In today’s fast-paced world, they also need clear, up-to-date visibility of outstanding commitments in order to see the full financial picture within their scope of responsibility. In addition to paid invoices (what they see on last month’s financial statements), the full picture includes open purchase orders (POs), approved but not yet placed POs, and outstanding purchase requests.
Managers who don’t know the full cost pipeline simply don’t have the information they need to make good financial and operational decisions. That puts them and your entire organisation at a competitive disadvantage to those who do.
Why it’s Important
- Budget control: Since purchase commitments are made well in advance of when they are paid, trying to manage a budget with just last month’s financial statement is like trying to drive down the expressway with one eye closed – accidents are bound to happen.
- Cash flow management: At times, department managers are asked to help manage cash flow in addition to their budgets – that’s a lot easier when they can see the commitments that are already made when deciding if they can approve another request.
- Operational productivity: A department manager’s primary responsibility is to perform an operational function such as order fulfilment, maintenance, or customer service. If, in the effort to manage the budget, a manager needs to spend an inordinate amount to time “asking around” about open commitments, or trying to re-do his/her plan because (s)he’s suddenly over budget, productivity and operational results are going to suffer.
What to Look For – Key Indicators
- Manager behaviour: Are some managers often surprised to find that they are over budget, or likely to go over budget? Conversely, are some managers overly cautious about doing necessary things because they’re concerned they could go over budget due to expenditures they’re not aware of?
- Frequent EOY budget crises: Situations where important activities cannot be covered in the budget because less important things were already purchased (i.e. times when things are not getting done due to budget constraints).
- Ask managers… How do you decide if you can approve a request or not? What do you look at to know where you really stand with your budget? Do you often just guess about open commitments?
- Ask yourself… How do you know what your organisation’s overall cost pipeline is? Do you have visibility beyond last month’s financial statements? Do you have the visibility you really need to know where the organisation stands with respect to budget and upcoming cash requirements?
How to Improve
- Institute good authorisation procedures: As already discussed this is critical to having any chance of knowing about purchase commitments before the invoice arrives.
- Capture purchase activity early: Put in place a way of capturing purchase requests and commitments as early as possible. Try to capture enough detail to enable managers to really know what the request or commitment is, who originated it, what it’s for, and why it’s needed. Be sure proper account coding is done up front.
- Make the information accessible: Make it easy for managers to see summaries and details of open commitments in addition to their financial statements. Enable this at multiple levels of organisational roll-up.
The Value of an Effective Purchase-to-Pay System
- Make capturing the information practical: Capturing purchase commitments and requests may not even be practical without a Purchase-to-Pay (P2P) system – the effort to do this on its own may not be justified. But since a P2P system captures and holds purchase activity from the time of request through PO, invoice and payment authorisation, it provides this information as a natural by-product of streamlining the buying process.
- Easy access: A good P2P system will provide a summary and drill-down capability for all outstanding commitments within a given manager’s span of responsibility. Combined with General Ledger (GL) account balances, this provides a complete picture of expenses.
- Better decisions: With the ability to easily view to-date and future expenditures right at the time of authorising new requests, managers can more quickly make the right decision to approve, deny or delay. With the ability to analyse the full cost pipeline at any time, managers are better able to make the right decision when asked to do things like contain costs, help with cash flow, and reduce budgets.