Mary S. Schaeffer, Institute of Management and Administration IOMA Accounts Payable a Guide to...

A

CCOUNTS

P

AYABLE

A G

UIDE

TO

R

UNNING

AN

E

FFICIENT

D

EPARTMENT

S

ECOND

E

DITION

M

ARY

S. S

CHAEFFER

Executive Editor

IOMAs Report on Managing Accounts Payable

co-creator The Accounts Payable Certification Program

J

OHN

W

ILEY

& S

ONS

, I

NC

.

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A

CCOUNTS

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AYABLE

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A

CCOUNTS

P

AYABLE

A G

UIDE

TO

R

UNNING

AN

E

FFICIENT

D

EPARTMENT

S

ECOND

E

DITION

M

ARY

S. S

CHAEFFER

Executive Editor

IOMAs Report on Managing Accounts Payable

co-creator The Accounts Payable Certification Program

J

OHN

W

ILEY

& S

ONS

, I

NC

.

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This book is printed on acid-free paper.

Copyright 2004 Mary S. Schaeffer and the Institute of Management and Administration

Published by John Wiley & Sons, Inc., Hoboken, New JerseyPublished simultaneously in Canada

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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.

Library of Congress Cataloging-in-Publication Data

Schaeffer, Mary S.Accounts payable : a guide to running an efficient department / Mary

S. Schaeffer.-- 2nd ed.p. cm.

Includes index.ISBN 0-471-63690-8 (cloth)

1. Accounts payable. I. Title. HF5681.A27S28 2004658.15'26--dc22

2004005531

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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For my dear husband, Hal Schaeffer,

whos been there for me through the worst of times as well as the best.

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vii

CONTENTS

Preface xxiAcknowledgments xxiii

Part One Processing 1

1

Invoice Handling

3

1.1 Introduction 31.2 The Invoice 41.3 Purchase Orders 51.4 Receiving Documents 61.5 Proper Invoice Handling 71.6 When Accounts Payable Receives Invoices Last 81.7 Entry by Month-End 91.8 Timely Approvals 101.9 Unidentified Invoices Sent to Accounts Payable 101.10 Use Best of Terms 111.11 Strategies to Use When Short-Paying Invoices 121.12 Goods Improperly Ordered Outside Purchasing 121.13 Nonpurchase Order Buying 131.14 Encouraging Others to Follow Accounts Payables Guidelines 141.15 Invoices without Invoice Numbers 141.16 Invoice Amnesty Day 141.17 Keeping Difficult Invoices from Disappearing 151.18 Using Vendor Statements: Theory 161.19 Using Statements: Reality 171.20 Filing: Batch versus Alpha Filing 181.21 Reducing the Number of Invoices 18

1.22 Handling Bills with Remittance Advices 21

2

Alternatives to the Three-Way Match

23

2.1 Introduction 232.2 Assumed Receipt 23

2.3 Evaluated Receipt Settlement 25

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viii Contents

3

Check Preparation Printing and Filing

33

3.1 Introduction 333.2 A More Common Approach 333.3 Manual Signatures 333.4 Authorized Signers 34

3.5 Proper Check-Signing Procedures and Control 353.6 Limiting Time Spent Getting Checks Signed 373.7 Mailing versus Picking Up Checks 393.8 Check Filing 403.9 Time-Saving Techniques in the Check Production Cycle 413.10 Canceled Checks and Irate Vendors 43

4

Automated Clearinghouse and Direct Deposit

47

4.1 Introduction 474.2 Direct Deposit 474.3 Other Common Examples 474.4 Combining Electronic Billing And Payments 484.5 Terminology 484.6 Check Truncation and Check Conversion 494.7 What Companies Are Doing Today 494.8 Case Study: How One Company Gets Suppliers

to Accept ACH Payments 494.9 The Future 50

5

Making International Payments

52

5.1 Introduction 525.2 Foreign Exchange 535.3 Bank Account Issues 535.4 Payment Mechanisms 535.5 International Payment Service 545.6 Benefits of International Payment Services 545.7 Payments to NAFTA Partners 55

Part Two Controls 57

6

Exception and Rush Processing

59

6.1 Introduction 596.2 Dealing with the Issue 60

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Contents ix

6.3 Hard-Line Approach 62

6.4 Identify Rush-Check Troublemakers 62

6.5 Modify Systems and Procedures to Reduce the Need for Rush Checks 63

6.6 Publish a Newsletter 64

7

Errors and Duplicate Payments

67

7.1 Introduction 67

7.2 Statistics 67

7.3 Types of Erroneous Payments 68

7.4 Low-Tech Solutions 68

7.5 High-Tech Solutions 69

7.6 Employees: Your Most Important Resource 69

7.7 Tolerance Levels 70

7.8 Handling Discrepancies 70

7.9 Accuracy and Timeliness 71

7.10 Timing Issues 74

7.11 Eliminating Duplicate Payments without an Auditor 747.12 Duplicate Pay Audits: The Future of Accounts Payable

and AP Audits 75

8

Paying When the Original Invoice Is Not Available

79

8.1 Introduction 798.2 Who Pays from Copies 798.3 Controls When Using Copies 808.4 Common Techniques to Ensure a Second Payment

