Partners in Profit:
AP’s Role in Sending Dollars
to the Bottom Line
A Special Report from
The Accounts Payable Network
Sponsored By:
Partners in Profit:
AP’s Role in Sending Dollars
to the Bottom Line
A Special Report from The Accounts Payable Network
© 2014 Diversified Business Communications
Published by Diversified Business Communications, Portland, Maine.
All rights reserved. No part of this publication may be used or reproduced in any manner or stored in any form whatsoever without written permission of the publisher. For information, contact Diversified Business Communications, 121 Free Street, Portland, ME 04101, 207-842-5557, www.divcom.com.
Table of Contents
The Accounts Payable Network Advisory Board ... 4
Introduction ... 5
The Need for Increased Visibility ... 6
How Automation Improves Processes — The Basics ... 7
Beyond the Basics ... 8
Quantifying the Benefits ... 10
Closing the Gap Between the Promise and Reality ... 11
Conclusion ... 13
About The Accounts Payable Network ... 14
The Accounts Payable Network
Advisory Board
Steve Adams, CPA
Director of Global Shared Services Implementations, McKinsey
Vivian Baker, APM
Accounts Payable Director, Financial Shared Services, The Coca-Cola Company
Judy Bicking, APM
Former Global Director, Accounts Payable European Project, Johnson & Johnson
AP Best Practice Consultant and owner of Island Decor & More / Ship to Shore Home Decor
Debbie Vander Bogart
Senior Director, Finance General Manager, Shared Service Center, Levi Strauss & Company
Larry Brang, CPA, APM
Director, Commercial Services - Americas, Merck & Company, Inc.
Dennis Cooper, MBA
Vice President, Operations Director, Accounts Payable at PNC Bank
Lynda Foertschbeck
Executive Vice President, IRSCompliance, Inc.
David W. Hay
Consultant, Former Director, Shared Services, Hewlett-Packard Company
Lex Lannom
Managing Director, Global Disbursements, FedEx Services, FedEx Corporation
Frederick C. Litow, CTP, APM
Head of Financial Administration, ING
Thomas F. Nichols
President, Process Management Improvement, Inc. and former director of financial operations
for AT&T’s corporate accounts payable and payroll management
Pamela Russavage, APM
Finance Manager, ConAgra Foods Business Services Center
Ben Shafer
Director - Payment Services, Pacific Gas and Electric Company
Susan Tinkler-Muller
Introduction
Advances in accounts payable automation are changing the way organizations look at AP operations. Once viewed as clerical cost centers primarily focused on keying data into accounting systems, AP departments are increasingly able to demonstrate real value to their companies.
Operating efficiencies reduce costs, sending dollars to the bottom line, but that’s only the beginning. Faster invoice processing can eliminate late payment fees and allow companies to capitalize on early payment discounts. This profitable use of free cash rewards the payer with double-digit, risk-free returns, and also can strengthen vendor relationships by improving cash flow for suppliers.
AP automation also offers near real-time visibility into the financial status of an orga -nization, allowing managers to base financial decisions on accurate, up-to-date information. With manual processing, invoices for substan -tial amounts can remain hidden and unac -counted for, leading to problems with cash flow and significant late payment penalties. AP automation gets data into the system more quickly and accurately, giving finance and ac -counting managers a complete picture of their organization’s fiscal status. It’s also easier to analyze spending patterns, ensure individuals are using approved vendors and stop out-of-program buying.
One organization discovered:
• > 78% of spend occurred out
-side of designated purchasing channels.
• 35% of total purchases resulted from “maverick buying” that failed to take advantage of ne
-gotiated company discounts
• Its decentralized procurement process contributed to invoices arriving in AP 31 days after in
-voice date — resulting in 66% of all invoices being paid late. Spend analysis identified these issues.
Armed with accurate, timely and detailed spending data, organizations gain the power to impact profitability. They are able to monitor buying behavior to increase policy compliance and savings, and to negotiate more favorable pricing with vendors. Extract -ing and utiliz-ing valuable business intelligence thus has a measurable impact on the organization’s bottom line.
The Need for Increased Visibility
Too often, the case for AP automation focuses solely on operating efficiencies. And that’s understandable, as it is a simple story to sell: an investment of X yields a sav -ings of Y. But focusing only on the low-hanging fruit underestimates automation’s real potential, according to Judy Bicking, an AP best practice consultant and member of The Accounts Payable Network Advisory Board.
“You can automate the process of invoicing to the point of eliminating the department pretty much, but that’s not where the true value is,” says Bicking, whose experience includes a 27-year tenure with Johnson & Johnson, where she served as global director, Accounts Payable European Project. “The data is the gold.”
What companies often fail to realize, she says, is that AP is the only function within an organization that has 100 percent knowledge of actual spend. In her role as a consultant, Bicking says she often hears from clients that it is procurement’s responsibility to nego -tiate with suppliers for best price, quality and delivery. But with a significant percentage of transactions occurring without purchase orders, she notes, procurement’s mission can only be incomplete at best.
