© 2012 financial operations networks llc ap’s changing role: from tactical to strategic; from...

© 2012 Financial Operations Networks LLC

AP’s Changing Role:

From Tactical to Strategic;

From Bill-Payer to Supporting Partner;

From Cost Center to

Working Capital Contributor

www.TheAPNetwork.com

About Your PresenterDavid W. HayAP & Procure-to-Pay Consultant

David retired from a 40-year career spanning International Banking, Finance and Computer Services and Outsourcing. Most recently, David served as the Director of Shared Services Business Services Outsourcing, for Hewlett-Packard. He was formerly marketing manager for e-payments and financial services for Global eXchange Services (GXS), where he was responsible for the strategic direction and development of GXS's online invoicing and payment solutions for B2B e-commerce on a worldwide basis and has served on GE Capital's initiative to create a GE Center of Excellence for e-billing.

David has worked with GE Capital, GE Medical Systems and GE Industrial Systems. As a member of key focus groups and task forces, he helped the GE businesses with their EDI and e-commerce initiatives. In his 24 years of GE experience, he held several key management positions in financial services, e-commerce and sales & marketing. A former international banker, David has more than 35 years of experience in the financial and e-commerce industries.

David is a regular speaker at accounts payable and payment conferences.


Agenda

• Introduction

• Rise of the CFO

• Secrets of the Best Performing Companies

• Benefits of a Strategic Approach

• Summary


Introduction

• In many companies the role of AP has changed dramatically over the last few years.― The economic downturn, government regulation,

outsourcing, technology and uncertainty about the future have greatly increased the role of Finance and AP within corporations

― According to a recent study* the recent downturn has enhanced the finance function in 72% of companies with 12% claiming they were already highly influential

*CFO Research and Expense Reduction Analysts


Key Concerns of the CFO That Impact AP• About the economy

― Consumer demand― Federal government policies― Price pressure

• About their own companies― Ability to maintain margins― Ability to forecast results― Working Capital Management

― And # 5 Managing IT Systems


Outsourcing

• Companies are moving from being vertically integrated to horizontal― Cost of goods sold increased from 10% to up to 80%― Resulting in a large increase in the number of suppliers and

$ volume handled by AP― Thanks to globalization many of the suppliers are offshore

adding to the complexity• Currency and credit issues, transportation and tax issues complicate

AP


Technology

• ERPs, EDI, the internet and the World Wide Web have changed the way we do business at a greater pace than ever before― Customers, internal operations and suppliers can all be

linked globally in a seamless e-supply chain― The contribution to the bottom line from productivity gains

have outstripped sales gains for many companies

• Increasingly, the finance department is responsible for technology


Technology (Cont’d.)

• Since the introduction of ERP systems the CFO has gained in influence over IT― In 42% of companies the CIO reports to the CFO― This figure rises to 60% in companies with revenues

between $50 and $250 million

• CFOs alone authorize 26% of all IT investments, CIOs alone only 5%

• Over the next six months IT budgets will stay flat or decrease for 60% of companies

Source; CFO Magazine Dec 2011


Productivity

According to the November 2011 issue of CFO Magazine, worker productivity has increased by more than 50% between 2009 and 2011

A recent study of CFOs, and other executives, by Deloitte asked “what are the top three reasons behind the rise in productivity at your company?”

And the top reasons are:


Top Reasons for Productivity Rise


Regulation

• Sarbanes-Oxley Act― Results in increased control over financial operations,

corporations are required to document processes to assure compliance with sound business practices

― CFO (and CEO) has to “sign off” on accuracy of financial documents

• OFAC ― Companies are required to comply with all aspects of the

Patriot Act with regard to who they do business with, i.e., vendors

• FCPA Foreign Corrupt Practices Act― Applies to a companies to customers and vendors


View from the Top

• In an interview with CFO magazine, Mark Goodburn, Vice Chairman of KPMG, was asked about the impact of Sarbanes-Oxley, and he said, “Companies have shifted their focus to things like ‘[What] do we get if [we are] automated versus handling it manually?’”


So What Does This Mean for AP?• To meet regulatory requirements CFO’s are

demanding accurate, immediate access to financial information

• Complete transparency into the whole process

• Lower cost and increased productivity


Benefits of Automation

Most companies automate to reduce costs through head count reduction and process improvement.


Productivity Gains in AP

Process change and automation have had a major impact on the costs and productivity in AP.


Automations Effect on Costs

2011 2009

CostCycle Time Cost

Cycle Time

Best in class $2.05 4 $3.47 3

Median $5.41 10 $16.91 15

Laggards $10.26 25 $36.51 33

Costs have come down greatly over the last few years


However

• Cycle times have not changed as much as cost for most companies

• The best-performing companies obtain costs per invoice in the range of $0.75 to $1.25― This is achieved through the complete automation of the

process.

• Long cycle times mean only the best performers can obtain discounts

There is still room for improvement


The Problem

• Many companies have automated only a few processes, such as e-invoicing

• Scanning is often still a back-end process

• The approval process is still manual with an image used instead of paper

• Little or no use of automated workflow or matching


Invoice by Type


Effect of Changes in Mail Delivery• According to The Hackett Group proposed changes

to the delivery time of first-class mail could cost a U.S. company with $10 Billion in revenue $100 million in working capital

• SMEs in particular will be effected as they have been slow to adopt e-invoicing and e-payments


Why do the best-performing companies achieve significantly

better results?


