Accounts Payable Best Practices (#81)
/In this podcast episode, we discuss several ways to improve the payables function. Key points made are noted below.
I think a lot of accounting people would agree with me, that payables is the most incredibly paperwork intensive and generally annoying part of accounting. The accounting staff is forwarded supplier invoices from all over the company, and then it has to figure out which ones are authorized, and if the related goods or services were received – and then pay it on time. If they don’t, then suppliers get ticked off and call in to demand payment. It’s not a very pleasant job.
Shrink the Invoice Volume
So… let’s see what we do to streamline it. The first order of business is to shrink the overall volume of supplier invoices. A really good way to do this by issuing company credit cards to employees. This gets rid of a lot of the smaller transactions that would otherwise eat up all kinds of accounting time. This doesn’t take long, so you can start seeing the results in just a few months.
A much slower way to reduce the number of invoices is to reduce the number of suppliers. This requires a lot of work with the purchasing staff to arrive at a short list of approved suppliers. Over several years, you can achieve a smaller number of invoices that have more line items on them; but it’s still an improvement.
And there’s another way of looking at invoice reduction. Is it the total number of invoices you’re trying to reduce, or is it the data entry of the invoices into your accounting system? Because if it’s the second one, you can set up a web site and have your suppliers enter their invoices through that portal. By doing so, you just shifted the data entry burden onto them. If you’re a large company, with some power over your suppliers, then this works. If you’re a small company, don’t even bother. Your suppliers will ignore it.
Streamline the Invoice Approval Process
Another problem is the invoice approval process. The standard drill is to send every invoice out to the department managers for approval. If the manager never gets around to approving the invoice, then it doesn’t get paid, and everyone blames accounting.
The solution is called negative approval, where you enter the invoice into the accounting system, and send a copy of the invoice to the manager who should approve it, with a note stating that you will pay it unless you hear otherwise. If the manager is fine with the invoice, which the case pretty much all of the time, then he throws out the invoice copy, and everyone’s happy.
Except for the internal controls auditor. The auditor wants to see that there’s clear evidence of approval for every invoice, so you can end up in a tug of war between greater efficiency, and proper documentation of controls.
Eliminate Manual Payment Processing
Another good area for improvement is manual processing of payments. This means there is no petty cash. Ever. It’s not only a waste of time, but there is always cash box pilfering. If anyone complains, tell them about the company’s corporate credit card program.
Another item is cash advances. Don’t do it. It takes time to create the payment, and then you have to track the employee’s payback through the payroll system. Since the employee who wants this special treatment is essentially treating the company like their private bank, go send them to the real bank down on the street corner, and get a loan. If a department manager complains that his staff absolutely must have a loan to get through some business travel, then – again – tell them about the company’s corporate credit card program. These types of manual activities take up a surprising amount of time, which is why it’s important to break the company of the habit of using them.
Minimize Expense Report Analysis
And then we have expense reports. Some payables departments review these things to death. Yes, I agree, there are cases of expense report fraud. But. It takes a lot of time to track them all down, and the cost-benefit on this is not good. Instead, do a periodic audit of expense reports, and when you find something suspicious, then flag that person for permanent reviews, and go back and check their old reports. This is way more efficient.
Enhance the Payment Process
And what about payments. I really don’t like paying by check. In fact, I really really don’t like paying by check. This is partially because I’m an authorized check signer right now, and signing checks is a monumental waste of my time. Sure, it’s supposed to be a control point, where you carefully review every check – but let’s be realistic here.
Any payment problems should have been spotted much earlier in the procurement process, so even if you find something, the company is probably obligated to pay it anyways. And also, check signers are really bad reviewers.
If you want to learn about payables controls, then go back to episode 13. For now, let’s just say that payment should be by the most efficient means possible, and that means electronic payment. You can set up ACH payments through a lot of accounting systems, and certainly through your bank’s web site. If you do this, there’s no more check stock to track, no check signing or mailing, no stop payments, no positive pay notifications – it all goes away.
Improve Document Retrievals
Another problem is document retrieval. If someone wants to research a payment at some point in the future, they have to go to storage, get the invoice, and put it back. Not only is this time consuming, but it’s quite possible that they’ll mis-file the document when they put it back. A really good work around is to scan all invoices when they come in, and then attach the digital copy to the invoice record in the accounting system. That way, there’s no more travel time to storage, and you’ll never lose a document again.
Ensure that W-9 Forms are Received
And then we have the W-9 form. For listeners outside of the United States, you can tune out on this one. Within the U.S., we have this annoying W-9 form that all suppliers are supposed to fill out; I won’t bother with the details of why it has to be done, but the basic problem is getting them to return the form. A lot of companies ignore it until the end of the year, and then they go into crisis mode to track everyone down and beg for a form. There’s a much easier way to do this, and it’s 100 percent effective. You simply do not pay the customer the first time around until they submit a W-9. This requires a little extra work up front, but it saves way more time than the initial cost.
Track Metrics
What about metrics, to see how the payables function is operating? One option is to create a report that shows all invoices that were paid after the required payment date. This is brings up a lot of process flow problems that you can fix. Another good metric is the proportion of invoices paid that are under $100, or some other fairly low target figure. If your corporate purchasing card program is working right, this should be a small proportion of total payments, and that represents good processing efficiency. And finally, track the proportion of electronic payments to total payments.
If you follow just these three metrics, then you have the tools to track down mistakes, and to gradually shut down both small payments, and check payments.