Will not Be Made 818.5 Controls When Paying from Copies 81

9

Master Vendor Files

84

9.1 Introduction 849.2 The Data 849.3 Cleanup Policies 859.4 When to Set Up a New File 859.5 Maintenance Policies 869.6 Good Master Vendor Policies 86

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9.7 Establishing Vendor Naming Conventions 879.8 Tips on Setting Up the Master Vendor File 889.9 New Vendor Setup 899.10 Adjustments, Corrections, and Additions 919.11 Maintaining the Master Vendor File 91

Part Three Cash Management 93

10

Terms and Taking Discounts

95

10.1 Introduction 9510.2 Should the Discount be Taken? 9510.3 An Ongoing Process 9810.4 Possible Problems When Paying Late 9910.5 Are All Possible Discounts Being Taken? 10010.6 Should You? 101

11

Cash Management

104

11.1 Introduction 10411.2 Why Discuss Cash Management in Accounts Payable? 10411.3 Payment Timing 10511.4 Maximize Float 10611.5 Purchasing Cards 10711.6 Bank Fees 10711.7 ACH Background 10711.8 ACH: Types of Corporate Payments 10811.9 Clean-Desk Syndrome 10911.10 Games Companies Play 110

12

Petty Cash

111

12.1 Introduction 11112.2 Petty Cash No-Nos 11112.3 Recommended Procedures 11212.4 Other Recommended Procedures 113

13

Payment Timing

114

13.1 Introduction 11413.2 Can Another Day be Squeezed out of Payables? 114

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Contents xi

13.3 Timing Payments in Difficult Times 11413.4 Stretching Vendor Payments 11513.5 Place Smaller Orders 11513.6 Talk to Vendors 11513.7 A Formalized Approach 116

14

Audits and the Outside Accountants Management Letter

119

14.1 Introduction 11914.2 Most Notable Payables Issues 11914.3 Using This Information 12214.4 Sarbanes-Oxley Effect 123

Part Four Travel and Entertainment 125

15

Handling Travel and Entertainment Reports

127

15.1 Introduction 12715.2 The Problem 12715.3 Solutions 12815.4 How Much Checking Is Enough? 13115.5 T&E Manual 13415.6 Policy and Procedures Changes 13515.7 What About Electronic Receipts? 13615.8 Faster Employee Reimbursements 13715.9 E-Tickets 138

16

Handling Electronic T&E Reports

139

16.1 Introduction 13916.2 Advantages 13916.3 Homegrown Systems 14016.4 Third-Party Electronic Software 14216.5 E-Tickets 142

17

Automating the T&E Report Process

146

17.1 Introduction 14617.2 Making the Most of Direct Deposit 14617.3 Spreadsheet Approach 147

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17.4 One-Card Intranet-Based Solution 14817.5 In-House versus Third Party 148

18

Value-Added Tax Refunds

150

18.1 Introduction 15018.2 What is Vat? 15018.3 Assistance Available 15118.4 Vat Reclaim Companies 15118.5 Time Limitations: Deadlines 15118.6 Focus on Vat-Friendly Countries 15218.7 Focus on Vat-Valuable Expenses 152

Part Five Technology 155

19

Electronic Data Interchange

157

19.1 Introduction 15719.2 What Is EDI? 15719.3 TECHNICAL Basics: introduction 15719.4 Why EDI? 15819.5 Getting Started 16019.6 Business Infrastructure Requirements 16119.7 Managing Accounts Payable EDI 16219.8 Accounts Payable EDI Opportunities 16219.9 Accounts Payable EDI Success Factors 16319.10 Systems Requirements 16319.11 Trading Partner Directory 16619.12 EDI Standards 16619.13 Effect on Supplier Partnerships 16719.14 Convincing Management 16719.15 FEDI Applications 16819.16 Cost-Justifying FEDI 16819.17 Getting Up the EDI Learning Curve 16819.18 Internet EDI 17019.19 Web EDI: An Idea Whose Time Has Come 17119.20 Security and Standards Issues 17119.21 Why the Internet? 17119.22 Special Application: ACH Debits for Tax Payments 172

