resource center/technology series

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1 resource center/technology series Accounts Payable Automation Technology: Procurement Cards The Perspective of a Practitioner By Craig Simpkins, CAPP The Institute of Financial Operations 615 East Colonial Drive, Orlando, FL The information contained in the Resource Center Web pages is for general information purposes only. The statements, comments, or opinions expressed within these documents and links are those of their respective authors, who are solely responsible for them. Inclusion of these documents and links in the Resource Center does not necessarily constitute or imply endorsement, recommendation, or favoring by IAPP/IARP/TAWPI. While IAPP/IARP/TAWPI endeavors to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information, products, or services contained within the Resource Center.

2 Welcome to the White Paper Series on Accounts Payable Automation Technology. The series consists of seven topics, all from the perspective of a practitioner: Introduction to Accounts Payable Automation Technology Invoice Receipt Process Workflow and Document Storage Procurement Cards Travel and Entertainment Disbursements Other Accounts Payable Processes The reports will focus on current and emerging methods of automation used to streamline and optimize the accounts payable process. In addition, each white paper is structured to enable readers to challenge the current level of technology within their organizations. Throughout the series, the reports will refer to the 2009 IAPP Benchmarking Study and its findings related to accounts payable automation technology. Charts pictured in this series are from the results of the study unless otherwise noted. Overview This whitepaper, which is the fourth in a series of seven, will focus on the procurement card. This paper will review and discuss the results of the benchmarking study, and correlate those results to options for automation technology. Specifically, the paper will discuss benefits, challenges, technology implementation, and success factors related to the incorporation of automation technology into your procurement card process. [] 2

3 Basic Criteria for a Procurement Card In addition to simplifying the purchasing process for both the employee and the supplier, procurement card automation technology will allow an organization to gain the efficiencies, productivity, and cost savings from a streamlined process. In addition, the basic criteria for a procurement card include: Ease of management for procurement of goods or services. The use of a procurement card will allow for an employee to purchase a good or service, without having to request a PO. In addition, it allows the supplier or vendor to receive their payment in a short period of time; however, there is a small fee for that convenience. Accurate cash flow projection for supplier/vendor. The supplier/vendor is guaranteed that a payment will be received within days after the completed transaction. Therefore, they will not have to wait for an extended period of time as they would if a purchase order or invoice were involved in the process. Procurement Card Facts One-third of all invoices are below $100, and in most large companies, as many as 80% of all invoices are below $1,000 72% of companies with more than 10,000 employees have implemented a Purchasing Card program 91% of organizations surveyed in 2007 expected their company to increase Purchasing Card spend by Productivity realized by purchasing, accounts payable, and the accounting function. The use of a procurement card eliminates the need for a purchase order, the invoice data entry process, possible disputes with invoices, and the disbursements process. In addition, the financial institution that issues the card, normally provides a file to the accounting team, so expense information can be uploaded to your ERP system. By using Purchasing Cards instead of checks, companies reported process savings of $69 per transaction (compared to the traditional purchase order process) and a 68% reduction in procurement cycle time. Source: RPMG Research Corporation, 2007 Purchasing Card Benchmark Data. Controlled Spending. A company can institute business rules within the procurement card process; therefore, specific suppliers can be identified to be used, and certain limits can be set for purchases. For example, a specific supplier can be identified for office supplies, and all other suppliers will be blocked for use. In addition, specific expense types such as flowers, alcohol, or jewelry can be blocked. Finally, limits can be established on a transaction and monthly basis. [] 3

