Aim for 100% Purchase Order
In the first white paper ”Digitalize It”, we came to the conclusion that paper-based invoice processing systems can no longer meet the needs of most organizations. Further, digitalization in favor of paper-based invoicing is just the first step towards improving your AP system and just begins to scratch the surface of our overall goal. In this second white paper in a series of five, we will cover the topic: “Aim for 100% Purchase Order”. Ideally, a vendor’s income is based on a negotiated sum of money in exchange for goods, which is paid upon verification from the buyer that the goods have been received and are in accordance both with the order details as well as with any underlying agreements. Unfortunately, the reality is seldom that simple as a number of things can go wrong from the time the buyer places an order to the time the buyer receives the invoice. IOFM reports have listed a few:
- The terms on the invoice do not match the negotiated terms.
- The prices detailed on the invoice do not match the prices stipulated in the agreement.
- Related charges such as freight and insurance are included, or excluded, when they should not be.
- The invoice is received before the shipments are completed.
- The goods are found to be damaged upon receiving them.
- Sales and use tax is charged or omitted.
Complete Purchase Orders (PO):
The Accounts Payable department (AP) is only able to quickly process a PO while avoiding exemptions on the occasion the PO is filled out accurately and in full, especially concerning such elements as terms and conditions, insurance and freight.
Oftentimes, the purchasing department neglects to include the details of special deals they have negotiated with the vendor on the PO leaving AP unaware of such special deals. This typically results in AP executing the transaction according to standard terms due to a lack of information and any special deals that have been made are “lost”. It is important to maintain an open and active dialogue between Purchasing and AP in order for AP to better-understand what Purchasing does on a daily basis. It is of equal importance for Purchasing to spend time with AP in order to get a better understanding of the actual damage a poorly prepared PO can inflict.
Maintaining Vendor Sheets:
Some vendors seem to repeatedly issue invoices with the same mistakes on them. For example, a certain vendor can consistently apply the wrong tax code or apply an extra cost for freight when it is stipulated in your agreement that the cost of freight is to be incurred by the vendor. You may have multiple agreements with your vendor regarding payment terms and price discounts yet frequently find that the correct discounts are not applied on the invoices you receive. Keeping so called “cheat sheets” containing vendor information and any corresponding agreements can help AP to quickly check the validity of an incoming invoice without requiring them to contact other departments or the vendor every time a discrepancy arises.
Keeping the purchasing system updated with the current price agreements will help to prevent future discrepancies. AP should inform Purchasing of all deviations from standard agreements so that Purchasing may take the appropriate action. In order to deal with such deviations more smoothly and systematically a system feature may be implemented which automatically detects and handles all deviations from standard agreements.
Some automated procure-to-pay systems have a feature called a “PO flip”. A PO flip occurs when, upon generating a PO for a given vendor, the vendor assimilates the information from the PO and “flips” it further onto an invoice. The invoice and the corresponding PO matchup perfectly without exception. A prerequisite for a successful PO flip is that the original PO data must be in accordance with the underlying contract’s terms.
Many e-invoicing solutions contain a feature that is able to detect errors on incoming invoices at an early stage and alert the vendor of these errors. This allows the vendor to promptly review the errors and resubmit a new invoice, significantly cutting down on the amount of time it would otherwise take to detect and correct such errors.
To Briefly Summarize:
In a perfect world, a vendor receives payment in exchange for goods as soon as their customer confirms having received a shipment. Alas, we do not live in a perfect world and a number of things can go wrong between placing an order and receiving payment. Fortunately, there are steps you can take to prevent mishaps from occurring along the way—a number of which we have described above. Everything from insisting on complete POs to implementing an e-invoicing system will help you on your path towards a 100% purchase order. In the next white paper, “Automate It”, we move on to Step 3 and continue our journey to improving your accounts payable performance.
Qvalia is an AP and Transaction Specialist consultancy firm servicing a client base numbering over a thousand in the area of automating AP processes. Qvalia observes that the world is facing a significant paradigm shift: with ever greater numbers of customers and suppliers connected to the same cloud service, errors in transaction flows will increasingly disappear, but so will thousands of hours of time-consuming invoice management.