Revealing Invisible Business Costs

In a volatile economy, organisations continue to jeopardise business success by failing to achieve any visibility over purchasing commitment. With almost two thirds of purchases only revealed when the supplier invoice arrives in accounts payable, organisations are failing to control cash flow, understand expenditure against budget and potentially jeopardising important supplier relationships.

If organisations are to achieve visibility of committed spend as the purchase occurs, rather than after the event, it is essential to answer four key questions: Who is buying? Who is checking? Who is assessing procurement value? Who is managing payment processes?

Poor Process

Despite five years of recessionary led improvements in financial management, organisations are still failing to impose adequate control over expenditure. According to research by Proactis, over two-thirds of purchasing happens before an order is even raised and 38% of companies estimate that in excess of 60% of inbound invoices are “invisible” to the organisation prior to receipt by Accounts Payable (AP).

The vast majority of organisations claim to have some form of procurement process. Yet in reality, not only have few organisations even considered issues such as supplier on-boarding or rationalisation of suppliers to achieve best prices, typical processes account to nothing more than some form of purchase order generation, often on a spreadsheet. And, to be frank, often this has only been put in place because growing numbers of suppliers refuse to deliver products or services without a PO number.

There is no central visibility of the purchase orders; no commitment or accruals; and no assessment of the impact of the purchase against available budget. Not only does AP become aware of the purchase only when an invoice arrives; but even then the invoice is not registered in the finance system. Organisations’ processes are so poor, there is a fear that if the invoice has been entered into the finance system it will be paid before approval. Instead the invoice is sent off to the relevant department for approval, where it is sometimes lost, forgotten or simply buried under a mound of other ‘more critical’ tasks.

Financial Implication

Is it any wonder the latest British Chambers of Commerce (BCC) survey of more than 5,000 businesses found that 94% of firms have been paid late, with one in four reporting that over 40% of their payments were received late? The problem is not just organisations delaying payment to maximise cash flow but endemic poor processes.

Today, even if a basic purchase order process is in place, it is hard to manage. Organisations struggle to keep track of orders, whether they have been approved – and by whom – and whether or not the goods or services have been received. With invoices lost or buried, suppliers will often resubmit and with no systematic approach to matching invoice value to order value and actual deliverable, organisations risk overspend/duplicate spend.

Too much time is wasted on paper chases; supplier relationships are compromised and, critically, with limited visibility of expenditure against budget, organisations have no view of corporate exposure and limited cash flow control.

Of course many organisations feel too small to justify the adoption of an official procurement process – especially service companies with few suppliers. Many are also justifiably concerned about business disruption, at a time when every organisation is operating with minimal spare capacity.

However, in the current economic climate effective cash control is essential: organisations need to understand purchase commitments in real time. No business can truly justify this lack of visibility into expenditure; or this lack of control of spend against budget. Furthermore, in a financial climate that offers discounted rates to businesses that make early payments, poor procurement processes are constraining opportunities to cut costs.

Achieving Visibility

eProcurement can transform the purchase process by delivering centralised visibility of the entire procurement cycle. With electronic recording of documents – from purchase orders to invoices and delivery notes – as well as actions and approvals; plus automatic posting of commitments, accruals and invoices, organisations can transform purchasing insight.

Furthermore, organisations can get up and running with eProcurement relatively quickly by exploiting a templated approach. Using a best practice model can provide rapid access to a state of the art solution that delivers upwards of 90% of requirements from day one. With a proven process that covers the basic end to end process of requisition through purchase order creation, authorisation, three way matching (order, receipt, invoice) and automatic generation of accounting entries, a business will achieve immediate visibility of soft commitments, accruals and actuals.

Critically, the system must be intuitive and non intrusive. A web-based solution that is integrated with the email system and enables requisitioners and authorisers to access the information from PDAs or iPADs is key. eProcurement does demand some cultural change; therefore making the process simple to use, with one click requisition and approval – plus the chance to click through for additional detail if required – is essential to ensure staff buy-in to the benefits of using the system.

Imposing Control

Taking a templated approach transforms the speed of implementation and also delivers far quicker Return on Investment (ROI), which can be measured in both time saving and hard cash. Implementation of a procurement system will save time in every step of the process – from supplier on-boarding to streamlined and efficient payment processes.

Depending on the size and type of organisation, cash savings will vary. Those with higher volumes of expenditure to approve will gain greater benefit from streamlined processes and a reduction in the time consuming paper chase; organisations with high levels of expenditure will gain significant value from consolidating suppliers and negotiating better pricing.

Every organisation, however, will immediately benefit from improved visibility at an early stage. Instant insight into the impact on budget of a requisition request will enable organisations to impose control over corporate expenditure. Good approval processes and automatic matching of invoice to purchase order and delivery note will flag invoicing errors early and eliminate the risk of duplicate invoicing, cutting down costs.

Crucially, improved insight into purchasing enables a business to understand not only current commitments but to highlight rolling commitments – a growing issue in a world of Software as a Service based monthly subscriptions with rolling contracts, as well as insurance, equipment leases and rent. By transforming visibility into the purchase process organisations will be far better placed to effectively manage cash flow in a volatile marketplace and drive ongoing improvements in procurement policies that will deliver year on year savings.

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Gary Waylett, CEO of Eclipse Group, was one of the founders of Eclipse Computing in 1987 and was responsible for establishing the business consultancy teams in Eclipse’s offices in Japan, the United Kingdom, Netherlands and United States. In 2004, the Eclipse offices in Japan, Singapore and Hong Kong were sold to Systems Union and the Australian and Fijian businesses were sold to Sydney stock-market listed UXC Limited. Since 2006, Gary has focused upon developing the UK business and its international business connections. Gary has more than 25 years of experience in working with international clients in Europe, US and the Far-East. He has created a reputation as a professional and trusted advisor, helping businesses to develop and implement clear strategies in how to manage and deploy corporate business and financial management solutions across multiple geographies. Prior to Eclipse, Gary worked for a well-known independent European consultancy and computer services group where he managed corporate accounts in the finance and banking sector. Today, he is a regular contributor to the media on all matters relating to finance and corporate management reporting. His first book published in 2003, “Going Global and still maintaining financial control” was a very practical guide to the pitfalls that can await the unwary financial director planning to implement new financial systems throughout a business that spans several countries and/or cultures.