Turning accounts payable from reactive to proactive

By David Griffiths, CEO at FISCAL Technologies

Today’s finance leaders must juggle ever-increasing challenges and expectations of supporting cost reductions across the enterprise, managing working capital efficiently and protecting the organisation from the growing risk of fraud, loss and reputational damage. This is no mean feat and the economic crisis caused by the coronavirus pandemic only adds to this myriad of challenges.

With this in mind, efficiency is key, but research suggests that the finance function needs to put its own house in order by optimising the accounts payable (AP) department. According to a recent survey, 96% of organisations say that some invoices require additional attention from accounts departments before any payment is made. Additionally, the same survey found that on average, £3million is misdirected annually.

Wasted time, reduced staff productivity and lost working capital are common due to errors, inefficiencies and fraud in the procure to pay (P2P) process – the cycle of supplier validation, onboarding, ordering, receiving and paying for goods and services.

Never before has the impact of AP performance been placed with such strategic importance to businesses across the globe. P2P departments – the workhorse of the finance function – driving the process of procurement and accounts payable are now at the centre of the business continuity plan.

The crisis created by COVID-19 requires AP and P2P to be proactive in order to reduce costs, with the focus on retaining and protecting cash taking precedence.

Protecting cash

In order to protect cash, you must first understand the AP risk landscape, your specific risk factors and also risk indicators. Common risk indicators include; Poor cash protection, incidents of procurement fraud, poor controls and non-compliance, reputational damage, increased operating costs, poor supplier relationships, regulatory action and penalties, and inconsistent supply chains.

Each of these areas presents an opportunity for payment errors and fraud, which directly affects the bottom line. Overpayments – paying duplicate or incorrect invoices – along with fraud together account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.

With regards to payment errors, most organisations are aware that they could be losing working capital due to making duplicate payments. However, there is a tendency to either conduct periodic recovery exercises or write the amount off, rather than conduct a thorough review of past transactions. This is because many consider the risk to be low with the value of the invoices falling below their risk threshold.

On top of this, even when these periodic recoveries – typically annually – are performed, the true volume of duplicate payments made isn’t recognised, therefore meaning there is not a true value of the risk.

Taking this reactive approach not only creates a latent risk because the funds have already left the organisation, remaining lost unless action is taken, but it also takes time away from more productive activities. Identifying duplicate payments, investigating causes, gathering evidence and recovering lost funds is a lengthy process. This undoubtedly reduces the effectiveness of the finance function, the ability to deliver compliant financial reporting, meet supplier terms of payment and internal targets.

Organisations that instead take a proactive, preventative approach can free up the time spent on managing the processing, investigation and recovery of duplicate invoices. This can also lead to a significant reduction in the time needed to investigate credits, prepare financial reporting and close the books. If this time is instead spent more productively on financial analysis, the value of the financial reporting is increased, and the books are clean.

Implementing proactive best practise

This form of AP best practise in turn leads to a number of benefits, from cash retention and protection to time savings and better staff morale. Reducing the risk of payment error retains cash in the business, and also significantly reduces the time needed to administer credits and prepare financial reporting. This allows AP staff to focus on their more valuable activities, increasing profitability of the organisation.

If AP is to achieve its goal of adding value to the organisation, team members could spend less time on liaising with suppliers to fix mistakes. With a proven, continuous, self-audit system in place, auditors have fewer reasons to conduct a detailed P2P audit, making audits less frequent, less intrusive, and less time-consuming for those involved.

The increase in paperless and automated accounts payable processes removes the step of manual checking and monitoring of transactions across the P2P process. However, without oversight and strong controls, this can also increase the risk of financial loss. Continuous, preventative analysis and monitoring payments – independently from the ERP system – delivers greater control and reduces loss due to error and fraud.

Additionally, low touch invoice processing should result in lower cost of AP resources and defines AP Best Practice. The ability to identifying risky vendors, ones with a high volume of credit notes (which may also be an indicator of fraud) quickly and prior to payment, reduces AP team workload and speeds up payment process.

These proactive measures result in fewer errors and therefore greater trust across the business, from procurement to AP, and the finance function and compliance team are aligned and able to focus on growth opportunities. Reducing these silos between Procurement and AP also benefits both the organisation and supplier chain.

Oversight, not hindsight

Despite all the noise about digitalisation, Artificial Intelligence (AI) and other technology advances, most AP professionals still face daily manual tasks that drain their time and energy, preventing them from performing more value-added work.

If accounts payable is to change perceptions of the department from being purely operational to playing a critical role in the organisation’s success, it must capitalise on its unique position at the centre of the financial activity.

The role of AP has never been more important, and organisations today face enormous challenges. Ultimately, any AP teams putting in place proactive processes, enabling them to act on insights and have oversight, rather than reacting in hindsight, will be in a strong position to battle these challenges.