Don’t Tell Your CFO What It Really Costs to Pay Your Bills
What issues are top of mind with your CFO? It’s a good bet that AP automation may not be high on the list.
That’s too bad, or maybe a good thing. If CFOs really understood the costs involved with processing an invoice, it may send them over the edge. Or actually have them start paying more attention to the AP function.
AP managers may not even be aware of the drain on business performance from a highly manual invoice process. The focus is typically on expenses associated with AP staff performing data entry, managing the routing of paper invoices, dealing with errors and exceptions, and handling vendor inquiries about payment status. Reducing that expense by 25%, 50% or 75% may not make the cut of top projects in finance.
But that ignores the hidden costs lurking below the surface.
This includes the “surcharge” on many purchases that doesn’t show up on invoices. I’m referring to the off contract or rogue spend that plagues organizations of all sizes, and across all industries. Your sourcing group might be rock stars at negotiating contracts, but how do they get enforced? Without a systematic way of linking a contract to an order, and an order to an invoice, there’s no way of knowing if an invoice is from a preferred supplier, at the negotiated price.
Imagine someone in your household running up thousands of dollars in charges to your personal credit card each month. You’d notice that right away on receipt of your statement, and take action to halt it in the future. But extra charges from contract leakage never appear on an invoice. They are hidden… to the tune of tens or hundreds of millions of dollars annually for large organizations, according to one survey that benchmarked corporate business processes. Even top performers were shown to experience contract leakage, just at the lower end of the scale.
In an attempt to plug this hole, many organizations get procurement involved in the review, approval and troubleshooting of transactions. But these professionals have better things to do. Devoting their time to managing transactions diverts time from strategic activities such as managing spend, which can dramatically impact business performance.
Then, there’s the invoice exception rate. Do you even know that number? I’ve seen industry surveys where poor performers report errors on 30% of invoices. That’s 30,000 invoices requiring extra time and attention out of every 100,000 to process. If it costs you on average $20 to fix a problem invoice, that’s $600,000 in additional overhead. But what if it’s $200 per invoice? Is that too high? Not if the invoice is for equipment maintenance that requires a service entry sheet, with pages of line items for different services performed and many parts for the repair. These invoices can be a nightmare to get right.
A broken invoice process also means you forfeit opportunities from early payment discounts to lower the costs of goods and services, and earn double-digit, risk-free cash returns. Having your AP staff pursue these discounts will improve your bottom line, but they can’t help you manage cash if they’re consumed with responding to process breakdowns.
In a networked economy, where transactions between buyers and suppliers occur over a business network, automation drives touchless invoice processing over 95%. Automatic matches of orders, contracts and invoices are the rule, not the exception. This frees up staff to help enforce compliance, drive suppliers off paper to an electronic process and monitor their performance, and expand the capture of early payment discounts. Imagine the business impact to your organization if you could focus AP efforts on these tasks.
Not yet ready for this transformation? Then you may want to delay that talk with your CFO about the true cost of paying your bills. You might find that he, or she, can’t handle the truth.