Matching a purchase order (PO) to an invoice is a longstanding accounts payable (AP) best practice for processing invoices and ensuring compliance. Yet most organizations also have some portion of spend that does not involve POs, making effective processing of non-PO invoices crucial as well.
By automating invoice processing, organizations can effectively implement a wide array of bestpractice strategies that transform the efficiency of AP operations—enabling them to compress PO and non-PO invoice processing from months or weeks to days or hours, eliminate exceptions that require manual resolution, remove virtually all non-PO manual touch points, and expand the capture of early payment discounts to every invoice.
Companies that continue to rely on paper-based methods face extensive challenges that make it difficult or impossible to process invoices effectively. As a result, they can't achieve substantial time and cost savings that can improve their bottom line.
Regardless of invoice type, a major challenge facing many AP departments is coping with the rising volume of paper invoices. Companies that responded to PayStream Advisors’ 2010 Invoice Automation Benchmarking survey indicated that they receive more than three-quarters (77 percent) of their invoices via paper. Respondents also stated that the high volume of paper invoices was their single greatest source of pain in invoice management.
It’s no surprise, then, that implementing e-invoicing was the top automation goal, cited by 40 percent of survey participants. This is a big change from several years ago, when companies were still focused on improving paper processes rather than eliminating paper at its source—their suppliers. Other research documents the cost savings from getting rid of paper and automating invoice processing. According to a 2010 Hackett Group AP Performance study, a high correlation exists between einvoice processing, low cost per invoice, and high on-time payment percentages. Organizations with the highest percentage of e-invoice line items (80 percent) were reported to have a $2.14 cost per invoice and 92 percent on-time payment percentage. Bottom quartile companies, with only two percent of e-invoice line items, were shown to have a $5.22 cost per invoice and 85 percent on-time payment performance.
Best Practice Tip
Route receipt-matching problems to the PO owner or requester as a watcher to help clear the exception. Route non- PO invoices for approval tot he requester identified by the supplier on the invoice.
Best Practice Tip
Though business user approval is not typically required for PO invoices (since purchase approval was already obtained through the requisitioning process), consider adding a final approval step for high value PO and non-PO invoices over certain thresholds.
As this data shows, eliminating paper invoices gives top performers a distinct advantage over companies still heavily dependent on paper. For example, a global equipment manufacturer dramatically reduced its operating costs on a global basis by transitioning to e-invoicing. Today, the company processes 90 percent of its global invoices electronically and has achieved an almost 100 percent touchless process. The company is so efficient that it has been able to reallocate 75 percent of its global AP staff.
Automating invoice processing can also reduce risk and enhance cash flow management. For example, one major media company used to have as much as $24 million in invoices on a person’s desk, but wouldn’t know of the liability until the invoices were processed. Moving to e-invoicing provided real-time visibility into these liabilities to greatly increase reliability in cash flow forecasting.
The Challenge of Managing Non-PO Invoices
While automating the processing of invoices delivers many benefits, challenges may arise when it comes to non-PO invoices. Non-PO invoices result when a supplier has provided goods or services to a buyer without receiving a purchase order. Because they lack an associated PO, these invoices require far more work to process once they arrive at the buying organization, creating a host of problems along the way.
- Difficulty identifying the purchaser.
Deciding how to route non-PO invoices can be extremely challenging, especially since these invoices frequently fail to include information vital to routing. For example, non-PO invoices must typically undergo a review and approval process after receipt by the person who ordered or approved the purchase of the item or service. If the invoice does not include some reference to the customer, business unit, or department that placed the order—or if it includes the wrong name—then someone in AP must follow up and identify who needs to approve the invoice. This not only delays proper accrual of the liability, but also means the invoice could sit for weeks with no action taken—resulting in invoice status calls from the supplier or submission of a duplicate invoice and the chance of duplicate payment.
- Lengthy approval processes and slow cycle times.
Once the purchaser has been identified, he or she must then verify, code, and approve the invoice, and hierarchy approval rules must be applied to ensure compliance to financial controls. The need to have multiple people approve non-PO invoices can significantly lengthen the processing cycle. Non-PO invoices can also appear on blocked and hold reports because they exceed budgets or don’t match to an existing vendor, resulting in further exception-handling activity. Only after all these difficulties have been resolved can the invoice be entered into the ERP or financial system for payment, but even here a new vendor setup could be required. This delays payment to suppliers and negatively impacts their cash flow while eliminating opportunities for the buying organization to capture early payment discounts.
- Loss of valuable data.
When an invoice has been fully approved, AP most often performs header-level data entry with account coding, which means the details of the purchase are stripped away and lost forever. This prevents the purchasing group from analyzing non-PO spending patterns in greater depth to drive more spend under management.
Next: Ariba Knowledge Nuggets: The Problem With Paper - Invoice Automation Pt.2
Beverly Dunn is a Customer Success Manager with Ariba. All customers are invited to join the private Customer Success group on Ariba Exchange, where you can access the Customer Success Spotlights, Lunch 'n Learn Webinar calendar and replays, and the Ariba Knowledge Nuggets.