A Lean System for Accounts Payable (#138)
/In this podcast episode, we discuss how to reduce the work load associated with the payables function. Key points made are noted below.
As I mentioned on the last episode, we’re assuming that “lean” means doing accounting with minimal resources. And again, we’re going to look at the whole process and locate those spots in the system where we can reduce the need for resources.
Recap of the Payables Process
Let’s start with a quick recap of the payables process. If you do a full three-way match, it means starting off with a comparison of the authorizing purchase order to the supplier’s invoice and a receiving report. If the invoiced price or quantity doesn’t look right, then you have to investigate further. And if there wasn’t a purchase order, then you send the invoice out for an approval. And after that, you pay the invoice.
Problems with Payables
This is a pretty crappy process, for two reasons. First, the three-way match means that the payables staff has to sort through a lot of paperwork. And there’re going to be missing documents and there’ll be variances that cause all kinds of extra work. And second, some managers are awful at returning invoices that they’re supposed to approve. So from a lean perspective, there’s too much time being wasted in accounts payable. If we want to operate payables with minimal resources, we can do so by spending less time on it. How do we do that?
Improvements to Payables
The first step is to completely avoid the three-way match. The easiest way is to have a rule that if an invoice is below a certain amount of money, no match is required. When you set that minimum threshold, do some analysis first to figure out what threshold will eliminate a bunch of invoices that aren’t too expensive.
The second step is to figure out which suppliers are completely reliable in submitting accurate invoices. If their invoices are absolutely always correct, then you don’t need to do a three-way match. Instead, audit their invoices every now and then, just to make sure that they’re still accurate.
And that is the key point. If you can train suppliers to issue perfect invoices all the time, there’s no need for a three-way match.
The impact from a lean perspective is massive, so this is absolutely worth pursuing. If you want to go down this path, it means setting up a system where the payables staff tracks which invoices went through the three-way matching process, and did not have any errors.
If you see several perfect invoices in a row, set a flag in the vendor master file to show that those suppliers are certified to avoid the three-way match. Also, if a supplier is having invoicing problems, then route this information back to the purchasing department, and request that a different supplier be used. And on top of that, start communicating directly with the supplier’s billing department to point out errors. Over time, you might be able to train them into a higher accuracy level.
If you go through these steps, there should only be two types of invoices still going through the three-way match. The first is invoices from new suppliers, who haven’t been evaluated yet. And the second type is invoices that suppliers keep screwing up – and those are the ones you want to be reviewing.
And by the way, the one thing you don’t want to do is spend a bunch of money to buy software that automates the matching process. It’s expensive, and you have to load every line item on every invoice into the system, and that requires a lot of clerical time. Instead, the lean approach is to use the system as little as possible.
Now let’s switch over to that other problem with invoice approvals, where it can be hard to get invoices back from the approvers. As you might expect, the lean view of things is to completely avoid approvals. But there are times when someone really should take a look at an invoice. So, what can we do?
One option is to automatically approve all invoices below a certain threshold amount. And again, do a study to see what threshold level would eliminate a lot of invoices from the approval process, while still leaving some approval control over the really expensive ones.
Next, if the purchasing department already issued a purchase order, then that is an approval – and you don’t need any further approvals.
Third, buy an invoice stamp that says, notify the accounts payable staff only if you do not approve. All other invoices will be paid automatically.
Use this stamp on every invoice that you send out for approval. This is called negative approval. If you take this approach, which I strongly recommend, you’ll find that almost every invoice is automatically approved. It’s really quite an event when an approver does not want to pay an invoice. So this will cover nearly all of your invoice approvals.
And finally, what if you have an invoice that’s so expensive that you just have to get an approval signature on it? Don’t send it by interoffice mail. You may never see it again. Instead, walk it to the person who’s supposed to sign it, watch them sign it, and walk it back.
Yes, this is ridiculously time-consuming, but it also absolutely guarantees that it will be approved on time. And also, you’re standing right there, so if the approver has a question about the invoice, you can answer it on the spot. And besides, this method is the exception. You’re not going to be walking invoices around the company very much.
So, what we’ve done is target the two big time-wasters in the accounts payable process, and we’ve figured out ways to avoid both of them. You may not be able to completely eliminate either one, but avoiding them 90 percent of the time should be possible.