How to maximise supplier relations – and cash flow September 2012

How to maximise supplier
relations – and cash flow
An m-hance white paper
September 2012
How to maximise supplier relations – and cash flow ❘ September 2012
Summary
The way that a company manages its accounts payable
(AP) process has a bearing on two critical areas that
affect the business as a whole: cash flow and supplier
relationships. These two factors become increasingly
important to the future profitability of an organisation
in a difficult economic climate such as that being
experienced today. Optimising both demands holistic
insight across a company’s finance operations.
Integrating and automating key processes, especially
those which affect accounts payable, not only gives the
business greater leverage in commanding better deals
with suppliers while allowing it to maintain cash flow at
an optimum level; it also facilitates all sorts of internal
efficiencies, driving down operational costs.
A company with smooth-running, streamlined AP
operations is able to save money by processing invoices
with a minimum amount of intervention and with a low
cost of materials, for example.
For those with responsibility over the finance function,
costly problems can arise when the AP process is
handled manually.
These include:
• Exposure to human resource issues, resulting from
employee absence and the need for holiday cover
• Duplication of effort (paper pushing, duplicate
invoice payments and so on)
• Spiralling costs associated with physically handling
paper and third-party storage fees
• The inability to easily access and share documents
as needed
• The detrimental reputation of the business and
the finance team if issues arising cannot be
readily resolved
The following white paper considers the potential
impact of inefficient, manual or only partially
automated processes, before setting out the various
‘end-to-end’ technology solutions that enable busy
finance departments to secure greater control over
their purchase-to-pay (P2P) / accounts payable (AP)
processes, allowing them to pass on the benefits to the
broader business.
The importance of the AP
function and the need to
move with the times
Behind every thriving business is
an efficient finance function, deftly
managing cash flow and oiling the
supply chain with timely payments
- so that vital sources of supporting
products and services never dry up.
Achieving this slickness of operation
does not happen by accident. It requires
a careful balancing act - on the one
hand ensuring that key suppliers are
paid on time so that lines of supply
keep flowing and suppliers will agree
to favourable terms, and on the other
that cash reserves are maintained.
Without optimised cash flow, even the
most prosperous-seeming business
can soon run into difficulty.
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All too often however, businesses
underestimate what a fragile situation
they would be in without tight cash
flow management. In pursuit of growth
it is more usual for companies to focus
on how much money they are going
to make and how they will attack new
markets. Yet in their preoccupation
with wealth in the form of top-line
performance, they lose sight of the
day-to-day health of the business:
the cash flow situation, which gives a
company its flexibility and its ability
to meet its existing obligations - and
its promises.
Traditionally conservative in outlook
and often preferring the apparent
reliability of methodical manual
processes, the finance department
is often the last area of a company
to consider or be considered for
technology investment. Respected
observers including IBM, Gartner
and Aberdeen Group estimate that
some 75-80% of invoices are still
processed manually.
Seen as a back-office/administrative
function and therefore a cost centre,
finance is commonly taken for granted
– until something goes wrong.
And at that point the results could be
catastrophic, even closing down the
business if cash flow - and lines of
credit – falter.
A good cash position
creates options
With the recession showing no signs
of abating, and banks’ lending terms
allowing little room for manoeuvre,
companies neglect their finance
department at their peril. A new SME
Risk Index undertaken by YouGov on
behalf of global insurer Zurich (August
2012) suggests that more than one
in 10 British SMEs have recently
considered closing down in the face
of continuing financial difficulty and
concern about the future.
At the other end of the spectrum, other
businesses are anxious to convert their
inertia of recent years into preparing
for new economic growth when it
eventually comes. New research cited
in an article in EN for Business, a
magazine for entrepreneurs and SMEs,
suggests that small and mediumsized enterprises plan to invest
£74.9bn in capital expenditure over
the coming 12 months. The findings,
from GE Capital, indicate that 92% of
businesses are planning an average
outlay of £73,805 on commercial
vehicles, manufacturing equipment, IT
and company cars.
Yet without adequate working capital,
companies will find it hard to achieve
the leverage they need to go after new
business without jeopardising the
business-as-usual. Shoring up dayto-day cash flow should be a priority
for any commercial organisation,
before they consider plans to tie up
funds anywhere else.
