process. If there is a PO and receiving information available to match with the invoice, then the invoice can be approved automatically and sent to the payment queue.
In addition to the three-way match process, rules can be set up to process routine invoices that have no receiving or PO on file, such as rent or utility payments from known vendors that fall within set dollar limits. Periodic audits should be performed to assure accuracy. The key benefit of this process is the elimination of late payment fees, since most utility, telecommunications and credit cards companies have payment terms less than the normal 30 days. One major company reported that their late fees exceeded $1 million.
Techniques such as assumed receipt/negative assurance can also be used to process invoices that are either discount-eligible or are from known, trusted vendors. An e-mail is sent to the buyer or approver, and AP will automatically approve the invoice for payment if the buyer does not respond within a set period of time. For example, the buyer would have five days to respond on invoices with net 30 day terms, and the two days for discount-eligible invoices or invoices with payment terms less than 30 days.
Once approved, invoices are placed in the payment queue to be released on the due date, whether it is the discount date, a due date as in utility and credit card payments, or as per terms, for example net 30.
Workflow systems allow AP management to design, implement and enforce rules for the business process. These include:
- · Segregation of duties, as the system routes the documents to the correct person for approval or action, and determines that no conflict exists such as the approver having created the invoice or the supplier master record)
- · Standardized and consistent processes
- · Established approval hierarchies for timely approvals
- · Full audit trial
- · Maintenance of all back up documentation for review at any time during the process
Self-service portals allow all relevant parties access to the data on a real-time basis. Reports or digital cockpits (or “dashboards”) allow AP management to monitor and report on progress against goals.
The result of these changes can reduce costs per invoice to below $1.00 per transaction with an elapsed time of the 3 to 4 days or less.
Extended Use beyond AP
A system with effective data capture and automated, rules-based workflow brings several key benefits that change AP from an inefficient cost center to a value-added business partner. But once implemented in AP, use of the system can be effectively extended to other departments within the company. The company can employ the system wherever there is a need for data capture or for work to flow among individuals according to defined processes. A capture-enabled business process management system automates creation, review and distribution of documents for action across the company.
Visibility and Margin Enhancement
Through the use of automation technology, the CFO gains a complete real-time view of the company’s financial condition. Liabilities are accrued as soon as the goods or services are received against a PO or a non-PO invoice is received; actual to budget is immediately updated, and above all, accurate cash requirements are known. In addition, the visibility allows for faster, more accurate audits, better enabling the company to meet internal control requirements.
However, the greatest benefit to the organization is the contribution to maintaining margin, which is the number one goal of CFO’s according to CFO magazine.
AP can assist CFO’s in maintaining or enhancing margins through two key programs: discount capture and spend analysis. In today’s tight markets and increased DPO, many suppliers are willing to give discounts for faster payment. These discounts typically range from 1.5 to 3 percent, with 2 percent for payment within ten days being the most common.
Complete visibility into the transactions gives finance managers the information needed to do a complete spend analysis by commodity or service purchased, or by vendor. In addition, this visibility helps to expose the number of duplicate records that are in the vendor file. Duplicates come about for a number of reasons: the same vendor has been added with different names (e.g., GE, General Electric, GE Capital, etc.), and different sites, or duplicates come about through mergers of companies (e.g., HP and Compaq). Visibility also reveals opportunities, such as regional offices purchasing the same merchandise from the same supplier at locally negotiated, different prices.
These discoveries will often result in an overall reduction in costs of 10 percent or more. People often think discounts are available only to very largest companies, such as Wal-Mart or GE, but small businesses can benefit as well. For example, the author handles the accounting for his son’s small business. By consolidating the bulk of the direct material purchasing to a few selected vendors, the shop had reduced the cost of these purchases by more than 10 percent. Furthermore, the annual minimum expenditure required to qualify for these discounts range from only $6,000 to $20,000.
To see the real benefits of this, assume a company with sales of $250 million and a profit before tax of 10 percent, or $25 million, and a cost of goods sold (“COGS”) of 45 percent of revenue. If the company’s leverage of spend analysis results in a 10 percent reduction of cost on only 50 percent of COGS, it will have added $5.6 million to the bottom line, or a profit growth of 22 percent – a number to make any CFO proud. Operating expenses can be impacted in the same fashion.
However, to get the required return, the company must take care to ensure there is compliance with the buying guidelines and contracts to eliminate off-contract spend. One company thought its off-contract spent was 30 percent. Upon analysis, however, it turned out that it was 200 percent, a figure that ran into the hundreds of millions of dollars!
So, visibility through automation has the potential to add much more than process cost savings to the bottom line.
By centralizing AP, revising processes, introducing automation and reducing the cycle time from weeks to a few days, AP departments can give the CFO the increased productivity and information vital to meet his or her goals. Discount capture, spend analysis, and cost reduction are benefits that directly impact the margin needed by companies in this day and age, at the same time giving the C-Suite the visibility and audit capabilities they need to confidently sign off on the effectiveness of financial controls and management certification of results.
A CFO's View of Achieving the Full Value of Accounts Payable Automation