Paper vs. E-Invoicing: The Impact on Working Capital

 

Another often-overlooked benefit of automating PO and non-PO invoice processing is the opportunity to expand early payment
discounts and optimize working capital. Nearly one-third of respondents to PayStream Advisors’ 2010 Electronic Invoicing
Benchmarking study listed the ability to capture discounts as a priority for their organization, while another 49 percent described the
ability to capture discounts as “somewhat important.” However, just 27 percent of respondents said they “always” have the ability to
capture discounts, while 14 percent said that they “never” capture discounts.
In most cases, companies fail to capture discounts available to them because they can’t process the invoices fast enough. According
to the PayStream Advisors study, the top reasons cited for missed discounts were:
• Manual routing of invoices
• Lengthy approval cycles
• Decentralized invoice receipt
• Lost and missing invoices
• Missing information on invoices
• Large number of exceptions
E-invoicing dramatically compresses the invoice approval cycle—reducing it from 23 days to as few as five, according to PayStream
research—and eliminates much of the friction associated with paper-centric invoice processing. It also enables companies to take
greater advantage of early payment discounts. In addition to maximizing the capture of standard discounts, such as two percent 10
net 30 terms, some e-invoicing solutions present “dynamic discounting” opportunities, where discounts can be captured on a sliding
scale based on payment timing after the standard discount date.

 

Best Practice
  • Make the requester responsible for ensuring the appropriate accounting on non-PO invoices.
  • Always have at least two approvers on every invoice: the requester and the requester's supervisor. When the value of the invoice exceeds the supervisor's authorization limit, the invoice should be routed to each subsequent supervisor until reaching a business approver with the proper authorization limit.

 

 

Winning Big through E-Invoicing

 

By automating its invoice process, a sports equipment manufacturer dramatically reduced its invoice processing backlog and eliminated four full-time temp positions dedicated to manually processing paper invoices (including hundreds of hours of overtime). Faster invoice processing enabled the manufacturer to increase early payment discounts from suppliers by more than 100 percent—capturing discounts on nearly 90 percent of eligible invoices processed, up from 40 percent of eligible invoices with its manual process—and leverage dynamic discounting as well. The e-invoicing initiative extends to PO-based and non-PO invoices and includes standard indirect spend suppliers as well as IT spend, consultants, and many contractors.


Enhanced DPO and a 20 Percent Improvement in Payment Timing


A major pharmaceutical company decided to implement e-invoicing after realizing that its paper processes cost more than the per-transaction expenses. As the company gained better visibility into its AP processes, it discovered that many invoices were being paid upon receipt. With e-invoicing in place, the company instituted new payment policies, extending standard payment terms as an incentive for suppliers to choose early payment discounts and starting the payment clock at the date of invoice receipt. As a result, the company extended its DPO while improving payment timing by more than 20 percent and giving suppliers greater visibility into their receivables and cash flow.

 

While EDI and other legacy business networks enable organizations to exchange business documents such as POs and invoices electronically, they weren’t designed to validate the accuracy of data before it is entered in back end systems for processing. Today, however, business commerce networks do just that. Business rules that normally reside within an ERP system (such as a quantity or unit price tolerance) are placed at the front of the invoice process for earlier validation within business commerce networks. Whereas before, resolving PO or non-PO invoice exceptions would cause AP much time and effort, performing validation at the time of invoice submission eliminates all that. Problem invoices are automatically detected and returned to the stakeholder most motivated to resolve
them—the suppliers—creating new potential for touchless processing.

 

E-Invoicing: Improving the Strategic Value of AP

 

Automating the processing of PO and non-PO invoices allows organizations to process invoices faster, improve compliance with orders and contracts, and eliminate the exceptions that cause additional delays. Instead of spending too much time responding to supplier inquiries and resolving invoice exceptions, AP can engage in more value added activities such as identifying early payment discount opportunities and implementing strategies to improve on-time payment performance. A successful e-invoicing initiative involves the support of procurement, AP, corporate finance, and IT. Here are some issues to discuss with all stakeholders when looking to improve AP performance through invoice automation.

 

  • Be sure your payables automation strategy addresses the areas that are top of mind for your CFO—reducing operating expense, optimizing working capital, increasing profits, and mitigating risk.
  • Make sure the solution you choose can provide Purchasing with data that documents the improved performance of your AP process. This will be valuable when negotiating new supplier contracts.
  • When selecting your e-invoicing solution, probe the validation level it provides for both PO and non-PO invoices. It should help you minimize exceptions, supplier status phone calls, and blocked invoices, not perpetuate them.
  • Identify the types and frequency of exceptions that occur in your current AP process. Understand which exceptions can be reduced or eliminated for each invoice type and estimate the value in your ROI calculations.
  • Compile a solid business case for your e-invoicing initiative, defining and quantifying what you expect in terms of project savings.

 

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Figure 3: Level 3 validation provides advanced account coing and matching capabilities.

 

7-11-2011 10-27-31 AM.pngFor non-PO-based transactions, automatically routing invoices for account codes and subsequent approvals is essential. So too is the ability to provide a simple end-user experience, so a person in the field can add account codes specific to their business unit, validate them, and route the transaction up the hierarchy or to specialists within the organization (e.g., to a tax expert for reviewing and approving tax variances). The ability to configure and apply validation rules to groups of suppliers with common requirements is another valuable capability. This enables organizations to quickly configure and implement business rules for supplier categories with the same validation requirements without starting from scratch each time. Finally, the most advanced networks provide a supplier onboarding methodology that allows companies to migrate low-volume suppliers that submit invoices via paper, email, or fax to an electronic process. The Ariba Network automatically generates a solicitation email to these suppliers, notifying them of the benefits of creating and submitting their invoice electronically next time.

 

Previous: Ariba Knowledge Nuggets: The Problem With Paper - Invoice Automation Pt.2

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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.