February 2, 2012 ACCOUNTS PAYABLE BEST PRACTICES

Transcription

1 February 2, 2012 ACCOUNTS PAYABLE BEST PRACTICES

2 IMPORTANCE OF A/P BEST PRACTICES After payroll, the largest disbursement of a firm s funds typically comes from Accounts Payable (A/P) Accounts Payable is often the largest single cost in the accounting function The typical Accounts Payable process is notorious for its manual, inefficient and errorprone nature, which leads to Errors: The average Accounts Payable department has a 1.6% error rate* High Cost: The average cost to process an invoice is $16.54* Lack of Controls: Clerical staff have broad discretion on how to apply management rules around PO/receipt/invoice matching and payment and invoice authorization rules are not always followed Poor Visibility: Financial managers accrue outstanding payables monthly; many of the individual transactions are paper invoices sitting in manager inboxes waiting for approval that financial managers have not seen Poor Documentation: The paper-intensity of the process leads to difficulty in locating manually-filed invoice and check documents Management Intensity: All of the above contribute to an excessive amount of management time, attention and resources to a non value-added function 2

3 IMPORTANCE OF A/P BEST PRACTICES Best practice Accounts Payable costs significantly less than the typical process The average cost to process an invoice is $16.54* A/P can be processed as much as 50 times more efficiently than others (32 ) Continuous improvement continually reduces cost while improving quality and service levels Sarbanes-Oxley Section 404 Requires Management To Acknowledge Its Responsibility For The Adequacy Of A Company s Internal Control Structure And Procedures For Financial Reporting To Assess The Effectiveness Of A Company s Internal Control Over Financial Reporting, With The Company s Independent Auditors Being Required To Attest To Management s Internal Control Report Annual reports must contain management s report on internal controls and the auditor s attestation of management s assessment Management must evaluate on a quarterly basis material changes in the company s internal controls Quarterly disclosure requirements include effectiveness of controls and procedures and changes in internal controls 3

4 BEST PRACTICES: QUALITY Data Entry Errors Data Entry Errors Can Occur on Any Invoice Field and Account for Most of the Errors in Accounts Payable Data Entry Errors Average 1.6%, a Very Large Amount Not Readily Measurable in Most Accounting Departments Receipt of Electronic Invoices (EDI, XML, etc.) Eliminates Data Entry Entirely Matching to Purchase Orders in an Automated Accounting System Eliminates the Need for Much Data Entry Data Entry by One Individual and Quality Review by a Different Individual Eliminates Almost All Data Entry Errors Double Entry of Invoices with Field by Field Comparison Eliminates Almost All Data Entry Errors Matching Errors Matching of Invoices to Purchase Orders and Receipts is Complex and Prone to Errors Business Rules for Matching are Frequently Not Documented or Followed by Clerical Staff Automated Matching in Accounting System (Typically Found in High-End ERP Systems Only) Well-Documented Business Rules Around Matching (What Constitutes a Match, Field by Field) and Action to Take if There is an Exception Logs of Exceptions by Exception Type, Sent to Purchasing Department for Vendor Follow-Up 4

5 BEST PRACTICES: QUALITY Duplicate or Incorrect Invoices Vendors Frequently Generate Duplicate Invoices When an Invoice Has Not Been Paid in a Timely Manner Improper Account Coding Account Coding is Judgmental and Rules for Coding are Not Well Documented or Otherwise Established in Most Companies; This May Lead to Inconsistent Coding Across Departments or Manipulation for Budgetary or Other Purposes Accounting System (Or Individual if Manual Process) Should Check for Duplicate Invoices by Invoice Number Accounting Should Check that an Invoice is For The Correct Company and Business Unit Duplicate or Incorrect Invoices Should be Logged So That the Source of Problems Can Be Found Well Documented Business Rules Around Coding Review of Coding by Managers to Ensure Business Rules are Followed Greater Use of Purchase Orders Eliminates Need for Account Coding by Managers 5

