Boardroom Chatter: Cost Reduction (Part 2 - Accounts Payable)

Charlotte Sutton
Charlotte Sutton,
Over lunch, the CEO, CFO & CPO of a large corporation were having yet another instalment of their on-going discussion about how to reduce costs. 
CFO: “One area within my own department where I think we could make a significant reduction is Accounts Payable,” offers the CFO for the first time. 
CEO: “Really – how?” replied the CEO with obvious interest. 
CFO: “Well,” answers the CFO, “we currently have the equivalent of 15 people processing invoices.  Including supervisors, our average loaded FTE cost is about $58,000 per year for a total labor cost of $870,000.  I think we can significantly reduce that while significantly improving invoice processing efficiency by streamlining and automating invoice processing like I know other companies are doing.”   
She then outlines the current situation on her napkin:
  • 70,000 invoices processed per year
  • 15 FTE in AP
  • 220 working days
  • = 21 invoices processed per FTE, per day
“That means the average cost of processing an invoice – just within AP, not the full cost to the organization – is $12.43,” continues the CFO. “The average cost for top performing AP departments is just $3.47.  That means we’re spending over 3.5 times as much per invoice as top companies.  And our invoice mix is pretty typical.”
“And one other thing…” she continues. “Our average time span from receipt to payment authorization is over 30 days, which means we’re missing opportunities for early payment discounts. Top performers have that down to under 3 days and are getting those discounts.”
CEO: “OK,” says the CEO, “how much do you think we could save if we somehow automate more of the process?”
The CFO grabs the CPO’s un-used napkin and writes out
Savings Opportunity ($100 million annual spend):
·      $522,000: Eliminate 9 of the 15 people or move them to other openings in the company by increasing productivity to at least 100+ invoices per day – a level many companies are already exceeding with automation
·      $300,000: Take 90% of available prepayment discounts (15% invoiced with 2% early discount offer)
·      $100,000: guess as to the value of duplicate and invalid invoices currently being paid erroneously because the department is always so rushed and can’t always verify invoices 
·      $922,000: Total savings – MORE than we’re currently spending in manpower cost!

With that savings potential, the CEO agrees with the CFO that she should investigate the reasons why invoice processing is currently taking so much manpower.  What she learns from talking with the AP department manager is:
·      “The great majority of invoices come in on paper via regular mail; we spend hours every day just opening envelops and putting invoices in piles for processing.”
·      “We’ve actually improved from where we were a couple years ago because we now scan them into our document handling system.  That helps, but a clerk still needs to process and enter each one.”
·      “Even for straight-forward invoices, it just takes time to find the PO, visually match the invoice to it, and verify the item or service was actually received.” 
·      “When there’s no PO it can take a lot of research to find out who ordered whatever it is we’re being charged for.”
·      “Even when there is a PO, it often take days or even weeks of e-mails and calls to run down the person who made the purchase to make sure they got what was invoiced.”
·      “When there are discrepancies, it takes a lot of time and effort to gather what paperwork we have, get it to the buyer and supplier, and resolve the issue.”
·      “We take our job very seriously, but we have to admit that we sometimes just go ahead and pay some invoices without ever getting firm confirmation that they are valid – we just don’t have the time to run every single invoice down.”
·      “Keep in mind… processing invoices is not all we do.  We spend a lot of time answering calls and e-mails from suppliers asking for the status of their invoice.  When we get behind, that gets especially bad. And people can get pretty angry sometimes.”

CEO: “You know,” says the CEO, “we’ve automated a lot of things we do over the past few years – I think it’s about time we automate AP.” 
So with the input of the CPO, the CEO and CFO list the AP environment they envision:
·      Most or all invoices are received in electronic form
·      Invoice data capture and account coding is automated
·      High percentage of invoices are processed ‘straight through’ to authorization – i.e. automatically matched with PO and receipt with no human involvement
·      Duplicate and invalid invoices automatically identified
·      Exceptions automatically handled via work-flow
·      Early payment discounts always taken when desired
·      AP personnel spend little or no time answering supplier inquiries
·      Average invoice processing time down to a few days; many done in one day
·      Totally paperless process; global access to all documents

CFO: As they finish the list, the CFO says: “If we can automate our invoice processing like this, we’ll get some other benefits in addition to the direct cost savings we’ve already identified.”  She lists those separately:
·      Better budget management with improved invoice account coding and earlier visibility
·      Better cash management with earlier visibility of overall liabilities
·      Much faster, easier audits
·      Reduced or eliminated cost of paper document storage
·      Improve supplier relationships due to more timely payments
So… the CFO and CPO agree jointly to lead an effort to put in place invoice automation capabilities along with improved PO and receipt handling to ‘complete the loop’ from Purchase-to-Pay.  The team leaves the CEO’s office with a clear vision of what they need to do and a practical picture of the savings they are going to contribute to the company.   
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