REMOVAL OF ALL CHARLES DICKENS PROCESSES

I believe the accounts payable team is the center of an accounting function, for without its smooth operation:

• Monthly accounts cannot be prepared promptly.
• The company does not, at any point in time, know its total liabilities.
• Budget holders spend too much of their valuable time processing orders and approving invoices for payment.
• There is a low level of accuracy in the monthly accounts due to missed liabilities and posting errors.
• The processing procedures are more akin to the Charles Dickens era than to the twenty-first century (after all, Charles Dickens had a checkbook and received paper-based invoices).
• Suppliers are forever on the phone querying payments.
• Expense claims are a nightmare for claimants and the accounts payable team.

The key twenty-first-century AP better practices are investing in AP technology, see Chapter 4, eliminating the receipt of paper based invoices, and moving the AP workload away from processing into the more value-added areas, as shown in Exhibit 5.1. This move, at the same time, will increase AP team job satisfaction and appreciation from budget holders.

MOVE TO A PAPERLESS ACCOUNTS PAYABLE FUNCTION

Why do we go from an electronic transaction in the supplier's accounting system to a paper-based invoice? Surely we should be able to change this easily with our major suppliers. Many U.S. multinationals have achieved this already. It requires an investment, skilled AP staff, and retraining of the budget holders. The rewards are immense.

To appreciate the benefits, the AP team should regularly visit the website for Accounts Payable and Procure-to-Pay professionals (www.theaccountspayablenetwork.com).

The various ways to make this move into the twenty-first-century AP paperless procedures include:

GET YOUR ELECTRONIC ORDERING SYSTEM TO WORK

Most accounting systems come with an integrated purchase order system. The more sophisticated systems give 24/7 access to the designated supplier's online price list and then email automatically the order onto the supplier, providing the order is within the budget holder's delegated authority.

These systems should be purchased and fully implemented before the accounting team ever considers upgrading the general ledger (G/L). Getting the electronic ordering system to work effectively is a major exercise, and one that should be researched immediately. There will be an organization that uses the same accounting system and where the purchase order system is working well. Visit that organization and learn how to implement the system.

GET A PURCHASING CARD SYSTEM IMPLEMENTED AS SOON AS POSSIBLE

A purchasing card card is a free AP system, run by your card provider, financed by your suppliers. Using these cards in all organizations from the private to government and nonprofit sectors is a no-brainer. It just needs to be researched and sold properly. Never, never call it a credit card; call it a free accounts payable system. Please reread my chapter on selling change before you promote this invaluable tool.

I estimate that the full cost from ordering, receipting, paying and filing, including time spent handling supplier queries is between $35 and $55 per transaction. That's pretty horrific when you realize that a high portion of your transactions are for minor amounts. Exhibit 5.2 shows a typical profile of AP invoices. The bulk of invoices coming to the accounts payable team may be for low-value amounts, especially if consolidation invoices have not yet been organized.

Remember that it costs the same to process a $10 transaction as it does a $100,000 transaction. In addition, is it appropriate to request budget holders to raise an order in your purchase order system for a $20 transaction? Surely the AP system is designed around 100 percent compliance of major invoices, say over $2,000, $3,000, or $5,000, depending on your size. Purchasing cards (see Exhibit 5.3) are different from a credit card and are here to stay.

Most organizations are happy with this level of control and will accept the sole liability for the card expenditure. However, the ever-cautious organization can have the liability rest with the staffperson, who must be reimbursed before the payment is due. This involves more processing steps so it is not the preferred option.

Purchasing cards work particularly well with high-value/low-volume items where you are purchasing through the same suppliers when you have organized, with the supplier, to also enter the appropriate G/L code information on the transaction. The two IT functions just need to get together and map out the G/L codes for the supplies and the card informs the supplier of the department code. This is not difficult, as most suppliers will not affect more than three G/L codes!

HOW THE PURCHASE CARD WORKS AT MONTH-END

On cutoff day all card holders are given 24 hours or so to ensure that all their expenditures are coded. All the purchasing cards holder has to do is access, via the web, the bank's purchasing cards system (which, of course, can be done from an airport lounge) and enter the required security details to get access to the statement. If the card holder has purchased from a designated supplier, all will be coded, thus underpinning national contracts. It will only be the one-off purchases that need coding. The card system can be preset with the most frequently used purchasing card G/L codes to aid efficiency.

AP team members look at the status of statements, send warning emails (“Please code your expenditure by 5 p.m. tomorrow”), and, where necessary, code all uncoded expenditure. Shame and name lists and the odd phone call from the CEO saying, “What do you not understand about the importance of this system?” will ensure that card holders realize that any breach of compliance is seen as career limiting!

AP can simply upload all the expenditure straight into the G/L, and all the purchasing cards can be paid by one—yes, one—direct debit payment. Now I am sure can you understand why most US organizations use a purchasing card.