4 High-volume, low-dollar purchases. One of the main benefits of procurement card automation technology is that a company can eliminate a significant amount of its transactional volume. This can be accomplished by leveraging the procurement card for high-volume, low dollar purchases, which can entail 80% of your transaction volume, which accounts for 20% of the total expense. Challenges of implementing Procurement Card Automation Technology In order to implement P-Card automation technology within your organization, you will need to overcome some challenges. These challenges include: Change management and training. The implementation of an automated solution will result in the elimination of paper from the process. In addition, card users and their direct supervisor will need to manage the process on a virtual basis. Therefore, it is imperative that a change management plan and a training program, are developed and supported by all individuals involved in the process. It is imperative that a regimented training program is rolledout, that involves more than a check in the box to complete the process. Employee engagement and accountability can be a challenge, especially if they are not on board with the process. Executive Support. As with any automation technology initiative, it is imperative that management supports the initiative, including the policies, procedures, and employee accountability that are required to ensure that are controls are followed within the organization. This initiative is meant to streamline the process for the organization and improve customer satisfaction; however, the trade-off is that rules are followed by those involved. Interface to current ERP/Business System. In order to gain the maximum efficiencies from the implementation of automation technology, it is imperative that the financial institution can help develop an interface to your ERP/business system. This interface will allow for the P-Card provider to feed transactional data direct into your system; therefore, accounts payable can voucher a consolidated invoice, and the detail information will appear in the general ledger. If this interface is not available, then other alternatives such as an upload template will need to be used to transfer the data to your system. Supplier Pushback. One of the main benefits of this process is to increase the level of customer service with your suppliers, as they will receive their [] 4

5 payment earlier. However, there is always the possibility that suppliers will push back as there is a fee associated with the acceptance of P-Card transaction. In some cases, the supplier will increase their prices to accommodate the use of a card; or they will be satisfied with receiving their payment in a timely manner. Internal Resource Capability. Internal resource capabilities include the support from audit, compliance, and the IT organization. In this day of increased fraud, it is imperative that business rules and controls are implemented that will prevent a company from the risk of financial statement fraud. Finding a financial institution that can accommodate your needs. There are several companies that can administer your procurement card program. However, it is imperative that you review and select the provider that can help achieve your overall objectives. Some factors to review when selecting a provider include: Current customer base and their level of satisfaction Type of platform (i.e. web-based) and pricing model Program monitoring, analytics, and reporting capabilities Supplier management and Technical Support Technical Capabilities Benefits of implementing Procurement Card Automation Technology Within the IAPP Benchmarking Study, respondents ranked the following benefits of incorporating automation technology into their Procurement Card Process: Increased efficiencies and visibility The management of spend control The use of data for supplier negotiations Improvement in Compliance and Audit Initiatives Facilitate the Budgeting and Forecasting Process Enforcement of Supplier Contract Compliance [] 5

6 In order to have a tool that can be leveraged to achieve the set benefits, there are certain factors that need to be evaluated. These factors include: Improved visibility to spend and buying habits. By implementing P-Card automation technology, an organization will gain better visibility on spend by expense type. For instance, they will have the ability to determine the amount of office supplies purchased and the supplier. Therefore, if employees are purchasing office supplies from multiple vendors, the technology will allow an organization to limit the purchases to one supplier, and gain the associated economies. Also, the increased visibility will identify if suppliers are being used that are not on the preferred list. Reduction in P2P Cycle Time and Costs. Technology will help streamline the process as the generation of purchase reqs, vouchering invoices, supplier dispute resolution, and disbursements are no longer required. In fact, one payment will be sent to the P-Card provider versus individual payments to each supplier. Overall, the cost of a Procurement Card transaction is 20% of a purchase order. Supplier receives payment faster. Even though the use of a P-Card will decrease the amount of time that a supplier has to wait for payment, the implementation of automation technology will expedite the payment further. In fact, suppliers will receive their funding within 2-3 business days after the transaction. However, the supplier will pay a small processing fee (2-3%) in order to receive their funds within this time frame. The short cycle-time will allow the supplier to better forecast their cash flow, versus relying on the lead-time when an invoice is vouchered and paid. Reduction of transaction processing. The use of automation technology with P-Cards will eliminate the need for purchase requisitions, purchase orders, invoice processing, dispute resolution, and payment processing. In addition, there will be a significant reduction in administrative costs within the P2P process. The elimination of these steps will result in significant savings to the organization. Improve Employee Productivity. Employees are authorized to make small purchases with the card, which improves productivity and accountability. While there is still administrative work that needs to be completed by the employee, it is completed at the back-end; therefore, it does not impede their ability to provide a high level of customer service. Maximize Rebates or incentives. Procurement Cards are a profitable product for the financial institutions that issue them. Therefore, the use of a P-Card [] 6

