You count on your AP team to make sure your organisation pays only those invoices that are correct, and where the supplier, in fact, has delivered the goods or services for which they are billing.
That is a big responsibility and one not easily performed given the wide range of invoices that arrive every day in most AP departments. It can take a lot of time and effort to verify the validity of certain invoices. At the same time, even though you don’t want to make payments any earlier than necessary, you probably do want to take advantage of any available early-pay discounts if at all possible.
The reality is that the effectiveness and efficiency with which AP does its “to-pay” part of the cycle is largely dictated by the way in which your organisation does the “purchase-to” part of the cycle. In other words, the more information the AP department has about what’s been purchased, the better job they can do when the invoice arrives.
Why it’s Important
What to Look For – Key Indicators
- Potential for overpayment: The last thing you want to do is to pay more than the agreed price, or for a greater quantity than ordered, or for goods or services never delivered. And you certainly don’t want to mistakenly pay the same invoice twice.
- Potential for fraud: Most invoice errors are, of course, unintentional; but there is always the possibility a supplier or someone else will try to submit false invoices if they think controls are lax.
- Savings from early payment discounts: When suppliers offer discounts for payment before the standard due date, that can be a valuable way to reduce the effective cost of the things you buy. In some cases, you may even be able to suggest such discounts with companies that don’t typically offer them.
How to Improve
- A high percentage of invoices that arrive without a corresponding PO#: The more research it takes to verify an invoice, the more likely it is that it will be paid without positive verification.
- Reliance on manual invoice matching: Even when the purchase order (PO) is properly referenced, the job of visually matching the details of hundreds of invoices to paper/image copies of the PO can be mind-numbing. On a busy day, it’s only natural that people may do only a cursory check.
- High discounts lost: If it takes too long to register, validate, and authorise invoices for payment, discounts are probably being lost unnecessarily.
The Value of an Effective Purchase-to-Pay System
- Capture PO information for as many purchases as possible: Obviously, the most important tool for ensuring an effective payment process is to capture purchase order (PO) details in the upstream purchasing process so they can be matched against the invoice when it arrives. That means insisting that employees get a PO number before ordering, and that suppliers reference the PO on their invoices.
- Establish matching tolerances: Very small discrepancies between an invoice and PO (e.g. less than 1% value on a line item) may not be worth the time and manpower to investigate. Tolerances will make it practical to pursue all important discrepancies by eliminating time spent on unimportant ones.
- Rigorously resolve all important discrepancies: For invoices with a PO#, this means going to the originator to find out which is right based on what they ordered and received. For invoices with no PO#, this will require first figuring out who placed the order – not always an easy task.
- Minimise the elapsed time for payment authorisation: This is important for many reasons, one of which is to be in a position to leverage early payment discounts. A long average lead time between invoice receipt and posting is also an indicator of inefficiencies, but we’ll address that with the final question.
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- Make it easy to capture all PO details: Because a good Purchase-to-Pay (P2P) system captures information electronically throughout the lifecycle of a purchase, purchase order (PO) information is available for matching to the invoice without the need for extra data entry; and certainly without the need for problematic paper files.
- Automate the matching process: With all the right information about the purchase captured and available, the Accounts Payable department need only register the invoice – the information will automatically be matched against the PO (and receiving information when appropriate). Valid invoices will be automatically authorised and discrepant invoices put on hold. Tolerances can be easily set to filter out trivial mismatches.
- Speed resolution of discrepancies: For invoices that don’t match the PO, a good P2P system will provide an electronic troubleshooting process enabling AP to quickly route it to the originator for resolution.
- Accelerate the overall process: By eliminating much of the paper shuffling, automating time-consuming processes, and leveraging electronic communications, a good P2P system can dramatically reduce the elapsed time between invoice receipt and posting while at the same time improving validation controls. Among other benefits, this can enable your company to take advantage of all available early payment discounts, and maybe even negotiate such discounts with more suppliers.