P2P Fundamentals - Part 4: Are You Properly Managing the Payment Process?

Charlotte Sutton
Charlotte Sutton,
In this 4-part series, we address the four fundamental questions finance executives should ask about their organisation’s Purchase-to-Pay process in order to drive savings. In this final part, we ask Are You Properly Managing the Payment Process?” 
The Accounts Payable (AP) function plays a key role in the Purchase-to-Pay cycle, and in your organisation’s cash management process. 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
  • 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.   
What to Look For – Key Indicators
  • 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. 
How to Improve
  • 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
Download the white paper: "Purchase-to-Pay:Get a Handle on How Your Organisation Really Buys Goods and Services"