Move from Tactical to Strategic

• AP and Purchasing work to improve the complete purchase to pay cycle

• Centralization of AP into a shared service environment

• PO distribution, front-end scanning, e-invoicing, workflow and payments integrated into a complete solution

It is the combination of the automated solutions with process change that return the best results.


Secrets of the Top Performers• Significantly higher use of POs

― AP and purchasing work together to improve process― Invoices that match with a PO can be paid without further

approvals required, reducing cycle time― Reduced errors as buyer, vendor and AP are all working

from the same information― Use blanket POs or contracts for regular buys


Secrets of the Top Performers (Cont’d.)

• Utilize machine to machine e-invoicing― Many methods available, EDI, XML, HTML and File

Transfer

• Use a portal to allow small players to create invoices on line, or “flip” purchase orders

• Use workflow for internal matching and resolution

• Move to e-payments



• Workflow― Removing people from the Process through the use of

automated matching and approvals• Add accounting codes to the invoice automatically

One company study showed 50% error rates on invoices where buyer/requestor added the account info

― Use “negative approvals” where PO or receiving info is not available



―Set up rules for automatic approvals• Set up blanket POs in the system• Auto pay all routine invoices such as rent, utilities and

indirect spend from trusted vendors that fall within $ limits—Audit after payment for compliance

• Auto pay all discount available invoices—Approve or audit after approval



• Use a portal to communicate with vendors―Deliver POs―Receive Invoices―Distribute Remittance advices―Handle Vendor Queries

• Eliminate phone calls and IVR



― Focus on the top 20% of suppliers• They often generate 80% of the transactions• They may be receiving e-POs and issuing e-invoices to other

customers

― Aim for 100% PO issuance with this group• Request PO line # on invoice

—Allows for accurate line-item matching

Why do some companies achieve significantly better results?



Companies with the best cycle times can target discount capture

• Discounts― 2 /10 net 30 can return more than 35%. One major

corporate estimated a $200 million addition to the bottom line from discounts• Offer discounts as an alternative to extended terms. One company

offered 1.5 / 15 or 60 days.


Early Payment Discount CaptureYields Lucrative Annualized Returns

Day 0 Day 10 Day 30

Example: Typical 2/10 Net 30 on $100 Invoice

Option 1: Pay $100 on Day 30

$100 minus Interest= $99.73 @ 5%/yr Interest

20 days

20

365198100

i

3689.0i

$100

$2 Interest over 20 days implies Interest

Rate of 37%/yr!!!

Day 0 Day 10

Option 2: Pay $98 on Day 10

20 days

$98

$98 + Interest= $100

Day 30

20

3651

iPVFV


Automation Benefits Go Beyond Cost• Automation allows for the data to be visible from the

moment of entry― Accruals can be accurately made― Invoices can be tracked by AP, purchasing and vendors

from entry through to payment• The auditors of one failing UK company found 50,000 invoices that

had not been entered or accrued

― Finance can accurately forecast cash requirements― Management can track progress against goals


Better Vendor Pricing

• Spend analysis― Allows for better pricing through volume discounts

• Companies are often buying the same product from the same vendors at different prices

― Reduce the number of vendors― Supply Standardization

• For Example buying less expensive pens, paper etc.

Lets look at an example


Benefit Example

• Our sample company has:― Sales of $250 million― Profit before tax $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 on only 50% of spend

the return to the bottom line is $5.6 million


Visibility

• Management has complete visibility into the process― Accurate accruals can be made― Cash requirements can be forecast― Spend analysis van be obtained in real time― Improved audit capabilities

• And above all performance to goals can be met


Digital Cockpits Can Be Simple …

Accurate view of your key business metrics


Implementation of a Vendor Program • Survey the vendors

― Large ones and utilities are often using EDI― Vendors may be signed up with a network― May be using Checkfree for EIP

• Work with your solution provider – they have “ramp teams” that will help bring vendors online.― You must work closely with the “ramp team”


Negotiating with Vendors

• Remind vendors that― They can cut six to eight days of processing time by moving

to e-invoicing and e-payment― E-invoicing reduces processing errors and delays― E-payment/e-RA allows vendor to more accurately apply

cash― Vendors can benefit from faster payments through

discounts


How Do We Negotiate Change?• Price increase

― Negotiate the price change by saying “I can only increase price if you will help me reduce costs by moving to e-invoicing and e-payment (EIP)”

• New contract / New PO / New vendors― Make e-invoicing and e-payment part of the contract

• Changes in payment terms― If vendor wants % terms, only agree if EIP used― One company’s terms are 1.5 net 15 or 60 days


Summary

Automated• $0.75- $1.50 invoice/payment• Process time reduced

to 1-3 days• Trade discount

capture possible• Bottom line gains from improved

vendor management and pricing• Reduced error handling

Paper Based • $3 - $93.00 per

invoice/payment• 20-45 day elapsed

processing time• Trade discount

capture difficult• 75% of all calls to

AP status calls• 80% of all calls from

internal employees

© 2012 Financial Operations Networks LLC

Thank You!

The Accounts Payable Network2100 RiverEdge Parkway, Suite 1010Atlanta, GA 30328Contact: [email protected] 770-984-1184www.TheAPNetwork.com

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