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February 2, 2012
ACCOUNTS PAYABLE BEST PRACTICES
IMPORTANCE OF A/P BEST PRACTICES
– After payroll, the largest disbursement of a firm’s funds typically comes from Accounts Payable (A/P)
– Accounts Payable is often the largest single cost in the accounting function
– The typical Accounts Payable process is notorious for its manual, inefficient and error-prone nature, which leads to
• Errors: The average Accounts Payable department has a 1.6% error rate*
• High Cost: The average cost to process an invoice is $16.54*
• Lack of Controls: Clerical staff have broad discretion on how to apply management rules around PO/receipt/invoice matching and payment and invoice authorization rules are not always followed
• Poor Visibility: Financial managers accrue outstanding payables monthly; many of the individual transactions are paper invoices sitting in manager inboxes waiting for approval that financial managers have not seen
• Poor Documentation: The paper-intensity of the process leads to difficulty in locating manually-filed invoice and check documents
• Management Intensity: All of the above contribute to an excessive amount of management time, attention and resources to a non value-added function
2 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
IMPORTANCE OF A/P BEST PRACTICES
– Best practice Accounts Payable costs significantly less than the typical process
• The average cost to process an invoice is $16.54*
• A/P can be processed as much as 50 times more efficiently than others (32¢)
• Continuous improvement continually reduces cost while improving quality and service levels
– Sarbanes-Oxley Section 404
• Requires Management To Acknowledge Its Responsibility
– For The Adequacy Of A Company’s Internal Control Structure And Procedures For Financial Reporting
– To Assess The Effectiveness Of A Company’s Internal Control Over Financial Reporting, With The Company’s Independent Auditors Being Required To Attest To Management’s Internal Control Report
• Annual reports must contain management’s report on internal controls and the auditor’s attestation of management’s assessment
• Management must evaluate on a quarterly basis material changes in the company’s internal controls
• Quarterly disclosure requirements include effectiveness of controls and procedures and changes in internal controls
3 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: QUALITY
Issue / Description Best Practice
Data Entry Errors
Data Entry Errors Can Occur on Any Invoice Field
and Account for Most of the Errors in Accounts
Payable
Data Entry Errors Average 1.6%, a Very Large
Amount Not Readily Measurable in Most
Accounting Departments
Receipt of Electronic Invoices (EDI, XML, etc.)
Eliminates Data Entry Entirely
Matching to Purchase Orders in an Automated
Accounting System Eliminates the Need for
Much Data Entry
Data Entry by One Individual and Quality Review
by a Different Individual Eliminates Almost All
Data Entry Errors
Double Entry of Invoices with Field by Field
Comparison Eliminates Almost All Data Entry
Errors
Matching Errors
Matching of Invoices to Purchase Orders and
Receipts is Complex and Prone to Errors
Business Rules for Matching are Frequently Not
Documented or Followed by Clerical Staff
Automated Matching in Accounting System
(Typically Found in High-End ERP Systems Only)
Well-Documented Business Rules Around
Matching (What Constitutes a Match, Field by
Field) and Action to Take if There is an Exception
Logs of Exceptions by Exception Type, Sent to
Purchasing Department for Vendor Follow-Up
4 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: QUALITY
Issue / Description Best Practice
Duplicate or Incorrect Invoices
Vendors Frequently Generate Duplicate
Invoices When an Invoice Has Not Been
Paid in a Timely Manner
Accounting System (Or Individual if
Manual Process) Should Check for
Duplicate Invoices by Invoice Number
Accounting Should Check that an Invoice
is For The Correct Company and Business
Unit
Duplicate or Incorrect Invoices Should be
Logged So That the Source of Problems
Can Be Found
Improper Account Coding
Account Coding is Judgmental and Rules
for Coding are Not Well Documented or
Otherwise Established in Most Companies;
This May Lead to Inconsistent Coding
Across Departments or Manipulation for
Budgetary or Other Purposes
Well Documented Business Rules Around
Coding
Review of Coding by Managers to Ensure
Business Rules are Followed
Greater Use of Purchase Orders Eliminates
Need for Account Coding by Managers
5 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: CONTROLS
Issue / Description Best Practice
“Disappearing” Invoices and Unapproved
Invoices
Invoices that Come Directly from the
Vendor to a Business Unit Manager or
Location Other than Accounting Tend to
Get Delayed (Sometimes on Purpose) or
Lost Due to the Many Opportunities for
