INFORMATICA 6

ARMANDO RAMIREZ VAZQUEZ

5 Steps to Automating Accounts Payable How to Achieve Process-Ready™ Data

White Paper

"Business is a Conversation"

– David Weinberger

The Cluetrain Manifesto: The End of Business as Usual By Christopher Locke, Rick Levine, Doc Searls, and David Weinberger

White Paper – 5 Steps to Automating Accounts Payable Page 1

Pains in the Accounts Payable Process

Knowledge and information are the lifeblood of any organization. The effective use of this information can mean the difference between success and failure. This is the case for all departments across your organization, from sales, to customer service, marketing, development, purchasing, and accounts payable.

In today’s business climate, business transactions can be thought of as ‘conversations,’ where information is exchanged as documents, email messages, instant messages, and fax transmissions. Effectively communicating with your customers, partners, and suppliers through any combination of these can be a significant challenge. Therefore, it should be no surprise that companies around the globe struggle to solve this problem without increasing their labor costs.

In the midst of cost constraints and regulatory compliance pressures, accounts payable departments are striving to improve and extend the services they provide for their own organization, increase efficiency, and enhance business relationships.

Changing Role of Accounts Payables Over the last 5 years the role of the accounts payable department in all levels of enterprises has dramatically changed. Specifically, an accounts payable department used to be managed as a cost center whose job it was to process and review transactions, coordinate with other departments, respond to inquiries, reconcile accounts and generally perform paperwork. More recently, however, this department is playing a larger support role helping to control, coordinate, and analyze key business processes.

In general this means that AP becomes more visible within the organization and their main responsibilities now lie in quality assurance, contract and policy compliance, reporting, and analysis. This change has come at a cost of increased workload and added responsibilities. To deal with this, AP departments need to re-deploy their skilled knowledge workers from doing back-office administrative tasks, such as invoices processing, to more business-critical management activities. To achieve this, AP departments are looking to automate as much of the business process as they can.

Regulatory Compliance Being financial documents, invoices are subject to compliance regulations such as Sarbanes-Oxley and Basel II. Therefore, it’s important that these documents are captured and archived using a well documented and consistent process. Scanning documents early in the process and delivering them to electronic repositories guarantees that important data is recorded, efficiently validated, and can be easily audited.

Invoice Processing Costs Processing an invoice involves capturing key data, entering it into the proper financial systems, and kicking off the related business processes. Although straightforward, this task needs to scale to handle the large numbers of invoices your business will receive each day. Accuracy and efficiency, therefore, are major concerns.

Costs associated with managing this volume of data, the human labor typically required, and the need to catch and fix errors along the way, can grow quickly. According to an Aberdeen report from 2006, the actual cost of White Paper – 5 Steps to Automating Accounts Payable Page 2

processing each invoice, from receipt to payment, can balloon to $80 (see Figure 1). Actual costs depend on the level of process automation you and your business partners implement.

Impact on Shareholders Typically, at the end of each month or quarter, key financial data is rolled up and reported. This includes revenue from accounts receivable, and expenditures from accounts payable. These figures are critical pieces of a company’s financial statements, and are used to make important resourcing decisions, and determine future stock value (for public companies). This financial data is also bound by strict legal / fiscal deadlines that can incur penalties if inaccurate, missing, or late. If many invoices require manual validation before they can be processed by your ERP system, reporting can be delayed.

In some cases, there may be invoices that cannot be included in the reports because the accounts payable team was unable to validate them in time. This results in a distorted view of your financials, which can negatively influence future resource, inventory, and work planning.

Cash Management: Early Payment Discounts Most vendors charge penalties for late payments on outstanding invoices. Not only does this cost you money, it can damage your vendor relationship. On the other hand, most vendors offer discounts when invoices are paid early. However, if you don’t have efficient processes in place, not only do you risk paying late fees, you miss out on early-payment discounts.

