Accounts Payable Improvement Requires Procurement Improvement

By David Hilcher

Accounts payable is an area that is singled out for process improvement in many organisations. The business looks at number of people doing manual processing and believes it is a simple case of putting in document scanning, or electronic data interchange and savings will flow.

Having completed four automations, I can put my hand on my heart and state the following:

  • AP is the dumping ground for most businesses. They end up dealing with the upstream inefficiencies and angry vendors waiting for payment
  • Automating a bad process makes things worse exponentially
  • If you manage to automate 80% of AP you have performed miracles – aim for 50 - 60%

Accounts payable at face value is expensive. No doubt about it. But the reason you have so many battery hens clicking away at keyboards, putting sticky notes on invoices, emailing, creating spreadsheets, and handling phone calls from irate vendors is because of what is going on in the rest of the business.

If you want to analyse the problem, start with the ideal situation. That is you have automatic matching of payables in your ERP. For that to occur you at least need:

  • A purchase order in your ERP with a price and quantity
  • Approvals from a delegate exercising their financial delegation in your ERP
  • A goods receipt correctly completed in your ERP
  • An electronic invoice from your vendor matching the above

Gathering a baseline is the best way to determine the benefits you will achieve through the transformation. The baseline must be measure the same way you intend to measure the target state. An ideal method is to choose a set of key performance metrics, and decompose through the cycle. Typically, AP and Purchasing are measured toward Total Cost of Ownership.

Looking at what the desired outcome is should lead you to understand you need to analyse the procure-to-pay cycle, or a value chain. Once you complete the analysis, look to categorise types of purchases and payments (for instance) so you can communicate the costs to the business.

Let us now go to the source and start to analyse the problem, and determine the changes you will need to make things work.

Gather Requirements: For a purchase to be expedited and for the payment process to be automated the root cause of the issue is requirements. Whomever it is that has a need for a purchase needs to clearly understand what it is they want, why they want it, when they want it, how they want, and from whom they believe it should be sourced. Your improvement starts here. This vital step is almost always misunderstood or replaced with a purchase requisition that does not drive the requestor to perform the correct analysis themselves. So many purchase orders require altering, cancelling or end up being processed for things that are not really required because the requestor was not asked to analyse their requirements correctly in the first place. This step is rarely measured despite it being a large contributor to the total cost of ownership.

Price requirements: In a larger organisation this may be the role of the purchasing section. If not, the ideal situation is to have some procedures or policy that provides guidance to the requestor on how to go about getting a price. For certain amounts you may be satisfied with a fax, for greater amounts you may want three quotes, and on some occasions some purchases may be mandated to be sourced through a particular vendor. The price is vital because for automation to work, the price must be firm. (Some organisations build small tolerances into the automation to cater for freight and tax variances).

You must let your vendors know:

The price on the quote is the price on the purchase order, and regardless of what you put on your invoice, we are paying the price on the purchase order.

Obtain approval to buy: Many organisations will have rules relating to separation of duties, and expenditure authority. If you have an ERP that has workflow, having the approval built in means that the invoice will never have to find its way back to the approver again. If the matching occurs, the approval completed when the purchase was at requisition status means the approver has exercised their financial delegation. This activity can be a real opener for anyone doing analysis. You will find approvers sitting on purchase requisitions, or doing their own requirements analysis.

Create Purchase Order: If the organisation has an electronic purchasing method, and perhaps some B2B capability, the differences in the total cost of ownership between dealing those suppliers and the ad hoc purchases is substantial. A fully approved requisition reaching a purchasing officer who then only has to check compliance is a big saving. Another saving in this area is instances where purchasing officers can amalgamate many purchases onto a single purchase order. A relatively simple ERP allows purchase orders with multiple lines that can be associated with multiple cost centres and multiple general ledger codes. Some ERPs even allow rules to be created where a single line item can be split across numerous business units.

Register New Vendor: The registration process must capture all the costs associated with registration. Some organisations require multiple approvals, and there maybe situations in which part of the registration administration is done elsewhere in the business. Registering and maintaining a large list of vendors is a costly exercise. That is why it is important to look at the TOTAL cost of ownership. A vendor that is difficult to manage is a costly vendor.

Receive Goods and Services: This must include receiving and receipting. Operational areas can be difficult areas to get compliance in this activity, but having to search around for goods receipts, and ensure they have been signed and checked off is costly.

Pay Vendor: The accounts payable process needs all of the other supporting activities to work according to plan to be efficient. Manual handling in this area is costly, not just to the accounts payable clerk, but to all that have to get involved in rework. Your baseline should be a sample large enough to capture a variety of situations in which AP have to go searching for approvals and details. The analysis should capture the process, time, and cost involved for ALL members of staff that have to be involved in ensuring the vendor gets paid. The full AP cycle needs to be documented and baselined if you want to measure and monitor the benefits and performance.

Even if you do not manage to get traction for your automation, capturing all the information above will provide enlightenment for business management.

Should you determine the savings and potential are too good not to undertake, take into consideration the capability of your business, and the company culture. You may wish to undertake the transformation in a series of transition steps. The smart steps are:

  • Look to changes that introduce behaviour change (of people, process and tools)
  • Start with changing people
  • Do not make the mistake of believing ‘system controls’ are the answer. Look for my article on influencing people for answers
  • Consolidate your vendor list. Look to work with vendors who are B2B keen
  • Communicate the costs you found in the baseline for each classification, and start charging for non-compliance

David Hilcher works in Administrative Services with Brisbane Catholic Education, BCEC provides education for 70,000 students at 137 facilities. There are approximately 13,000 employees.