© 2011 financial operations networks llc visibility: the real value of automation david w. hay...
TRANSCRIPT
© 2011 Financial Operations Networks LLC
Visibility: The Real Value of Automation
David W. HayFinancial Operations Networks
Tuesday, April 12, 2011
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility
In 1995, Baring Bank, London’s oldest merchant bank, was forced out of business
through the actions of one trader who accumulated losses of $1.3 billion by
speculating in the futures market
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility (Cont’d.)
The subsequent government report pointed out that many companies encounter similar problems:• Lack of knowledge about what was happening in
the business• Lack of control• Lack of accountability• And above all, “lack of visibility into the practices of
the business”
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility and AP
“So what has a rogue trader in a bank got to do with AP?” one might ask…
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility In AP
• Another example:― KPMG: auditors of a large property company found 50,000
invoices unaccounted for― The auditors “were surprised at the level of backlog of
invoices that had not been processed for a listed company”
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THE ACCOUNTS PAYABLE
Leadership Conference
• The two examples may be extremes, yet every day we make decisions based on incomplete information― A few years ago I took over for a recently departed
employee and discovered invoices totaling $187,000 in her desk….invoices that had not been accrued for at year end
Visibility In AP (Cont’d.)
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THE ACCOUNTS PAYABLE
Leadership Conference
For every example of the problems created by a lack of visibility, there are examples of how a proactive use of knowledge can add
significantly to the bottom line
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THE ACCOUNTS PAYABLE
Leadership Conference
Every week, supermarkets have between 6,000-8,000 items on sale.
Unfortunately, customers are often faced with empty shelf space.
Retail Example
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THE ACCOUNTS PAYABLE
Leadership Conference
One major European-based chain solved this problem by allowing its suppliers online access to the information from POS systems in stores.
This “visibility” allowed the suppliers to track sales and replenish as needed, eliminating stock outages.
Retail Example (Cont’d.)
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Leadership Conference
A manufacturer in the computer graphics industry virtually eliminated finished goods inventory by
basing production and parts ordering off the sales offices 30-, 60- and 90-day forecasts.
Manufacturing Example
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THE ACCOUNTS PAYABLE
Leadership ConferenceRegulation
• Government regulation in the post-Enron and 9/11 era have made visibility into the financial operations of companies mandatory
• Sarbanes-Oxley requires that the CFO sign the financial statements of a company
• OFAC rules require that companies check that their customers and vendors are not on the restricted parties list
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THE ACCOUNTS PAYABLE
Leadership ConferenceSarbanes-OxleySection 404Specifically requires management’s annual internal control report to contain:• A statement of management’s responsibility for
establishing and maintaining adequate internal control over financial reporting
• A statement identifying the framework used for management to evaluate the effectiveness of internal controls
• Management’s assessment of the effectiveness of internal controls
• A statement where the independent auditor has issued an attestation report on management’s assessment
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility and AP (Cont’d.)
How can AP add value to the organization through visibility?
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THE ACCOUNTS PAYABLE
Leadership Conference
The short answer is through automation.
However, automation alone will not solve the problem!
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THE ACCOUNTS PAYABLE
Leadership ConferenceAutomation andProcess Change
• Before starting an automation program, first look at your current systems and reengineer to enhance business processes― For example:
• Issue POs for all purchases• Review master data file for duplicate entries, old vendors, etc.• Review how approvals are handled: is it one over one, are $ limits
set, can approvals be eliminated?—i.e. if a known vendor bills a similar amount each month then auto-
approve, and audit occasionally• Above all, have all invoices sent directly to AP, not the approver/buyer
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THE ACCOUNTS PAYABLE
Leadership ConferencePaper Invoice FlowDepartments or
Locations Suppliers
Invoices
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THE ACCOUNTS PAYABLE
Leadership ConferencePaper Invoices Not Sent to AP• Delays in process, invoices can take 20-35 days to
reach AP
• This leads to:― Lost invoices (7% according to Gartner)― Duplicate payments― Lost discounts― Lack of accruals
• And above all a complete lack of visibility
• 80% of all errors occur with paper invoices
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THE ACCOUNTS PAYABLE
Leadership ConferenceRecommended ProcessDepartments or
Locations SuppliersCentralized
AP
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THE ACCOUNTS PAYABLE
Leadership ConferenceBenefits of Centralized ModelAll invoices sent to a central point• Allows for immediate entry to AP system
― Allows for immediate accruals― Images can be created and forwarded for approval― Discount capture possible― AP had the information on hand to answer vendor queries― And …
The system can be automated!
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THE ACCOUNTS PAYABLE
Leadership ConferenceAutomation
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Leadership Conference
• Computers began to be used in businesses in the 60s and 70s― Most were single function stand alone systems, and
communication was limited to 300 or 1200 baud― Visibility was through “print out”― Very limited “ad-hoc” reporting― No consolidation without manual creation
• Often through the use of spreadsheets
No real increase in visibility
Automation (Cont’d.)