This in turn means being prepared
to look at new IT systems which can
integrate and streamline everyday
processes, and provide new visibility
into the company’s cash flow status
- as well as early alerts to potential
problems that may be looming.
Streamlining
accounts
payable
processes is the obvious way to
start, giving the finance department
a tighter handle on the money going
out of the business and improving
supplier relationships and the leverage
the company has when negotiating
discounts. Optimised purchase-topay solutions are designed for exactly
this purpose, enabling companies
to improve business relations with
suppliers so that a reliable supply
chain is assured and that the business
takes full advantage of early payment
discounts
and
other
‘preferred
customer’
privileges.
Additional
benefits can then be derived from close
integration with peripheral systems,
to further accelerate processes and
provide a more rounded view of how
one aspect of financial management –
and one source of cash flow or cash
consumption - affects another.
Slicker processes provide a
better first impression
Without appropriate technology to
manage AP processes and track cash
flow, finance departments risk not
only supplier relations, additional
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How to maximise supplier relations – and cash flow ❘ September 2012
costs (in the form of full pricing and
interest on late payments), and cash
flow bottlenecks, but also internal
efficiency. Heavy reliance on manual
processes by experienced staff
increases a company’s exposure to
productivity dips through employee
absence and the learning curve as
new team members are brought up
to speed. It also leads to excessive
resource consumption, made worse
by paperwork duplication, the inability
to track down the right documentation
quickly, and the need to physically
store it all. Not to mention the risk of
anything happening to those physical
documents - for example, in the event
of a fire.
Any slowdown in workflow, or
emergence of bottlenecks as particular
documentation is being tracked down,
doesn’t reflect well on the finance
team either – or on the credibility
of the business. Inefficient manual
processes and susceptibility to human
error give out the wrong messages to
staff, suppliers and customers.
Surprisingly - given all of these
potential risks (and the substantial
potential for increased efficiency and
accuracy if processes are automated
and visibility boosted by intuitive
reporting) – the finance departments
of the majority of SMEs still rely far
too heavily on manual processes,
and paper.
Profits: In one door, out
through another
Commonly,
excessive
focus
on
bringing new money in to a company
will have resulted in the channelling
of IT investment funding to the
front-end of the business - in pursuit
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of new markets and new sales.
Yet unless systems are in place to
maximise how far those new gains
go for the business, companies are
inadvertently risking their profits by
failing to maximise the company’s
cash flow position and take advantage
of preferential supplier terms.
The more integrated a company’s
finance management activities are,
for example with payroll systems,
the greater visibility its managers
will have over its cash flow situation
at any given time. Armed with this
knowledge, they can take pre-emptive
steps to maintain and strengthen this
position, ensuring that the business
can continue to pursue its goals,
without risking the day-to-day health
of the company – ie its ability to pay
suppliers and staff.
That so many SMEs still hold on to
archaic manual processes, then, is
staggering. When it is considered
that UK NHS hospitals, which are
stretched to the limit financially, are
keenly adopting electronic document
management technologies so that
they can manage patient records
electronically, it seems absurd that
commercial businesses still cling
on to cumbersome, inefficient and
risky paper-based processes. More
than two decades on from the first
murmurings about the merits of the
paperless office, a recent survey has
shown that up to 67% of accounts
payable departments are still bound
by
physical
documents,
which
they continue to push around
inefficiently and compress into metal
filing cabinets.
The broader impact of
inefficient AP processes
If a supplier’s bills are not paid on
time, or are consistently riddled with
errors, this valued source of products
or services to the business may
become reluctant to continue to offer
lines of credit, or to prioritise their
account, because this could have a
negative impact on their own bottom
line and cash flow.
The imminent EU Late Payment
Directive seeks to reduce the burden
of overdue payments on businesses,
by giving companies the right to insist
on 30-day payment terms - and to
levy penalties and interest on overdue
payments. It is hoped that this move
will provide the catalyst needed to
drive changes in payment practice once
and for all. Certainly, businesses will
need improved visibility and control
over their payment processes to avoid
incurring the resulting penalties, and
to build their reputation and status as
a preferred business partner.
To ensure that payment systems
and processes are fit for purpose,
companies need to reassert control
of their purchase-to-pay processes,
and integrate processes and systems
as far as possible to improve visibility
and be able to follow through the
implications of any one decision or
action. This then gives the financial
management choices about how
and when to pay, in accordance with
the expectations of suppliers and
their own working capital strategies.