7 program, specifically a green solution, can result in savings to overhead, and a rebate from the card issuer. Implementation of auditable controls. A technological solution will allow an organization to limit the amount per transaction, the transaction value on a monthly basis, and will allow for blocking of inappropriate merchant codes. The benefit of automation technology as it relates to auditable controls is that the Procurement Card Administrator has real-time access to activity, and can address violations to the process in an immediate manner. Improve Customer Service and Employee Satisfaction. Suppliers will now receive their payment within days of the transaction. Even though there is a fee involved for the supplier, they are guaranteed on the timing of the cash flow. In addition, they do not have to worry about receiving a valid purchase order, issuing an invoice, and waiting for a payment. Employee satisfaction results, as they are empowered to purchase the product or service that they need, provided they adhere to the stated controls. In addition, the employees are interacting with a satisfied supplier. Elimination of Petty Cash. Since a majority of suppliers accept a procurement card, the implementation of the program will allow for the elimination of petty cash. Therefore, the risk associated with managing a petty cash fund no longer exists, and the paperwork required for the reimbursements of petty cash is no longer required. Procurement Card Automation Technology Success Factors Up to this point, we have briefly identified the challenges and benefits of implementing procurement card technology. The success factors associated with implementing procurement card automation technology include: A dedicated resource to the project. Clear and concise guidelines. Auditable controls. Comprehensive Training and Communications Plan. The vendor selection process based on the need and requirements of your organization. A deployment plan (including a pilot). Compatibility to your ERP system. A monitoring program to track compliance and performance. [] 7

8 Procurement Card Benchmarking Data Based on a benchmarking study that was conducted by the IAPP, there is opportunity for many companies to implement a Procurement Card Program. In addition, the implementation of automation and technology will result in the previously discussed success factors. Below you will see the percentage of invoices received by the various means within an organization. The volume of invoices received by paper/mail (98%), (93%), and fax (81%) still dominate the responses. This chart clearly shows that there is an opportunity for organizations to evaluate the use of procurement cards. Therefore it is important to review your accounts payable data, and determine if there are low-dollar, high volume expenses that can be converted to a Procurement Card. In addition to this measurement, the same group of respondents were asked to provide data related to payment information on payments related to invoices. As you can see, paper checks (96.8%), ACH s (79.4%), and wire payments (59.4%) are used most for payments. Again, this is an indication that procurement cards can be leveraged to process payments. Even if the invoice is generated via paper, , or fax, there [] 8

9 can still be a processed implemented to pay the invoice via a procurement card. Procurement Card: Utilizing Technology to Streamline Processes The implementation of a Procurement Card within your organization will result in efficiencies and effectiveness of your operations. However, as we have reviewed up to this point, automation technology will enable your department and organization to achieve a return on investment on the implementation. A few key items that will allow you to streamline processes include: Controlled process. The financial institution that administers the program has experience with companies of many sizes and transaction types. Therefore, they have incorporated this gained knowledge into their processes, which results in a strengthened level of control for the overall process. Management of SIC/MCC Codes. The administrator of the procurement card has the ability to block SIC/MCC codes for a particular supplier or for a specific type of expense. For example, the MCC Code 5681, which is for Fur s, can be blocked for usage with the P-Card. In addition, suppliers may be classified as another type of expense than their main line of business, which could result in authorized purchases being made. For instance, a casino could be classified as a restaurant; therefore, the card user maybe purchasing items that would be classified as food/dining from a MCC Code perspective; however, may involve actual gambling. Overall, automation technology enables: Real-time access to modify spending limits or to Cancel cards Spending limits are standard, with deviations granted on an exception basis Cards can be cancelled if employee is abusing the policies and procedures or no longer with the company Users, Approval, and Spending Limits. The use of a web-based tool will allow for real-time management of users, approvers, and spending limits. For example, if an employee is terminated from the organization or is suspected of misusing the procurement card, the card can be suspended or deactivated in a matter of seconds. Also, a card user may need to have the transaction of monthly limit adjusted for a specific business reason, which also can be handled in a matter of minutes. [] 9