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Leadership Conference
• The introduction of ERP systems helped bring all information into one system so visibility would be enhanced
• Today many special purpose systems, such as AP systems, have been introduced to work with ERP or stand alone
• It is now possible for all relevant parties to access data in real time to enhance reporting and decision making
Automation (Cont’d.)
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THE ACCOUNTS PAYABLE
Leadership Conference
• Key to an efficient automation solution is the work flow system. The work flow system will:― Receive invoices from e-invoicing or scanning― Route invoice to approver for action
• Can include hierarchy for management approval
― Contain business rules• Example could be auto-pay for certain invoices
― Match invoice with PO or receiving― Route problem invoices for action
Automation (Cont’d.)
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THE ACCOUNTS PAYABLE
Leadership ConferenceP
roce
ssin
gD
etai
ls
Process flow
SSC or Scan/Capture Hub operators retrieve scanned image and indexing for matching with PO and GR
Accounts Payable ProcessPO-Based Invoices
Matched Invoicesare uploaded to the relevant ERP system for final match and payment.
Discrepant invoices are resolved by SSC Processors, referred to buyer or returned according to policy.
Matched invoices arestored in SSC until scheduled upload to ERP Systems.
Vendors UsersERPSystems
Pre Matched/Approved Invoices
PaperInvoices
System
System
Edi &FileInvoices
Scanning/Capture Hub Shared Service Center AP System
PO &GR
Invoice Matched
YES
DiscrepancyResolution
Discrepancy Resolved
YES
Portal
NO Contact Buyeror Return
Buyer approval
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THE ACCOUNTS PAYABLE
Leadership ConferenceDon’t ForgetYour Vendors• Set up or source a vendor portal:
― Allow vendors to submit invoices― Post payment information and RAs― Built-in inquiry system, could be via email or chat― Allow vendor to request early payment
• Additional enhancements could include:― Post information on invoice process― Delivery of POs and PO change information
• PO flip capability, where PO is converted to an invoice
― New vendor package― Policy manual information
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THE ACCOUNTS PAYABLE
Leadership ConferenceDon’t ForgetYour Users
Post relevant documentation:• Company policy documents• T&E policy• News and information about your own department• Calendar― Cutoff dates for payments― Holiday schedules
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THE ACCOUNTS PAYABLE
Leadership ConferenceTechnologies Solutions
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THE ACCOUNTS PAYABLE
Leadership ConferenceThe Real Benefitsof Automation
• Allows for full visibility into the entire PO-to-payment process
• Greatly reduced processing time― Discount capture is possible― Late payments reduced― Lower costs
• Not only in AP costs, but the greatest benefit comes from a reduction in cost of materials
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THE ACCOUNTS PAYABLE
Leadership Conference
• In this model requester and buyers are:—Buying the same product
from different vendors at different prices
—Buying the same product from the SAME vendor at different prices
• AP is often the last to know when a new vendor is added
Invoices
Paper World
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility withCentralized AP
Full visibility from receipt of AP through payment• Allows for full spend
analysis and vendor management
• Discount capture possible
• All relevant parties have access to data
• SOX and audit goals met
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility’sBiggest Benefit
Spend analysis• Allows for better pricing through volume discounts• Reduce the number of vendors• Supply standardization
―For example buying less expensive pens, paper, etc.
Lets look at an example …
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THE ACCOUNTS PAYABLE
Leadership ConferenceBenefit Example• Our sample company has:
― Sales of $250 million― Profit before tax of $25 million― Cost of goods purchased – 45% of revenue
• Many companies achieve a 10% reduction in price paid for goods and services― In this example if 10% reduction is only 50% of spend, the
return to the bottom line is $5.6 million
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THE ACCOUNTS PAYABLE
Leadership ConferenceMeasuring Activity
• Use the information in your system to measure how you are doing against targets
• Decide what the key metrics are that you are trying to measure
• They could be:―% of invoices backed by a PO―Invoice errors―Invoices received from unknown vendors―Vendor calls received by AP staff
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THE ACCOUNTS PAYABLE
Leadership ConferenceVisibility…
Accurate view of your key business metrics
Red/Yellow/Green tolerances set by Administrator
Today’s Date: April 12, 2011
Trade Discount Acquisition 75% 85% 70%
Cycle Time (Average Days) 12 days 10 days 8 days
Discrepant Invoices 300 220 200
Number of Processed Invoices 20,000 27,500 19,000
Supplier System Utilization Click Here
Invoice Match and Pay
Metric Description Last Month MTD Target Status
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THE ACCOUNTS PAYABLE
Leadership ConferenceBenefits Summary
• The C-Suite has all the information they need to manage the business
• SOX and other regulations can be made
• Staff can make better buying decisions, enhancing the bottom line
• Improved vendor relations
• Improved internal customer relations
© 2011 Financial Operations Networks LLC
Thank You!