The loss of return in such cases can be significant, as the following simple example shows (see Figure 2). Consider a typical discount of 2/10 NET 30. Here, the buyer receives a 2% discount if the invoice is paid within 10 days instead of the 30 day term.

Admittedly, these savings are offset by the loss of 20 days of interest. However, if we extrapolate the savings over about 18 20-day periods each year, the result is a 36% return. This is a far better return when compared to leaving the money in the bank. 1 $ 3 $ 11 $ 34 $ 80 $ Best Top 25% Median Lower 25% Worst Aberdeen 2006 Invoice Processing Cost

Figure 1 – The cost per invoice varies according to the amount of process automation your business implements. White Paper – 5 Steps to Automating Accounts Payable Page 3

Invoice Process

The main steps in processing an invoice are

• Invoice receipt • Invoice verification / matching • Invoice approval • Invoice payment

When looking at these sequential steps, companies spend a lot of time matching invoice data to the original purchase order (PO) or contract (invoice verification), and acquiring approval (invoice approval). It’s in these areas that technology can increase efficiency and offer the greatest cost savings.

Having the ability to electronically capture invoice data, regardless of its form, helps to eliminate errors that may otherwise be introduced by manual processing. It also enables the automation of invoice data validation and contract matching, and integration with existing enterprise systems. Invoice data can be automatically classified, and then distributed in a secure, digital, form without incurring shipping costs.

2/10 Net 30

2% for 20 days

Year = 18 * 20 days

2% * 18 = 36% p.a.

Figure 2 – The annual return of early payment discounts. Seller Buyer Print, paper, postage Delay 5 days Invoice Creation Invoice Delivery Payment Receipt 1,5-4 € Data Entry, invoice Approval No Early Payment Discount 5-8 € Manual error handling. inbound & outbound calls, invoice data cleanup 16-31 € Manual error handling. inbound & outbound calls 3-8 € Payment Receipt Process 1-7 € Buyer Payment 5-8 € Invoice Receipt Payment Delivery Payment Verification Payment Approval Invoice Verification Invoice Approval Payment Check

Figure 3 – Costs incurred at each stage of invoice processing.White Paper – 5 Steps to Automating Accounts Payable Page 4

The Five-Step Approach to Automation As discussed above, capturing invoice data electronically is the key to an efficient, error-free, invoice processing cycle. As a result, the reduction in errors helps to streamline the rest of the process, and in turn saves you money.

To help you achieve these benefits, Kofax has defined a five-step process that you can implement incrementally. Experience has shown that it’s best for companies to start at the beginning and incorporate this phased approach over time according to a plan. Let’s review these steps now.

Step 1: Controlling the Paper Workflow Business information exchange is still very much dependent on using paper as a medium. As an organization, you need to create one or more central points where invoices arrive. The goal is to eliminate the potential of an invoice being lost on desks or in mailboxes before they’re processed. Streamlining invoice handling within your organization and limiting the number of "touch points" along the way helps to achieve this.

Next, the goal is to convert the paper into digital images right away. Early scanning of incoming invoices and then delivering electronic images throughout your organization is an effective solution to the issues around manual paper flow. Kofax solutions can help you efficiently capture invoices at distributed and remote locations regardless of volume. Invoice data can be transported electronically, instantly, anywhere in the world.

The benefits of immediately scanning invoices include:

• Eliminate lost invoices • Decrease invoice-processing time • Store documents in a secure, digital, form • Reduce physical storage and paper filing costs • Gain immediate access to digital invoice data regardless of location

• Eliminate costs associated with physical document copying and shipping • Image-enable ERP environment

Centralizing the influx of invoices and scanning them to have instant access to invoice data is the first step needed to feed the AP/ERP line-of-business applications. This also enables the use of business process outsourcing, where remote, offshore, teams can perform invoice processing. The resulting data can then be sent to your AP department for import into their ERP system.

Estimated cost reduction for step 1: $10 per invoice