10 Compatibility with ERP Systems. The financial institution that administers the procurement card will have the ability to transmit data direct to your ERP system, via EDI, or can provide a file that can be uploaded. This will save the accounting department hours of work in preparing journal entries that would need to completed in a manual process. The procurement card process should integrate with the following systems: Human Resource System (i.e. Peoplesoft) Accounts Payable Business System General Accounting ERP System E-Procurement Auditing and Compliance Budgeting and Forecast 1099 Reporting Reconciliation Process. If the MCC Codes are mapped to the correct Chart of Accounts, then the reconciliation process between the consolidated invoice and the individual invoices will be streamlined. In addition, it is imperative to track employee changes; otherwise, the expenses will be routed to a default account, and will be considered a reconciliation item. Real-time Reporting. In order to manage the spending at a transaction level, the financial institution will provide reporting that will assist in the analysis of spending, and will help manage the audit and compliance process. Overall, automation technology as it relates to reporting provides for: Technology will allow for administrators to determine when and how the card user will have access to data. Depending on complexity of software, editing tools will be provided to make changes (i.e. split charges) Reporting by SIC, user, or vendor for audit and analytical purposes. [] 10

11 Procurement Card: Critical Steps related to the Implementation of Automation Technology The implementation of automation technology requires thorough and proper planning; otherwise, you will not gain the planned efficiencies. Important steps to think about when implementing automation technology includes: Define correct technology implementation tools Map out business requirements with all stakeholders Define interfaces and mappings between systems Define software requirements Configure the system (user, supplier, account codes, approvers, etc..) Communicate new plan to supplier community Create a process for cardholders Develop business rules, processes, and procedures Develop training program for employees and suppliers Procurement Card: How Technology can benefit the supplier. Even though a supplier will have to pay a small fee to accept a procurement card, there are still a multitude of benefits. These benefits include: Timeliness of payment due to mail float (avg. of 2-3 days) Reduced billing and payment processing costs, and less disputed invoices Improved customer relationships and increased sales Automated payments generated upon approval of invoices Better management of Days Sales Outstanding Lower billing and collection costs Improved cash collections forecasting [] 11

12 The only risk to a supplier is when they are given the wrong card information (which can delay payment) or an authorized person uses the card; however, they end up receiving the funds, only the process maybe delayed. Procurement Card: Monitor Compliance and Audit One of the main benefits of automation technology is that enable to organization to have controls in place to prevent fraud. In addition to being a web-based solution, there is workflow and electronic storage documentation that keeps the information at your fingertips. Some of the features of automation technology include: Administrator has the tools to monitor card usage Regular audits of compliance Monthly and transaction card limit established through portal Watch for split transactions, which identifies that a card user may have violated the transaction limit for a purchase. Workflow for approval of statement by employee and manager Require and track receipts for purchases Exception reporting received when attempted purchase against blocked SIC. Audit for non-compliant and frivolous spend Approved reports and receipts submitted timely Electronic storage of reports and receipts for quick retrieval The key factor is that the organization has real-time access and visibility to the process. Transactions can be analyzed and reviewed for reasonableness, and cardholder privileges are managed on a perpetual basis. From a compliance perspective, automation technology will allow for additional controls that are more difficult to manage from a manual perspective. These controls include: Monitor access for program administration (request, authorization, and execution) Ensure cardholder is not approving manager or executive [] 12