Contrast this situation with more adhoc ‘fire-fighting’, as the finance team
reacts to new requests and situations,
and it’s easy to see where efficiencies
can be gained and the robustness of
decisions improved.
A research report issued by Proactis
a couple of years ago concluded that
inefficient AP practices were having
a significant and tangible effect
on businesses. The chief financial
officers surveyed concurred that their
business performance was being
compromised by ‘underperforming’
accounts
payable
departments,
resulting in higher transaction costs
and difficulties in managing working
capital. Additional findings suggest
that 15% of an organisation’s revenue
is spent on creating, managing and
distributing documents – with an
average document being printed
five times. By automating their AP
processes, organisations can save
significantly on these costs.
For
many
organisations
today,
particularly SMEs, long-term survival
is unlikely to be possible without
streamlined and robust AP processes
in place.
Technology that can be
deployed to improve
AP efficiency
Implementing process improvements
and new technology empowers a
company to proactively manage
its accounts payable activities with
multiple goals in mind:
• To pay invoices on a
predetermined schedule of the
company’s choosing
• To ensure the accuracy and
authenticity of invoices that the
company pays
• To minimise, or eliminate paper
• To extract key business metrics
• To effectively manage working
capital
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How to maximise supplier relations – and cash flow ❘ September 2012
Typically 80% of the accounts payable
function is associated with invoice
processing. However, despite 99.9% of
all invoices being prepared electronically,
the vast majority are processed by
manually keying information from
a paper invoice document into an
automated system to then process and
pay! This represents a considerable
waste of time and effort, especially given
that the reproduction process can lead to
the introduction of inaccuracies.
Automating the function not only
eliminates these risks, but enables
the digitised content to be re-used in
a number of efficient and intelligent
ways, improving managerial visibility,
accelerating processing, improving
reliability,
sharpening
internal
financial controls and optimising a
company’s most critical asset (other
than its people): CASH.
A case in point: The Russell
Group in Scotland
The Russell Group
( http://www.johngrussell.co.uk/ ),
Scotland’s leading logistics and
warehousing group, reports efficiency
savings of £100,000 per year as a
result of automating its purchase-topay process with a comprehensive,
end-to-end
electronic
invoice
solution that encompasses approvals
and accruals.
Previously, the group’s purchaseto-pay processes were highly timeconsuming and costly due to handling
large volumes of paper. Purchase
invoices coming in to the head office
in Glasgow would have to be circulated
to 15 different sites across the UK for
signatory approval. Often, invoices
would go astray, resulting in further
delays to the approval process.
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The Russell Group estimated that
it was taking around four weeks
from distributing an invoice to the
relevant person, to having it manually
authorised and returned to the finance
department for processing. As the
organisation grew, the inefficiencies
were magnified with inordinate
amounts of time spent chasing people
for approval. The lack of visibility
about where invoices were in the
approval chain also had an impact
on the control the group had over
its finances, and on crucial supplier
relationships.
As a result of tightly integrating
the new e-invoicing solution tightly
with the group’s finance system,
the 75,000 invoices that the Russell
Group receives each year are now
electronically scanned or emailed
directly to head office. The system
accurately tracks the status and
location of all unapproved invoices
using the finance system’s query
tool, speeding up the group’s entire
approval process and vastly reducing
the amount of wasted time associated
with lost or missing documents.
Powerful invoice-matching workflow,
meanwhile,
provides
added
functionality for users to approve,
reject or query scanned invoices via a
simple web browser. This functionality
also incorporates enquiries for entering
and approving requisitions in addition
to checking and approving invoices
that have been marked as requiring
approval, improving financial visibility
and accounts payable reporting.
Having automated a range of paperbased processes using the new
web-based solution, the Russell
Group claims it is saving in excess
of £100,000 each year, while having
greater financial control. Invoice
approval times have shrunk from
four weeks to just 10 minutes,
transforming staff productivity levels.
A further benefit is that, by being
able to pay invoices in a timelier
manner, the group has boosted its
supplier relationships, putting it in a
stronger position to negotiate early
payment discounts.