Paper to Get Lost
Unapproved Invoices (Not Yet Received by
Accounting) are Not Known to Accounting
and Therefore Company Liabilities are Not
Truly Known or Reflected on the Balance
Sheet
All Invoices Should Come in to a Central
Location and Scanned or, at a Minimum,
Logged Before Being Sent for Approval
Logging of Invoices Provides the CFO With
a True Picture of the Liabilities of the
Company
Invoice Images Should be Routed
Electronically for Approval to Track
Invoices at Each Step of the Process and
Eliminate Managers “Sitting” on Invoices
in Their InBox
6 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: CONTROLS
Issue / Description Best Practice
Lack Of Well-Defined and Documented
PO-Receipt-Invoice Matching Business Rules
In Most Companies, Matching Business Rules are
Not Documented in Writing or in Complete Detail
and Accounting Systems are Incapable of
Matching Automatically Using All Necessary
Rules, Forcing Accounts Payable Staff to Apply
Rules Manually
Document All Matching Business Rules in
Complete Detail
Automate Application of Business Rules Utilizing
a Combination of Accounting Systems, Third-
Party and Proprietary Software Solutions
Excessive Use of PO-Receipt-Invoice Matching
Tolerances
Many Accounts Payable Departments Use
Matching Tolerances to Reduce the Effort to
Resolve Unmatched Items, But Are Often Set Too
Loosely (to Reduce Effort), Allowing Dollars to be
Lost
Low to No Use of Tolerances
Analysis of Effort in Resolving Unmatched Items
vs. Dollars Lost to Determine the Proper
Tolerance Levels
7 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: CONTROLS
Issue / Description Best Practice
Broad Discretion of Application of PO-Receipt-
Invoice Matching and Approval Level Business
Rules by Accounts Payable Staff
Accounts Payable Staff Apply Rules Manually
and Generally Have Broad Discretion on How to
Apply Business Rules; Few Companies Audit
Rules Compliance
Document All Matching Business Rules in
Complete Detail
Train Management and Accounts Payable Staff
on Business Rules
Audit Compliance of Business Rules
Return Invoices without Account Coding or
Improper Coding to Approver/Buyer for Correct
Coding
Automate Application of Business Rules Utilizing
a Combination of Accounting Systems, Third-
Party and Proprietary Software Solutions
Approval of New Vendors or Update of Key Vendor
Information
Careful Controls Should be Placed On Who Can
Approve the Establishment or Revision of
Vendors to Prevent Fraud
Purchasing Department Should Approve All New
Vendors and Changes to Existing Vendor Records
8 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: VISIBILITY
Issue / Description Best Practice
Financial Management Does Not Know the True
Picture of Outstanding Company Liabilities
Many Invoices are in Manager’s InBoxes or
Remote Locations at Any Point in Time;
Financial Management Has No Way of Knowing
the Dollar Value and Due Dates of These
Invoices
Centralize Receipt of Invoices at a Central
Location and Route Electronically for Approval
Using Workflow Technology
Develop a Report at the End of the Month for
Financial Management to Accrue All
Outstanding Liabilities Accurately
Managers Keep Invoices in Their InBoxes Too
Long or Misplace Them
Managers Inadvertently or Deliberately (to Avoid
Costs Hitting Their Cost Center) Do Not Approve
or Reject Invoices on a Timely Basis or Lose
Them; Financial Management Has No Way of
Knowing the Dollar Value and Due Dates of
These Invoices
This Also Leads to Poor Credit From Vendors,
Late Charges or Inability To Take Advantage of
Discounts
Centralize Receipt of Invoices at a Central
Location and Route Electronically for Approval
Using Workflow Technology
Set Business Rules for Managers to Approve or
Reject All Invoices within 2 days of Receipt or
Less
9 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: DOCUMENTATION
Issue / Description Best Practice
Difficult to Find Invoices and Checks After
Processing and Document Storage is
Expensive
Paper Documents are Difficult to Locate
After Accounts Payable Processing Due to
Filing Errors and Are Expensive to Store and
Locate
Many Companies Store the Invoice, a Copy
of the Check and Purchase Order Together
for Ease of Retrieval, But This is Extremely
Expensive
Utilization of Imaging Systems Integrated
into Accounting System
Elimination of Paper Files
10 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: MANAGEMENT INTENSITY
Issue / Description Best Practice
Accounts Payable is Management
Intensive, Complex and Voluminous
Accounts Payable is a Transaction
Processing Function, Not Really an
Accounting Function
This Means that Accounts Payable
Requires More Management Time and
Employee Supervision (“Fire Fighting”),
More Technology and Capital Than Other
Financial Processes
Management Techniques for Accounts
Payable Also Differ Markedly From
Accounting Functions and Requires More