13 Enforce established business rules including audit points Provide for real-time visibility and reporting Ensure correct person is approving the expenses Ensure approved statement and receipts are submitted in a timely manner Facilitate training process Allow for immediate communication of infraction via company e- mail Procurement Card: Ghost Cards In addition to procurement cards, organizations have an option of managing a ghost card program. A ghost card is not a physical card, it is a high-limit charge account with one vendor or a group of vendors with which an organization conducts a very high number of transactions. It can be effective when a group of employees place orders from the same supplier, as they normally don t transact enough business on an individual level; however, cumulatively they conduct enough business to justify a ghost card. The characteristics of a ghost card include: Allow for supplier to utilize one account number to process transactions Maintained by one card provider No physical card Streamlines procurement process for employees The following factors related to automation technology are necessary to achieve the benefits of a ghost card. These factors include: Ensure vendors have the technical ability to handle the process. Ensure that card provider has the ability to facilitate the process. Ensure that an EDI interface can exist between the card provider, your organization and the supplier. [] 13

14 Procurement Card: Other Best Practices As previously mentioned, the use of automation technology can include the electronic storage of documentation. A few key points related to document storage include: For audit purposes, approved statements and receipts need to be retained per state requirements. Sales Tax management and reporting Back-end imaging can be utilized to facilitate the storage. Additional opportunities that result from automation technology include: Possible consolidation with Travel and Entertainment card, for optimal economies Implement initiatives to reduce the reliance on paper checks Expand to other purchases, such as high-dollar, low volume Reconciliation tool for general accounting Spend analysis to manage supplier and expense categories. Procurement Card: Key Performance Indicators/Balanced Scorecard There are several key performance indicators that can be utilized to measure the overall success of your procurement card program. Again, the use of automation technology will allow for real-time visibility to these metrics, which facilitates the analysis and review of expenses in a timely manner on a monthly basis. The key performance indicators include: % of employees that have P-Cards Transaction/monthly limit Average amount per transaction Average spend per card % of supplier base in which P-Cards are utilized % of spend processed on P-Cards # of transactions per month [] 14

15 % of P-Card transactions/statements that are audited on monthly basis The main point related to key performance indicators is that they need to be structured to drive the right behavior of the users/approvers and provide the required data to manage your overall business. In addition, a company can utilize a best practice scorecard to ensure that it is netting the most efficient results from a company and industry perspective. The scorecard can include best practices, which are assigned a weight based on importance. Therefore, management can measure the overall success of the program and/or identify areas where improvements are required. Summary A common theme of this whitepaper was to emphasize the importance of utilizing automation technology to manage your procurement card program. Even though a company can experience success through the use of a manual program, automation technology will allow for a streamlined process, will allow for real-time visibility and management, facilitates the audit and compliance process, and will provide the reporting required to drive the overall objective and goals of the program. Looking Ahead The next white paper in this series will focus on the Travel and Entertainment Card, and will discuss the alternatives and benefits related to its automation. [] 15

16 About The Institute of Financial Operations The Institute of Financial Operations is a membership association comprising four affiliates: International Accounts Payable Professionals (IAPP), International Accounts Receivable Professionals (IARP), the National Association of Purchasing & Payables (NAPP), and The Association for Work Process Improvement (TAWPI). Based in Orlando, Fla., with offices in Boston and London, The Institute serves as a global voice, chief advocate, recognized authority, acknowledged leader, and principal educator for people in financial operations, with a particular focus on accounts payable, accounts receivable, payments, procure-to-pay, automation, data capture and document management. Combined, the affiliates have more than 6,000 members. Under The Institute, the affiliates share one board of directors, one staff, and a single portfolio of member benefits available to all, including Financial Operations Matters magazine and a website re-engineered and relaunched in late [] 16

17 About the Author Craig Simpkins, CAPP, has held positions in shared services for several years, in addition to experience in accounting and finance management. Simpkins holds a Bachelor of Science degree in accounting and finance, and a master of business administration in entrepreneurship, and is both a certified fellow (CFPIM) with APICS and a certified supply chain professional (CSCP). Currently, he is a member of the IAPP s Ask the Expert team and has presented webinars in AP technology for the IAPP. In addition, he has developed and presented courses on CAPA and CAPP Certification and Best Practices. Simpkins has taught CPIM and CSCP review courses and has written several Internet-based CPIM review courses for APICS and Accenture Software. Additionally, he has presented several times on the topic of lean accounting and has several years of experience with new system and technology implementations. [] 17