Payments and invoices need approval and coding to ensure that they are paid and accounted for correctly. For best efficiency and the least errors it’s normally best to let master data settings steer coding.
Expense management
The master data of goods and services combined with data from other dimensions will contain information about accounts, cost centers, cost bearers and perhaps more that’s used to code transactions. If you combine this with automatic approval of invoices that match purchase orders and deliveries, then invoices can be both coded and approved without any manual work apart from occasional maintenance of master data. Other daily processes like writing and sending purchase orders and registering deliveries will take care of other inputs needed. If, in addition to this, the invoices and purchase orders are sent and received electronically (EDI not PDF:s or similar) then you have a fully automated process.
The opposite to an automated process is when you receive invoices on paper or pdf and manually code and approve. Usually, this is done with a workflow tool (invoice is scanned and then circulated electronically) which to a certain extent makes the task smoother but still you are far from an automated, error-free and fully efficient process. It is recommended to keep manual coding and approval to a minimum. The risk of fraud is also higher with a manual approval process due to the fact that an employee with sufficient authority more easily can ‘push through’ invoices.
The coding and approval of certain expenses like entertainment and business travel can be particularly challenging and difficult. Restaurant and conference costs, for example, are often partially non-tax-deductible and there may be different VAT-rates on the same invoice. It’s difficult to avoid a manual process for codng such expenses. Usually it’s best to process them withing the expense management process rather than within procurement and accounts payable.
The coding and approval of certain expenses like entertainment and business travel can be particularly challenging and difficult. Restaurant and conference costs, for example, are often partially non-tax-deductible and there may be different VAT-rates on the same invoice. It’s difficult to avoid a manual process for coding such expenses. Usually it’s best to process them within the expense management process rather than within procurement and accounts payable
Registration and approval of vendors
Many organizations strive to reduce the number of vendors and even more so the number of new vendors registered. Registration of new vendors is a time-consuming and costly process. Organizations usually want to control and approve the introduction of new vendors to assure they comply with requirements concerning such things as payment terms and general legitimacy.
In some organizations vendors are registered as they appear – when an invoice is received from a previously unregistered vendor. This process is very common but far from optimal as you risk accepting unfavourable terms and even fake or incorrect invoices. You may also run into trouble with VAT if the new vendor is not properly registered . The vendor could also be on some kind of black list if you are unlucky. Such black lists usually contain vendors that act unethically in different ways, for example through fraudulent business practices, non-payment of taxes and exploitation of child labour.
It’s absolutely doable to have a both a structured process for registering new vendors and simultaneously a spontaneous ad-hoc process. The structured process would apply to regular vendors with significant volumes expected. The unstructured process would apply to minor purchases and best taken care of in the expense management process so as not to reduce the efficiency of procurement and accounts payable.
A structured process for introducing new vendors would involve steps to assure that the vendors accepted adhere to the organizations policies concerning trading terms and general suitability. If an organization uses a procurement platform like BasWare or Ariba the process for introducing new vendors is integrated in the platform. Such a process normally involves steps to negotiate terms with the vendor, to check credit rating and black lists and establish price lists and forecasts.
For purchases outside the main procurement process an unstructured process may be acceptable. This usually concerns smaller and ‘ad-hoc’ purchases. Examples are trainings, conferences, office supplies and presents. Such purchases are preferrably done within the expense management process with credit card payment. Payment terms are usually more favourable (=longer) for credit card payments than for payment against invoice. By using the expense management process these purchases don’t disturb the main procurement and accounts payable processes. For these smaller purchases there could still be limited checks on the vendors to assure that they, for example, are propoerly VAT registered. In many countries monthly VAT reporting requires organizations to send transaction level data and therefore it may be necessary to register complete vendor data also for credit card purchases and one-time vendors.
A good control of new vendor registrations and the trading terms applied is a key factor in optimizing an organization’s cash-flow and profitability.
Payments / Payment files
An often overseen step of the purchase-to -pay process is the actual paying. It’s a good idea to consider all payments and not just those related to traditional purchasing of goods and services. Other payments include taxes, salaries, fees and utilities.
Payments can be a rather messy process with many payments done manually outside the main optimized process. There are also inherent security risks within the payments process. How do you, for example, assure that an approved payment really goes to the right receiver.
Most organizations of a certain size work with so called payment files which are created in the accounting system. Ideally all payments would be done with payment files and there would be as few files and payment runs as possible, one per week or even less. A payment file is created by the accounting system by collecting all approved and due invoices on a certain date. Usually organizations do not make all payments with payment files, however. Manual payments are made for advances, urgent payments and payments which banks cannot process in a file. The latter can, for example be domestic payments in a foreign currency.
Another inefficiency with payment files is that you may need to create many of them. Files for domestic payments, for foreign payments in various currencies and more. There are banks that claim to be able to process different types of payments in just one file so instead of sending ten files for payments in ten different countries you would send one file and the bank would forward all of these to the right place. In reality this never seems to work though.
To make payments as efficient as possible an organization should strive to reduce the number of payment files, payment runs and manual payments. This goes for supplier payments as well as for salary payments and other payments.
An important aspect of payments is security. A payment file is traditionally a text file produced by the accounting system and then uploaded to the bank. The text file can be manipulated if you know what to do. An account number can be changed, for example. To avoid this you can use various approaches: if technically possible send the payment file directly from the accounting system to the bank, use another format than text (depends on technical possibilities), periodically audit payments. If nothing is checked you will eventually find out when suppliers get in touch for not having been paid.
Security for manual payments is also difficult to ensure. Important is to divide duties, to never have the same person registering vendors, invoices and making payments. All three tasks should ideally be done by different persons. It is advisable to use a workflow tool for controlling requests and approvals for payments. E-mail communication is best avoided. One of the most well known frauds is sending fake e-mails which look like they are sent by senior management asking accountants to execute payments (CEO- fraud). With a workflow tool such frauds are much more difficult to carry out.
A convenient way to make payments is through direct debits. A direct debit is a payment which is automatically debited to an account by a vendor when it is due. The payer must in advance give the vendor permission to charge the account. There are many methods for direct debits and we will not go into the details of how these work here. Many are local like Italy’s RIBA or the Nordic Autogiro. The most important direct debit method on a European scale is SEPA direct debit which is a low-cost alternative for both domestic and international direct debits.
If you want to use direct debits is often a question of policy. Allowing vendors to charge your accounts obviously requires trust and it also limits your possibilities to control outgoing payments. There may be situations when you want to delay payments for cash- flow reasons or due to disagreement and other reasons. Some vendors require customers to accept direct debits. Such vendors usually have a strong or even monopoly-like position. Examples are utilities, insurance companies and government organizations.
