When an invoice sits on the business' desk for 27 days before it's sent to accounts payable, is that okay?
Blog13.07.2012 Comments (1)
Accounts payable, Electronic invoicing, Purchase to pay
A few weeks ago we asked our social media followers a question, “When an invoice sits on the business' desk for 27 days before it's sent to accounts payable, is that okay?” and we were inundated with responses. Perhaps unsurprisingly the resounding answer seems to be no, it is not okay. But why is it not okay and what can you do to avoid this happening? And if it’s not okay, why are so many companies doing it?
An invoice sitting on the business’ desk for 27 days before being sent to accounts payable can have a hugely negative impact on the accounts payable department and not just in terms of the fact it makes accounts payable look like they are not doing their jobs correctly. The most prominent effects coming from the discussion were:
Early-payment discounts: Accounts payable do not have much opportunity to generate revenue for a business, but by processing invoices efficiently they can contribute to savings attained through early-payment discounts. If they are unable to process and invoice for 27 days, they will fail to capture these discounts. Early payment discounts can only be captured within a window of time, and by 27 days, this window is gone forever. Sounds dramatic, but it’s true – you’ll never get that opportunity for savings back again for that particular transaction.
Late payment fees: Not only will accounts payable be missing early-payment discounts, but they run the risk of losing more money through being charged for late payment. By paying late they are stretching payment terms (though not strategically and more through inefficiencies) and yes, inflating the capital the company is sitting on, but suppliers are becoming savvy at charging late fees. So paying late is a false economy.
Accounts payable systems: When entering the invoice on the system, it is likely that the late invoice will have to be entered into a different month to the one that the expense actually relates to. This will result in an accrual entry being necessary causing extra, unnecessary work. Again at a cost to the company.
Poor visibility: Because an invoice has sat on a desk out in the business for 27 days, it suggests it’s likely to be a non PO invoice. This means it has taken longer for this financial data pertaining to a commitment to be on the system. This means your finance team is making decisions based on data in the system which is incomplete.
This practice obviously causes problems. And plenty more than the four chosen above, but what can be done to try and eliminate these problems arising?
Invoice submission: A suggestion that appeared throughout the responses was that the supplier needs to be told to send their invoices directly to accounts payable. This cuts out the middle-man and allows accounts payable to process the invoice as soon as it comes in. If the invoice needs approval from procurement, then a scanned copy can be sent to the relevant person if it’s paper and a PDF sent directly if it’s electronic.
Alignment: Of course, in large organisations trying to get all vendors to send invoices directly to accounts payable when they have a set-in-stone habit of sending them to procurement can be difficult. What is truly required here is alignment between the accounts payable and procurement departments. Getting these teams aligned, and implementing a full end-to-end procure-to-pay process will give both departments the same objectives and strategies, helping to alleviate problems like this. (For tips on how to align accounts payable and procurement see Anna’s last blog posting.)
Electronic invoicing: If your company really suffers from invoices arriving in accounts payable late, perhaps you should think about what you can gain from implementing electronic invoicing. e-Invoicing will eradicate this problem by creating a touchless process reducing the risk of invoices going missing.
Have you had this problem in your company? How did you solve it?