E-invoicing: Eliminating
paper wherever possible
To further streamline and drive AP
efficiency, it is recommended that
organisations implement document
management and e-invoicing solutions
and in such a way that they are
tightly integrated into the company’s
ERP
purchase-to-pay
solution.
Today there is really no excuse to
be issuing, handling or re-keying
information from paper invoices when
everything could be so efficiently
and easily managed electronically with all of the associated benefits of
being able to spontaneously search
and call up related documentation,
and to access and share this with
remote colleagues, suppliers or clients
as appropriate.
The now widespread acceptance
of
cloud-based
software
and
services makes it easier than ever
to deploy such capabilities, safe in
the knowledge that the content has
been reliably backed up, and that it
can be viewed securely from anywhere
by anyone with the appropriate
access rights.
Barriers to change
So why aren’t more companies
taking advantage? A 2012 survey of
financial directors from more than
600 companies by Tradeshift provides
some clues. The research, which
looked at barriers to adoption, found
that for many companies up to 48%
of invoices still had to be scanned or
input manually, due to the inaccuracy
of optical character recognitionbased scanning (OCR). Sometimes the
technology fails to interpret invoice
data correctly – confusing a ‘0’ with
an ‘o’, for example. Interestingly,
57% of FDs participating in the
research admitted that e-invoicing
would be more widespread if it was
free to all suppliers.
Fortunately, a new generation of cloudbased technology offers to address
many, if not all, of these concerns.
Unlike traditional e-invoicing systems
which still rely on a certain amount
of manual intervention, cloud-based
e-invoicing
solutions
completely
remove the need to ever print off, scan
or manually handle paper.
They are able to process text PDF
invoices sent by email, by automatically
extracting data from the PDF itself via
a cloud service application. This data
is then converted into a standard
electronic invoice format before it
is uploaded into an organisation’s
finance system. In addition, unlike
OCR, cloud e-invoicing solutions are
100% accurate as they do not rely on
‘interpretation’.
Evidence suggests that a company
processing more than 5,000 invoices
per year could save between 6080% of their existing processing
costs by switching to a cloud-based
e-invoicing solution. This could
translate to something in the region
of £30,000 to £350,000 depending on
the volume of invoices processed over
a three-year period.
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How to maximise supplier relations – and cash flow ❘ September 2012
What’s more, new cloud-based
invoicing solutions don’t cost anything
for suppliers, which is a big step in
the right direction if e-invoicing is
to enter the mainstream and fulfil its
promise of revolutionising financial
and business efficiency.
Streamlining purchasing to
further improve AP efficiency
For maximum improvements to
internal processes and cash flow,
organisations should be looking
to multiply the benefits wherever
possible - by feeding the efficiency
gains achieving through one system
into improvements to another, to
create a situation where two plus two
adds up to a lot more than four.
For a more holistic transformation,
businesses would be advised to
look to implement an end-to-end
purchase-to-pay solution that is
tightly integrated with the company’s
ERP
system.
One
cost-efficient
approach, with the potential for
significant impact, is to harness a webbased e-procurement solution with
electronic workflow functionality. This
offers a company the ability to track
and efficiently manage everything
from recording a requisition, sending
it through the approval process, and/
or receiving an invoice and entering it
onto an organisation’s finance system
for approval, to making the accruals at
the period end.
Such an approach offers the added
benefit of being able to track the
approval process through the finance
system’s reporting tools, significantly
adding value to the AP function.
Organisations that have drawn on
this broader kind of solution have
8
been found to benefit from around
a 50% reduction in the overall cost
of processing, from receipt of paper
invoice to payment. In the optimum
scenario the end-to-end process
also registers and monitors the
online receipt of goods (automatically
alerting the finance team to enter the
invoice onto the finance system and
electronically circulate for approval);
ensure automatic holiday provision
(to ensure invoices can be assigned to
a colleague to approve); and provide
a facility for budget checking and
recording of historical requisitions (to
avoid re-keying of information).