“For many organizations, the invoice is the first acknowledgement of a debt,” Bicking says. “And, unfortunately, it’s usually followed by the supplier who calls to say, ‘You haven’t paid me.’ But that can’t be the realization of your debt. How can you operate not knowing if you’re selling enough to cover your debt? This is not the way to be run -ning your ship.
“Companies don’t know what they don’t know,” she adds. “AP has to change the process.”
With manual processing, invoices tend to hide, resulting in lost discount opportunities and late payment fees. It’s hard to know how much you’ve spent, and how much cash you need to have on hand, when the information you need resides on pieces of paper slowly making their way through the organization over cities, states, and even continents.
From an executive perspective, this lack of visibility is maddening, and financial analy -sis can become more of a guessing game than an exercise in management. Even worse, consistently late payments damage an organization’s reputation in the eyes of vendors and business partners. Too often, the blame for inefficiency falls on the AP department. But without automation, AP is as blind to the upstream processes as anyone else, and just as powerless to move things along.
How Automation Improves Processes — The Basics
True AP automation starts with accurate data capture technology that reduces manual keying and allows outstanding obligations to be recorded quickly in the payment systems. Data can be validated against vendor information in the financial system, and matched with purchase orders, contracts and receipts. Data capture also eliminates theAutomated workflow eliminates “lost” invoices with reminders to approvers, and en -sures approvals are handled according to business rules.
Automation technology boosts productivity with real-time dashboards that allow AP managers to track efficiency and workload at the individual and departmental level, allowing appropriate staffing for peak periods. With this information, managers also can benchmark the invoice processing cycle, pinpoint bottlenecks and compare data over time.
Beyond the Basics
When they’re no longer chasing paper and keying in data, AP resources can be put to more profitable use, such as researching and resolving root causes of exceptions, capturing discounts and extracting spend data for analysis of patterns and practices. Automation makes it possible for companies to capture and take a “deep dive” into AP data — understanding what’s been purchased, where, when, how and at what price. That information sheds light on buying behavior and provides opportunity to change spending habits that are detrimental to the organization.
According to Bicking, it is commonplace to discover that “You’re buying whatever an individual in your company needs, and they’re so busy with their jobs that they’re buy -ing wherever, whenever and at whatever price. Often, they’re pay-ing overnight delivery because they waited until the 11th hour to buy what they needed to get their job done.”
Such actions may seem innocuous when committed by a single individual, but such behaviors don’t typically occur in isolation. Projected over an entire organization, the collective impact can be astounding. A best-practice, automated AP function provides
the requisite foundation for business intelligence that can restore order by achieving the following:
• Reining in “maverick buying”
A leading financial institution conducted a comprehensive review of its procure-to-pay cycle because it was troubled by poorly managed spending and excessive late payments. The bank prematurely concluded that its AP department was performing inadequately, however data analysis revealed the real problems:
— More than 78 percent of spend occurred outside of designated purchasing channels.
— 35 percent of total purchases resulted from “maverick buying” — defined as “off contract” buying that failed to take advantage of negotiated company discounts.
— Its decentralized procurement process contributed to invoices ar -riving at AP 31 days after invoice date — resulting in 66 percent of all invoices being paid late.
— Spend analysis identified these issues that could yield significant savings.
• Negotiating better rates
Using the right technology also enables an organization to establish a master database that can manage vendor growth, as well as provide insight into ac -tual spend that can lead to negotiation of better rates. For example, a com -pany could identify its vendors for office supplies and determine the annual expense for such goods. Bicking outlines the following scenario: “Suppose I find I am dealing with nine suppliers; I can select and negotiate — ‘If I give you all my spend, can I coordinate best price, quality and delivery?’ That’s spend management. What would I save if I did that versus what I’m paying for office supplies today?”
Quantifying the Benefits
Though automation’s individual cost-saving benefits are impressive in their own right, they can collectively have an eye-opening impact on profits. The Institute for Supply Management has calculated that every dollar saved in operations is equivalent to $7 to $10 in additional sales (depending on the desired margin of profit).
This so-called “sales equivalent” is key to quantifying an automated AP operation’s bot -tom line benefit. And that benefit can be substantial.
Consider an example using the following assumptions: • $300 million in sales
• 10% profit before taxes ($30 million)
• Cost of goods purchased at 45% of revenue ($135 Million)
A 10% reduction in cost on half the spend (0.1 x 135M x 0.5 = $6.75M) would yield a 23% increase in profit. That increase represents the equivalent of $45 to $65 million in additional sales.
In a case study documented the Procurement Strategy Council/Corporate Executive Board (PSC/CEB), a global technology company realized $1 billion in savings by ag -gregating spend data from multiple systems and analyzing monthly spend reports. Most companies have a long way to go before they can perform that kind of spend analysis. But savings are available even to companies just embarking on the automation transformation.
