Using invoice line-item visibility to your advantage
Accelerating the approval of invoices has proven to be a difficult task for most finance departments despite the recent emphasis on technology solutions to combat labor intensive, paper-based processes. In a recent research report published by Boston-based research firm Aberdeen Group, 83 percent of domestic and 86 percent of international organizations continue to receive bills in paper format. On average, the firm's industry benchmark reveals that paper invoices take 27.6 days to process. Part of the reason invoices take such a long time to go from receipt to approval is the hierarchy of approvers through which the invoice must pass.
When you consider that very few invoices these days contain just a single line item, the notion that it takes nearly a month to process paper invoices doesn't seem so far fetched. Multiple line items typically lead to multiple cost centers, which inevitably lead to multiple approvers. Without the ability to capture those individual line items and interject them simultaneously into the workflow queues of the required approver's finance departments can only sit and wait as invoices move from desk to desk for approval.
In a business climate demanding greater visibility and control of expenses, a growing number of finance directors have sought alternative approaches to streamlining the payables process. Most of these alternatives are built around solutions ranging from in-house data capture and automation tools to the paperless workflow of electronic invoice exchanges. But the key factor in accelerating the approval of invoices lies in the power to efficiently route, and track, invoices at the line item or cost-code level, aided by an automated, non-linear workflow.
Getting Down to Business
In the absence of industry standards for electronic invoicing, the costs of traditional Purchase-to-Pay cycles for businesses processing a significant number of invoices each year can add up quickly. In an attempt to reduce AP transaction processing costs, some organizations have looked to purchasing cards or “p-cards”. While p-cards have been quite successful in driving efficiencies for small-ticket items, they are generally regarded as a modern day equivalent of 'petty cash' because they fail to provide the detail required for proper GL coding. And at the end of the day, p-cards don't eliminate paper from the process.
Likewise, given the tendency of low-volume vendors to shy away from submitting invoices electronically, customers of invoice exchanges — offering captive vendor networks and facilities for uploading invoice data online — are frequently unimpressed by the limited efficiency gains realized. For network vendors, the hope is that once a supplier is driven to submit electronic invoice data files for one client, that "connection" can be leveraged for other payer organizations in a growing network of both buyers and sellers. But at best, only a small fraction of vendors — on average between 30 and 35 percent — ultimately subscribe to these networks. With such a small percentage of vendors participating, customers of these exchanges find it difficult to fully realize the process efficiency and cost reduction potential for e-invoicing initiatives.
Managing Today's Paper Reality
As paper-based trading remains the norm for the majority of business-to-business transactions, the first step to increasing line-item visibility and control is the ability to efficiently and effectively process detailed invoices, both paper and electronic. According to a 2004 study by The Hackett Group, an Atlanta-based global strategic advisory firm, the average cost to process an electronic invoice line item is about 15 percent of the cost to process a paper-based invoice. For the average company, electronic processing amounts to $0.58 per line item, compared to $3.84 per line item for a paper-based invoice.
As a result of ongoing paper invoice realities, forward-thinking organizations are pursuing varying degrees of accounts payable automation via one of two paths: by partnering with an outsourced services provider to transform paper into electronic invoice data, or by leveraging in-house document capture solutions as an on-ramp to more advanced automation. In-house solutions, which utilize highly sophisticated character recognition technology and basic document routing rules, can provide good results at the invoice header level, where only information regarding total amounts and supplier details are required. In general, however, these solutions have proven to be difficult to implement and maintain as processes evolve, and do not provide the granular level of information required for line-item cost coding, approval and analysis.
Many successful organizations have been able to address the paper challenge by working with outsourced service providers to deliver a more complete on-ramp to fully automated corporate spend management. Employing advanced scanning technologies, these providers possess the ability to receive paper invoices and quickly, accurately and cost-effectively extract invoice data at both the header and line-item levels. With clean, workflow-ready electronic invoice data files, finance departments can quickly feed the data directly into an enterprise resource planning (ERP) system or invoice automation tool for more advanced workflow, such as automated purchase order matching, discrepancy resolution and approvals.
Toeing the Line
Most of the invoices organizations receive today contain multiple line items, each attributable to a different cost center and therefore requiring more than one approver. This type of scenario can instantly transform the approval cycle into a methodical, time-consuming process as invoices move from one approver to the next. As the invoice comes to a stop on each approver's desk, the entire process can be unintentionally held hostage while awaiting the approver's attention.
With the ability to capture and code expenses by line item and split costs across multiple cost centers, however, organizations can break this elongated process down. Depending on business requirements, non purchase order-based invoices can be individually cost-coded by total or by line item in accordance with the cost centers attributed to the nominated reviewer, and managed through an automated corporate approvals matrix.
As invoice data is captured at the line item level, approvers receive email notifications advising them of the specific line items that require their attention. Mandatory cost-coding facilitates budget management, while user-specific cost center/code pull-down menus or "pick lists" can help to minimize mistakes, virtually eliminating the need for re-coding by the finance department.
These types of capabilities naturally accelerate the approval process and eliminate the primary disadvantage of traditional invoice management systems that route only the first line of a multi-line invoice. The reliance on having to wait for the first approver in the queue to forward the invoice on to other departments for approval of additional line items is therefore completely eliminated.
Visibility into the status of each line item as it moves through the process provides the basis for effective spend management and analysis as well as a discernable audit trail. At the same time, it presents an entry point for dynamic discounting and trade financing opportunities. In an un-automated environment, there's simply no way for accounts payable to (a) pinpoint the location or status of the invoice, (b) track cash flow for accurate spending forecasts or (c) provide suppliers with estimated invoice approval or payment dates.
Getting Payback from the Process
Studies show that automation can reduce invoice cycle times by up to 85 percent, creating a tangible financial return for any organization. Without electronic workflow, companies often struggle to pay their bills within 60 or even 90 days. Given the continued pressure being exerted at the executive level to increase cost efficiency, maximizing the potential of electronic invoicing initiatives is more important than ever. Partnering with an outsourced services provider capable of processing both paper and electronic invoices and capturing data at the line-item level, can ultimately facilitate payment within 10 days or less. By facilitating payment in such a short timeframe, organizations can begin to take advantage of negotiated discounts, prevent late payment penalties and establish a more efficient approach for managing resources.
About the Author: Chip Martin is vice president of Product Management, Bottomline Technologies, a provider of payments and invoice automation software and services. www.bottomline.com.