THE BETTER PRACTICES WITH PURCHASE CARDS

The better practices with purchase cards include:

• A minimum amount is set before accounts payable will process a one-off supplier's invoice through the AP system. As a minimum, I would suggest $2,000. The only exception is you will always process you main suppliers' transactions through the AP system, regardless of how small the invoice. You need to look at the profile of your expenditure. You want at least 50 percent of the volume to be caught by the purchase card system.
• All employees who make regular purchases are given a purchase card.
• Employees who make only one-off payments do so through their own credit card and claim back or use their manager's purchase card.
• Corporate credit cards are recalled, as they represent a duplication.
• You never take purchase cards away from staff who are not coding their expenditure—you simply set the hounds on them!
• Pick the purchase card that offers the easiest system, which links well with your G/L, permits supplier to code, and has a cash expense claim add-on.
• For suppliers who are reluctant to lose the 2 to 3 percent, reimburse this fee based on the actual annual spend, which is easily sourced from the purchase card system.

For more information, search the web for “purchasing card” + “ name of your bank.” All you need to do is contact your bank, which will have many better practice examples.

CUT OFF ACCOUNTS PAYABLE ON THE LAST WORKING DAY

Better practice is to cut off AP at noon on the last working day. If AP is held open, you will find it difficult to complete prompt month-end reporting. What benefit does holding open AP for one or two days have? Chapter 3 covers cutting off accounts payables on the last working day and how to limit accruals and bring them forward. Please reread this for more information.

MOUNT THE LAST SIGNED CHECK ON THE CEO'S WALL

In all workshops, I find leading-edge organizations that do not have a checkbook. However, for many organizations, some suppliers still request checks. The question is, how do you get the reluctant suppliers to give you their bank details?

Some progressive companies have given up mailing letters to suppliers requesting the move to electronic payment, and have instead hired temporary staff to call suppliers. One company with 99 percent of accounts paying by direct debit (and still not happy) calls suppliers and says, “We would like to pay you, but we cannot. [Pause.] We are a modern company and pay all our accounts electronically. We have thrown away the checkbook and are at a loss as to how we can pay you, as you have ignored our requests for your bank account details!” One company canceled its check payment run and was able to obtain 120 suppliers' bank details within four hours of phoning them to say, “We cannot pay you!”

I recommend that the last check be written payable to “A.N. Other” for 99 cents. This check is then ceremoniously mounted in a golden frame with a plaque saying, “This is the last check and is a symbol of our drive to end all Charles Dickens processes.” The framed check is then mounted in the CEO's office. The CEO will get much pleasure in answering visitors when they ask, “What is that check doing in a frame?”

The benefits from using electronic funds transfers as a payment method include lower costs, predictable cash flows, and fewer supplier phone calls over late payment.

PERFORM FREQUENT DIRECT CREDIT PAYMENT RUNS

It is a better practice to perform frequent direct credit payment runs, in fact treating this as a normal day-to-day activity. In organizations doing frequent runs, an invoice is received directly by AP from the supplier, and the details are matched to the electronic order and the electronic receipting flag that says “goods/services have been received in full.” Once order, invoice, and receipting match one another, a payment is processed on the agreed future payment date.

IMPROVE BUDGET HOLDERS' COOPERATION

There are many ways to improve budget holders' cooperation:

• Increase budget holder turnaround on purchase invoice approval by linking performance to their bonus element.
• Establish account management within the finance team (e.g., Sarah looks after budget holders A, B, and C; Ted looks after budget holders D, E, and F).
• Send a “welcome letter” to new budget holders to train them from the beginning and eliminate potential bad habits before they have a chance to become permanent.
• Hold workshops outlining how budget holders, and their relevant staff, should work with the finance systems (AP, reporting system, G/L, completion of expense claims, use of the purchasing card, etc.).
• Reward and recognize good budget holder behavior.
• Make budget holders aware of all their errors.

SPEED UP BUDGET HOLDERS' CORRECTION OF OMISSIONS

One company reports that it now has a 24-hour turnaround for all branches to approve all invoices that cannot be matched to orders and that have not been electronically receipted. If a branch manager does not achieve this on one single day in the month, he or she loses one month's performance bonus. The CEO was approached and got behind this initiative. This takes clever marketing, and is well worth the effort. This change, along with streamlining of supplier invoice timings, will have a profound impact on processing volumes, helping to smooth out the workload, as shown in Exhibit 5.4.

A WELCOME LETTER TO ALL NEW BUDGET HOLDERS

Imagine the goodwill created when a new employee receives a welcome letter from the AP department asking for a slot to deliver a 20-minute training session for the individual within the next few weeks. Why wait until new employees are educated by the uneducated (budget holders who do not know or do not comply with the AP procedures)? Get in there first. Deliver a brief training presentation, including:

• Procedures
• Forms
• Problems we have, and why they create a lot of wasted time
• How budget holders and the AP team can work most effectively together
• The presence of shame and name lists—you point out, “But this, of course, will not affect you!”