6 BEST PRACTICES: CONTROLS Disappearing Invoices and Unapproved Invoices Invoices that Come Directly from the Vendor to a Business Unit Manager or Location Other than Accounting Tend to Get Delayed (Sometimes on Purpose) or Lost Due to the Many Opportunities for Paper to Get Lost Unapproved Invoices (Not Yet Received by Accounting) are Not Known to Accounting and Therefore Company Liabilities are Not Truly Known or Reflected on the Balance Sheet All Invoices Should Come in to a Central Location and Scanned or, at a Minimum, Logged Before Being Sent for Approval Logging of Invoices Provides the CFO With a True Picture of the Liabilities of the Company Invoice Images Should be Routed Electronically for Approval to Track Invoices at Each Step of the Process and Eliminate Managers Sitting on Invoices in Their InBox 6

7 BEST PRACTICES: CONTROLS Lack Of Well-Defined and Documented PO-Receipt-Invoice Matching Business Rules In Most Companies, Matching Business Rules are Not Documented in Writing or in Complete Detail and Accounting Systems are Incapable of Matching Automatically Using All Necessary Rules, Forcing Accounts Payable Staff to Apply Rules Manually Document All Matching Business Rules in Complete Detail Automate Application of Business Rules Utilizing a Combination of Accounting Systems, Third- Party and Proprietary Software Solutions Excessive Use of PO-Receipt-Invoice Matching Tolerances Many Accounts Payable Departments Use Matching Tolerances to Reduce the Effort to Resolve Unmatched Items, But Are Often Set Too Loosely (to Reduce Effort), Allowing Dollars to be Lost Low to No Use of Tolerances Analysis of Effort in Resolving Unmatched Items vs. Dollars Lost to Determine the Proper Tolerance Levels 7

8 BEST PRACTICES: CONTROLS Broad Discretion of Application of PO-Receipt- Invoice Matching and Approval Level Business Rules by Accounts Payable Staff Accounts Payable Staff Apply Rules Manually and Generally Have Broad Discretion on How to Apply Business Rules; Few Companies Audit Rules Compliance Document All Matching Business Rules in Complete Detail Train Management and Accounts Payable Staff on Business Rules Audit Compliance of Business Rules Return Invoices without Account Coding or Improper Coding to Approver/Buyer for Correct Coding Automate Application of Business Rules Utilizing a Combination of Accounting Systems, Third- Party and Proprietary Software Solutions Approval of New Vendors or Update of Key Vendor Information Purchasing Department Should Approve All New Vendors and Changes to Existing Vendor Records Careful Controls Should be Placed On Who Can Approve the Establishment or Revision of Vendors to Prevent Fraud 8

9 BEST PRACTICES: VISIBILITY Financial Management Does Not Know the True Picture of Outstanding Company Liabilities Many Invoices are in Manager s InBoxes or Remote Locations at Any Point in Time; Financial Management Has No Way of Knowing the Dollar Value and Due Dates of These Invoices Centralize Receipt of Invoices at a Central Location and Route Electronically for Approval Using Workflow Technology Develop a Report at the End of the Month for Financial Management to Accrue All Outstanding Liabilities Accurately Managers Keep Invoices in Their InBoxes Too Long or Misplace Them Managers Inadvertently or Deliberately (to Avoid Costs Hitting Their Cost Center) Do Not Approve or Reject Invoices on a Timely Basis or Lose Them; Financial Management Has No Way of Knowing the Dollar Value and Due Dates of These Invoices Centralize Receipt of Invoices at a Central Location and Route Electronically for Approval Using Workflow Technology Set Business Rules for Managers to Approve or Reject All Invoices within 2 days of Receipt or Less This Also Leads to Poor Credit From Vendors, Late Charges or Inability To Take Advantage of Discounts 9

10 BEST PRACTICES: DOCUMENTATION Difficult to Find Invoices and Checks After Processing and Document Storage is Expensive Utilization of Imaging Systems Integrated into Accounting System Elimination of Paper Files Paper Documents are Difficult to Locate After Accounts Payable Processing Due to Filing Errors and Are Expensive to Store and Locate Many Companies Store the Invoice, a Copy of the Check and Purchase Order Together for Ease of Retrieval, But This is Extremely Expensive 10

11 BEST PRACTICES: MANAGEMENT INTENSITY Accounts Payable is Management Intensive, Complex and Voluminous Outsourcing of Accounts Payable Processes Accounts Payable is a Transaction Processing Function, Not Really an Accounting Function This Means that Accounts Payable Requires More Management Time and Employee Supervision ( Fire Fighting ), More Technology and Capital Than Other Financial Processes Management Techniques for Accounts Payable Also Differ Markedly From Accounting Functions and Requires More Management Training 11