Approach accounts payable and its
supporting activities in a holistic way
like this and the advantages soon
multiply. Key benefits now include:
- Greater financial control – for
example, through the elimination
of ‘maverick’ spending
- The ability to maintain an effective
invoice register through the finance
system to enhance accounts
payable reports
- The ability to maintain historic
records of approvals, detailing an
audit trail of the approval process
(ie greater financial transparency)
- An end to lost or mislaid
paperwork which can cause
troublesome not to mention
embarrassing delays in making
payments, while potentially
incurring late payment charges
- 50% reduction in the overall cost of
processing from receipt of paper
invoice to payment
Conclusion
It is all too easy for a business to
neglect its finance department when
looking for savings and transformation
through IT. Yet companies that do
this could be undermining the profits
coming into the business, not to
mention their future leverage when it
comes to preparing for and investing
in new growth.
Just as it is a false economy to pursue
new business at the expense of
keeping existing customers satisfied
(given the relative cost of sale),
prioritising revenue generation and
business expansion over a company’s
cash position is a risky strategy.
For many companies, modernising
the vital supporting activities of the
finance department is long overdue.
The good news is that the latest
solutions, particularly those which
harness web-based portal features
and cloud-based delivery, are easy and
cost-effective to deploy - and offer
additional business benefits beyond
those associated with the automation
of manual processes. These include the
ability to share content remotely, get
invoices approved when signatories
are out and about, and trigger alerts
when bottlenecks to workflow are
threatened or when cash flow risks
being compromised.
For the sake of the company’s
reputation alone, organisations should
be looking to dispense with paper
and secure a tighter handle on their
documentation so they can address
queries satisfactorily in a single phone
call or email. For the sake of the
ongoing fortunes of the business, they
should be building a bigger picture of
their financial leverage, maximising
the company’s ability to invest when
banks aren’t lending, and staying the
right side of suppliers – especially with
new 30-day payment rights coming
into force.
Their survival and future prospects
may depend on it.
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How to maximise supplier relations – and cash flow ❘ September 2012
Source & resources
Five reasons to automate your AP processes,
Accounts Payable News:
http://www.accountspayablenews.org/apautomation/reasons-to-automate/191-five-reasonsto-automate-your-ap-processes.html
SMEs for prepare for growth, EN Magazine:
http://www.enforbusiness.com/news/smes-preparegrowth-20116369
Business process management,
Accounts Payable News:
http://www.accountspayablenews.org/apautomation/business-process-management-.html
One in 10 British SMEs has considered closing down,
British SME:
http://www.britishsme.co.uk/2012/08/15/one-inten-british-smes-has-considered-closing-down
The Necessities of Paperless Accounting Systems,
American Journal of Scientific Research ISSN 1450223X Issue 7 (2010), pp.106-118, © EuroJournals
Publishing, Inc. 2010:
http://www.eurojournals.com/ajsr_7_09.pdf
If AP fails, business fails, Accounts Payable News:
http://www.accountspayablenews.org/apautomation/e-invoicing/70-cash-flow.html
PROACTIS Survey Finds Inefficiencies in
Accounts Payable:
http://www.eclgrp.com/news/proactis-survey-findsinefficiencies-in-accounts-payable
SMEs battle outstanding invoices,
Accounts Payable News:
http://www.accountspayablenews.org/payments/89survival-of-the-fittest.html
Who’s in charge of cash flow, Bilbus Blog:
http://blog.bilbus.com/tag/sanjeev-chhuganiworking-capital-small-business-financing-financialtechnology-commercial-finance-alternative-financing
Dynamic discounting, Accounts Payable News:
http://www.accountspayablenews.org/payments/366dynamic-discounts-join-the-revolution.html
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Reasons to automate, Accounts Payable News:
http://www.accountspayablenews.org/apautomation/reasons-to-automate.html
Terms of Endearment: Avoiding Late Payment
Penalties, Accounts Payable News:
http://www.accountspayablenews.org/payments/353terms-of-endearment-avoiding-late-paymentpenalties.html
A guide to invoicing,
The Guardian Small Business Network:
http://www.guardian.co.uk/small-businessnetwork/2012/aug/03/how-to-invoice-best-of
EU Late Payment Directive:
http://ec.europa.eu/enterprise/policies/singlemarket-goods/fighting-late-payments/index_en.htm
E-invoicing benefits:
http://www.einvoicingbasics.co.uk/benefits-ofeinvoicing
Tradeshift e-invoicing survey:
http://www.sharedserviceslink.com/file/94414/iseinvoicing-failing-to-deliver.html
mha_wp_MCF_0912
How to maximise supplier relations – and cash flow ❘ September 2012
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