Management Training
Outsourcing of Accounts Payable
Processes
11 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
Issue / Description Best Practice
Accounts Payable Process Efficiency and Cost
Some Firms Employ Best Practices That Reduce
Accounts Payable Processing Costs To As Low As
$0.32 Per Invoice
Detailed Matching and Approval Business Rules
No Invoice Accepted Without A Purchase Order
No Invoice Accepted On Paper; All Invoices Must
Be Electronic
Scan All Remaining Paper Invoices
Evaluated Receipts Settlement (Disbursement
Made Upon Receipt Of Goods Based On PO
Pricing; Invoices Irrelevant)
Use Of Procurement Cards For Low Dollar
Purchases
Utilization of Workflow to Electronically Route
Invoices for Approval
Web-Based Invoice Processing and Payment
Status for Vendor Self-Service
Call Center to Handle Vendor Phone Calls
Short Pay Invoices as Appropriate But Itemize
Deductions to Prevent Confusion by Vendors
Take Deductions Wherever Possible
BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT
12 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
Issue / Description Best Practice
Continuous Improvement
Gather Pertinent Data and Analyze It to
Continually Improve the Accounts Payable
Process
Revise the Accounts Payable Process to
Take Advantage of New Techniques or to
Correct the Cause of Problems
Investigate and Implement New
Technologies to Further Enable the
Process
Implement Accounts Payable Reporting
System to Better Measure and Manage
the Process and Report on the Following
in Real-Time: Exceptions by Field, Type of
Exception, and Invoice; Status of Invoices
at Each Step of the Process; Cycle Times;
and Cost
Manage the Process Tightly, Paying Close
Attention to Metrics Gathered in the
Reporting System
Begin the Continuous Improvement
Process Again
BEST PRACTICES: EFFICIENCY & CONTINUOUS IMPROVEMENT
13 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
BEST PRACTICES: SARBANES-OXLEY
Issue / Description Best Practice
Sarbanes-Oxley Compliance
Ensure Effective Internal Controls, Allow
Management to Ensure the Adequacy and
Assess the Effectiveness of Those Controls
and Procedures, and Allow the Auditors to
Attest to Management’s Internal Control
Report
Document All Invoice Matching and
Approval Business Rules in Complete
Detail
Utilize Well Documented Business Rules
Around Coding
Utilization of Workflow to Electronically
Route Invoices for Approval
Utilization of Imaging Systems Integrated
into Accounting System
Centralize Receipt of Invoices at a Central
Location
Develop a Report at the End of the Month
for Financial Management to Accrue All
Outstanding Liabilities Accurately
Automate Application of Business Rules
Utilizing a Combination of Accounting
Systems, Third-Party and Proprietary
Software Solutions
14 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
EXAMPLE OF ACCOUNTS PAYABLE BEST PRACTICES:
THE IQ BACKOFFICE PROCESS
A BEST PRACTICE SOLUTION
CUSTOMIZED FOR EACH CLIENT
Supplier Provides Good / Service
Supplier Sends Invoice
IQ Opens Mail and Scans Invoices
IQ Indexes & Matches Invoice
& Identifies Exceptions
IQ Performs 100% Audit
Client Manager(s) Approve Invoice & Resolve Exceptions
Online
IQ Vouchers Invoice in Client Accounting System
Client Approves Payments in Client Accounting System
IQ Prints and Mails Checks, Wires & ACH Payments
IQ Answers Supplier and Client Phone
Calls & Correspondence
Electronic Invoice
Shared Service Center Utilizing:
Industry Best Practices
SAS70 Controls
Complete Audit Trail for Each Invoice
Dedicated Client Teams
Real-Time Management Reporting for Complete Control
THE IQ SOLUTION
HAS THE ESSENTIAL
COMPONENTS OF A
WORLD-CLASS
ACCOUNTS PAYABLE
PROCESS:
16 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
CONTINUOUS IMPROVEMENT PROCESS
Process ( Re)Design
Application Of
Technology
Process Management
Reduced Cost Higher Quality
Faster Cycle Time Employee Efficiency
Customer Service
Process ( Re)Design
Application Of
Technology
Process Management
Reduced Cost Higher Quality
Faster Cycle Time Employee Efficiency
Customer Service
Accounts Payable Expertise
IQ Accounts Payable Process Virtuous Circle
17 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
WEB-BASED A/P REPORTING
• Web-Based Reporting & “Drill-Down” Provides Managers with Greater Access to Information and Control Over the Business Than They Ever Had:
– Customized reports on expenses
– “Drill-Down” to the transaction and associated source document image
– Reports generated real-time, reflecting changes in the business dynamically
– Cost effective – available to all managers, employees, associates, clients and vendors without per user fees
– Easy to use – Web-based requiring one to two hours of training
18 Accounts Payable Best Practices © 2002-2012, IQ BackOffice, Inc.
IQ BackOffice 2121 Rosecrans Ave., Suite 3350
El Segundo, CA 90245 www.iqbackoffice.com