12 BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT Accounts Payable Process Efficiency and Cost Some Firms Employ s That Reduce Accounts Payable Processing Costs To As Low As $0.32 Per Invoice Detailed Matching and Approval Business Rules No Invoice Accepted Without A Purchase Order No Invoice Accepted On Paper; All Invoices Must Be Electronic Scan All Remaining Paper Invoices Evaluated Receipts Settlement (Disbursement Made Upon Receipt Of Goods Based On PO Pricing; Invoices Irrelevant) Use Of Procurement Cards For Low Dollar Purchases Utilization of Workflow to Electronically Route Invoices for Approval Web-Based Invoice Processing and Payment Status for Vendor Self-Service Call Center to Handle Vendor Phone Calls Short Pay Invoices as Appropriate But Itemize Deductions to Prevent Confusion by Vendors Take Deductions Wherever Possible 12

13 BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT Continuous Improvement Gather Pertinent Data and Analyze It to Continually Improve the Accounts Payable Process Revise the Accounts Payable Process to Take Advantage of New Techniques or to Correct the Cause of Problems Investigate and Implement New Technologies to Further Enable the Process Implement Accounts Payable Reporting System to Better Measure and Manage the Process and Report on the Following in Real-Time: Exceptions by Field, Type of Exception, and Invoice; Status of Invoices at Each Step of the Process; Cycle Times; and Cost Manage the Process Tightly, Paying Close Attention to Metrics Gathered in the Reporting System Begin the Continuous Improvement Process Again 13

14 BEST PRACTICES: SARBANES-OXLEY Sarbanes-Oxley Compliance Ensure Effective Internal Controls, Allow Management to Ensure the Adequacy and Assess the Effectiveness of Those Controls and Procedures, and Allow the Auditors to Attest to Management s Internal Control Report Document All Invoice Matching and Approval Business Rules in Complete Detail Utilize Well Documented Business Rules Around Coding Utilization of Workflow to Electronically Route Invoices for Approval Utilization of Imaging Systems Integrated into Accounting System Centralize Receipt of Invoices at a Central Location Develop a Report at the End of the Month for Financial Management to Accrue All Outstanding Liabilities Accurately Automate Application of Business Rules Utilizing a Combination of Accounting Systems, Third-Party and Proprietary Software Solutions 14

15 EXAMPLE OF ACCOUNTS PAYABLE BEST PRACTICES: THE IQ BACKOFFICE PROCESS

16 A BEST PRACTICE SOLUTION CUSTOMIZED FOR EACH CLIENT THE IQ SOLUTION HAS THE ESSENTIAL COMPONENTS OF A WORLD-CLASS ACCOUNTS PAYABLE PROCESS: Supplier Provides Good / Service Supplier Sends Invoice IQ Opens Mail and Scans Invoices IQ Indexes & Matches Invoice & Identifies Exceptions Electronic Invoice IQ Answers Supplier and Client Phone Calls & Correspondence Shared Service Center Utilizing: Industry s SAS70 Controls Complete Audit Trail for Each Invoice Dedicated Client Teams Real-Time Management Reporting for Complete Control Client Manager(s) Approve Invoice & Resolve Exceptions Online IQ Vouchers Invoice in Client Accounting System IQ Prints and Mails Checks, Wires & ACH Payments Client Approves Payments in Client Accounting System IQ Performs 100% Audit 16

17 CONTINUOUS IMPROVEMENT PROCESS IQ Accounts Payable Process Virtuous Circle Accounts Payable Expertise Process Process Management ( Re)Design Reduced Cost Higher Quality Faster Cycle Time Employee Efficiency Customer Service Application Of Technology 17

18 WEB-BASED A/P REPORTING Web-Based Reporting & Drill-Down Provides Managers with Greater Access to Information and Control Over the Business Than They Ever Had: Customized reports on expenses Drill-Down to the transaction and associated source document image Reports generated real-time, reflecting changes in the business dynamically Cost effective available to all managers, employees, associates, clients and vendors without per user fees Easy to use Web-based requiring one to two hours of training 18

19 IQ BackOffice 2121 Rosecrans Ave., Suite 3350 El Segundo, CA