Does this sound like a familiar complaint and grievance of your accountants/ controllers/ compliance managers – “There is no context for the invoice raised!”. They have gone around various departments like legal, finance, IT security etc. but no one seems to have approved or reviewed it. No matter how carefully organised your company’s Internal Controls might be, they are easily bypassed and hence might be causing way too much inconvenience to an average team member in your organisation.
Looking closer at a case in hand with the example of invoice collections as raised earlier, most organisations have established practices for purchasing, as laid down by your controllers. Let’s take a look at an average workflow process:
- The process generally begins with a series of requisitions and approvals by various team leads and departments with final approval from the upper management if the need is so.
- Only post the approvals is a purchase order drawn up by the company’s purchasing manager, which is subsequently sent to the vendor.
- Once the order is accepted by a vendor, it is shipped to the company along with a shipping document/packing slip.
- The invoice for the same, generally shows up a few weeks later and the Accounts Payable department matches the invoice to the purchase order (rooting out discrepancies in the PO and the invoice if any) and then with the packing slip (ensuring the actual arrival of the goods).
Now, this sounds like a simple and relatively effective invoice reconciliation process that is suited to most Accounts Payable departments. However, this process, with its seemingly airtight controls, with barely any red flags in the workflow, seldom works.
The central flaw of this process is the fact that it was all done manually, which resultantly comes with its attendant paperwork and problems.
Here’s where it all goes south:
- Increase in Turn-Around Time: Manual processes make it quite difficult to track the status of invoices physically and also ensuring that the responsible individuals have all approved their invoices in a time-appropriate manner. In many cases paper invoices, end up sitting for days on desks or even get stuck in the inter-office mail, thus waiting for an approval. Another inherent problem with paper processes is that they make it difficult for managers in measuring the effectiveness of the processes, their staff and systems, or be able to make any quick adjustments. Automation of the processes, on the other hand is capable or reducing the turn around time by almost 1/4th in comparison.
- Error Prone/Incorrect Information: When talking about a manual accounts payable setup, the invoice information is trapped with paper documents. Auditing such an environment would mean businesses have to cobble together all the information, spread across various systems, which ends up being a time-consuming and error-prone affair, leading to incorrect/ delayed/ incomplete data collection.
- Lack of Data for Day-to-Day Operations: Managers need to understand staff-productivity, which correlates to the effectiveness of the invoice processes (for example the number of invoices processed or the ones that are awaiting action/approval or even exceptions resolution) along with the average time that is taken to process an invoice. This is especially important as finance needs accurate insights into the details such as the high-value invoice payments that are due, early-pay discounts that may be about to expire, and even a forecast of the cash requirements of the accounts payable’s for the next period.
Without being to factually determine the legitimacy of an invoice, the accounts payable clerk is left with no options but to clear the payment of the invoice to the vendor anyway. Since a late payment can end up damaging vendor relationships or even attracting a penalty, the accounts payable department has to reconcile all the invoices so that the finance team is able to close the books in a timely manner. Thus, a lapse in processing due to the constraints presented by manual processing, leads to a complete lapse in controls in the accounting process.
- Cost Reduction Via Automation:
Globally speaking, studies have shown that accounting for the number of man-hours as well as resources that are open on manual processing of invoices, a company can lose anywhere between $8-$60 per invoice (depending on a variety of factors like misfiling, storage, labour costs, late fees etc.) On the other hand, when it comes to automated invoice processing, manual work can be minimised by almost 20 times. This further includes putting an end to late fees and also avoiding any chances of duplicate bills (fraud protection) which reflects in terms of overall decreased costs of invoice processing as well (in many cases automation of AP has reduced costs by as much 80%)
Setting up an efficient, accurate as well as timely – period-end close cycle, lays the foundation that is capable of elevating business performance. This, in turn, is also capable of supporting accurate decisions while satisfying the internal and external requirements of reportage. Reliance on outdated or inefficient manual processes of account analysis tools, end up stifling the efficiency of the execution of your reconciliation tasks, hence it is imperative for any successful organisation to be continuously examining alternatives, to maintaining that competitive edge.