This presentation is best delivered in a casual format, on a laptop, placed in front of the new budget holder. See Appendix A for a draft welcome letter.

INTRODUCE “SHAME AND NAME” LISTS

If you want to change human behavior, you need to work on it for a duration of 12 weeks, and during this time, the penny will drop. If you create a number of shame and name lists and ask the CEO and the senior management team (SMT), to phone a few culprits each week you will, over 12 weeks, create change. I would recommend preparing a laminated card with all the league tables (i.e., lists of the culprits with the highest number of errors, exceptions, etc.), cut to fit the inside pocket of the SMT members' jackets. All the SMT need to do is discuss the matter with the budget holders with enough firmness that the budget holder understands that repetition will be career limiting. The suggested lists are:

• Budget holders with the most purchase invoices without a corresponding order
• Employees with late expense claims
• Budget holders with purchase invoices awaiting approval that are already outside the set approval turnaround time
• Budget holders who have missed deadlines

Remember, you will never want to invite all the budget holders to your Sunday afternoon barbeque, so do not worry about being unpopular with a noncompliant budget holder. You need to make one thing clear: Not complying with the accounting system requirements is going to prevent any chance of climbing the corporate ladder. In other words, there are three options open to these nonconforming budget holders: You leave the organization, they leave the organization, or they change. You might, as one attendee pointed out, want to call these lists “budget holders requiring further training.”

REWARD GOOD BUDGET HOLDER BEHAVIOR

One accounting team gives a bottle of wine a month to the budget holder who provides the first complete month-end submission. This simple acknowledgment has provided the appropriate environment for timely submissions from budget holders. It is also important to record the “winner ” on the finance team home page on the organization's intranet so the relevant budget holder gets the recognition, which is the main reward.

HAVE A CLOSER RELATIONSHIP WITH YOUR MAIN SUPPLIERS

There are a number of ways a closer relationship with suppliers can improve processing. The more your key suppliers' systems are linked to yours, the better. It is simply an issue of getting the two IT departments together around the same table. Better practices include:

• Having all major suppliers link their systems with yours and having the supplier provide consolidated electronic invoices that are already G/L coded. Set a target of getting your top five suppliers all electronic within the next three months. You will need to get on the phone today to talk to your counterpart in the supplier organization (the CFO or management accountant). Do not leave this to the IT department to organize, as they might find this type of exercise personally challenging. Where have you seen an IT department full of extroverts and great communicators?

• Have one stationery supplier and introduce consignment stationery cupboards on all floors in the organization. Staff then can take out what stationery they need. At first, this will lead to some waste. You simply chart usage and compare average usage per employee per floor. The stationer then invoices you monthly, in a consolidated invoice, sent electronically with floor-by-floor usage.

  The consignment stock is replenished each week. During these visits, the stationer brings in the one-off items that have been ordered in the last two days, thus avoiding the courier charges.

• Bring the invoicing of all monthly accounts, such as utilities, credit cards, and so on, earlier in the month (e.g., invoice cycle including transactions from May 28 to June 27 and being received by June 28). You still have a month's transactions, and thus, many finance teams would avoid accruing the remaining business days to month-end, as there is a set-off from the previous month.
• Ask major suppliers to request an order from your budget holders; support this by not paying supplier invoices unless there is a purchase order. Simply return the invoices to suppliers and ask them to attach the purchase order (they will not want to repeat this activity more than once!).
• Require suppliers to enter their transactions into your system. When I work for IBM, I enter my invoice against a particular order. No order number means there is no chance to enter the transaction.
• Ask large-volume, small-dollar suppliers to accept your purchasing card.

SELF-GENERATED INVOICES (BUYER-CREATED INVOICES)

Where a supplier invoice will be received too late, where some product may be missing (raw material blown out of the truck), or where your systems are so sophisticated that you have no need for a supplier's paperwork, a buyer-created invoice will aid efficiency.

The supplier's shipping document is used to determine the quantity of goods supplied or, in the case of a weigh-bridge process, the actual weight, measured by the weigh bridge. The agreed weight is then multiplied by the agreed purchase contract price to calculate the amount owed. The customer then direct credits the supplier, who also is sent an electronic invoice. The invoice contains all required details, such as quantity, date of service, taxes, value, total payable, and a unique invoice number using, say, the first three letters of your company, two letters of theirs, and four numbers (e.g., invoice #dsbbd1234).

The benefits of this process include:

• Reduced data entry costs
• Elimination of duplicate and lost invoice condition
• Reduction in processing steps
• Reduction in queries arising from invoice and delivery mismatches
• Minimization of clerical error

PDF DOWNLOAD

To assist the finance team on the journey, templates, checklists, and book reviews have been provided. The reader can access, free of charge, a PDF of the following material from www.davidparmenter.com/The_Financial_Controller_and_CFO's_Toolkit.

The PDF download for this chapter includes:

• Copy of some purchase card instructions
• Draft welcome letter to new budget holders