As previously discussed, it is common for organizations that haven’t fully automated to lose invoices or experience unnecessary delays in processing. Vendors often send
invoices to individual departments where the documents languish before arriving at AP, resulting in late payment fees. Duplicate invoices cause even more confusion as well as inadvertent overpayment.
One Fortune 100 company, cited in TAPN’s The Future of AP: Technologies for
Improved Efficiency and Financial Visibility acknowledged late fees totaling $1.5 mil
-lion per month. By efficiently processing invoices, automation can help avoid such unnecessary charges. Just as importantly, it can create opportunities to capitalize on early-payment discounts. With common discount terms of 2/10 net 30, that 2 percent saved equates to a 37 percent annual return on money saved — far exceeding interest earned on holding the money to term. Captured discounts provide risk-free cash to the bottom line.
Closing the Gap Between the Promise and Reality
TAPN’s AP benchmarking surveys show that only a modest number of companies have automated the procure-to-pay process end to end.Without capitalizing on automation, companies are plagued by misclassified and in -complete data, and are undermined by non-standardized data management protocols. In turn, that limits or prevents the ability to capture granular detail essential for forecasting new savings, negotiating better contracts, prioritizing spend categories and enforcing spend compliance, according to the PSC/CEB.
To maximize automation’s benefits, it is imperative that companies bring their suppli -ers online as well. According to the TAPN report, The Future of AP: Technologies for
Improved Efficiency and Financial Visibility, the following are effective tactics for
• Require existing suppliers who seek additional business or price increases to agree first to convert to automation.
• Add a processing fee for paper invoices. This is increasingly becoming ac -cepted, particularly with organizations such as retailers.
• Create alliances with software providers — they have “ramp teams” that can help bring existing vendors online.
Just as important as gaining vendor cooperation is persuading company management to believe in AP’s potential, according to Bicking.
“Upper management often doesn’t have a very high opinion of accounts payable. Be -cause of this process in which invoices are aging past due, and phone calls get escalated to the top, it looks like AP is out of control and not doing the job,” she says. “That’s not the case. AP, unfortunately, is the last to know.”
To overcome such perceptions, AP managers and directors should build a well-docu -mented case when lobbying for automation. Bicking’s advice:
“Study your data; study your metrics. Outline your current process, and what the process needs to be. Then, you’ve got to start meeting with upper management, saying what you need to bring cash under control, and explaining why AP is important: Be -cause you’re the main input to the liability of the financial statement. You have to talk the CFO’s language . . . If you stick to the facts, it will change.”
“Will it happen overnight? Probably not. It is a long process.
“Too often, managers run accounts payable, but don’t get into the details,” Bicking continues. “They think that’s not their job. But if you don’t get into the details, how are you ever going to convince upper management how they really should be handling the procurement process, from thought-of-need to payment?”
Conclusion
With a vision of what AP can become and ample means to quantify the rewards, AP leaders need to accelerate the transformation from paper pushers and heads-down data entry to a valuable source of business intelligence.
With the use of automation and technology and an eye toward holistic spend analysis, AP finally can shed its reputation as a bottleneck and become a valuable contributor to reaching corporate goals. By teaming with purchasing and finance, AP can deliver visibility, efficiency and control of spend — completing its transformation into a true partner in profitability. ■
About The Accounts Payable Network
The Accounts Payable Network (TAPN) is the complete resource for accounts payable, helping more than 36,000 accounting and finance executives at organizations world -wide meet their commitments to accounts payable business process performance. TAPN provides — in one easy-to-access, cost-effective, online location — insights, analysis, guidance, advice and best practices for AP strategies, technologies, controls, compliance, people and processes. Members have unrestricted access to critical infor -mation guaranteed to help them make smart accounts payable business decisions. Focus areas include all AP functions: AP metrics and benchmarking, tax and regula -tory compliance, proven solutions to real-world problems, AP automation, case studies, member Q&A networking forums and more than 250 downloadable, customizable AP policies, flowcharts, templates, and internal-control checklists.
TAPN’s highly popular AP tools help compare technologies and AP solution providers, find new ways to streamline operations and enhance controls, and take advantage of ex -tensive educational opportunities. Additional networking opportunities allow members to share problems and solutions with peers “in the trenches” through the public and private forums and discussion groups.
The Accounts Payable Network is completely independent and is not owned by or affiliated with any industry supplier. For further information, please contact The Accounts Payable Network, 121 Free Street, Portland, ME 04101, 207-842-5557, www.TheAccountsPayableNetwork.com
About Perceptive Software
Lexmark’s Perceptive Software (NYSE: LXK) builds intelligent capture, content man -agement, process man-agement, enterprise search and integration products that bridge the gap between enterprise software applications and the unstructured information and processes they don’t manage. Perceptive accounting solutions increase visibility and control, allowing organizations to improve financial performance, reduce risk and en -sure future flexibility.