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Contents xiii

20

Imaging

175

20.1 Introduction 17520.2 Poor Mans Imaging 17520.3 Planning for Full-Scale Imaging 17620.4 Using Full-Scale Imaging with E-Mail 17620.5 Imaging on a Smaller Scale 17620.6 Overview 17720.7 Imaging in Practice: Growing Pains 17920.8 Legal Acceptance 18020.9 Disaster Recovery 18020.10 Frequently Asked Questions about Imaging 18120.11 Preparing Documents for Imaging 182

21

The Internet, E-Mail, and E-Invoicing

184

21.1 Introduction 18421.2 E-Mail 18421.3 The Internet 18521.4 Case Study: An Accounts Payable Department Web Site 18721.5 What to Include on an Accounts Payable Web Page 19121.6 Electronic Invoicing 19121.7 Everyday AP uses for the Internet 19421.8 Case Study: Putting the Web to Work

for Accounts Payable 196

22

Encryption and Digital Signatures

200

22.1 Introduction 20022.2 Basics 20022.3 Case Study 203

23

E-Marketplaces and XML

206

23.1 Introduction 20623.2 E-Marketplaces 20623.3 XML 20823.4 How Accounts Payable Professionals

Can Prepare Themselves 20823.5 How to Participate in the E-Commerce Revolution 209

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Part Six Specialty Topics 211

24

Purchasing Cards

213

24.1 Introduction 21324.2 What Is a Purchasing Card? 21424.3 How a Purchasing Card Differs

from a Consumer or Corporate Card 21424.4 Why Use a Purchasing Card? 21524.5 How Does the Purchasing Card Work

within the Company? 21524.6 Plan Administrator 21524.7 User Feedback 21524.8 Vendor Feedback 21624.9 Control Features 21724.10 Maximizing Cost Savings 21924.11 Considering a Program 221

25

Post Audit Firms

223

25.1 Introduction 22325.2 Why Are Accounts Payable Audit Firms Necessary? 22425.3 How Post Audit Firms Work 22425.4 Accounts Payable Benefits 22525.5 Costs 22525.6 Getting Money Back 22625.7 Selecting the Best Profit Recovery Firm 22625.8 Other Considerations 22825.9 Reaction to Profit Recovery Firms 22825.10 Self-Auditing 22825.11 Self-Auditing for Duplicate Payments 22925.12 Current State of Duplicate Payment Audit Industry 229

26

Benchmarking

230

26.1 Introduction 23026.2 What is Benchmarking? 23026.3 Sources of Benchmarking Data 23226.4 Benchmarking Applications 23226.5 Case Study: How to Start or Improve

a Benchmarking Program 234

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Contents xv

Part Seven Regulatory Issues 239

27

Form 1099 and Form 1042-S

241

27.1 Introduction 24127.2 Background 24127.3 Best 1099 Practice 24227.4 What if the 1099 Is Not Filed? 24227.5 Who Should Receive a 1099? 24327.6 Letters Instead of W-9s 24427.7 B-Notices 244

27.8 Types of Payments Reflected on 1099S 246

27.9 More Help from the IRS 246

27.10 Its 1099 Time: Changes Implemented in 2002 246

27.11 1042-S 249

28

Sales and Use Tax

250

28.1 Introduction 25028.2 Defining Sales and Use Tax 25028.3 Education 25128.4 Policies and Procedures 25228.5 Sales and Use Tax Audits 25228.6 Sales and Use Tax Terminology 25428.7 Types of Sales and Use Tax 25428.8 Keeping Up To Date 25428.9 Use Tax and Nexus 25528.10 Specialized Software 25528.11 Additional Learning Opportunities 256

28.12 Help Others Help Accounts Payable 256

28.13 Industry-Specific Sales and Use Tax Advice 259

28.14 Avoiding a Sales and Use Tax Disaster 26228.15 Conclusion 263

29

Escheatment

264

29.1 Introduction 26429.2 What Is Escheatment? 264

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29.3 What If You Do Not Escheat? 26529.4 Dilemma 26529.5 What Can Be Done? 26629.6 Necessary Documentation 26629.7 Software Solutions 26629.8 What Can Accounts Payable Professionals Do? 26729.9 What If You Have Not Been Escheating? 26829.10 Professional Organizations

for Unclaimed Property Owners 26829.11 Typical Unclaimed Property Experience 26829.12 An Unclaimed Property Game Plan 270

Part Eight Management Issues 273

30

Ethics

275

30.1 Introduction 27530.2 Sections of Sarbanes-Oxley Act Pertinent

to Accounts Payable 27530.3 Cascading Certifications 27630.4 Sarbanes-Oxley Act: A Case Study 27630.5 Foreign Payments 27830.6 Office of Foreign Assets Control 27930.7 What This Means to Accounts Payable 279

31

Disaster Recovery

281

31.1 Introduction 28131.2 Personnel Travel Policies 28131.3 Telephone Trees 28231.4 Computer Backups 28331.5 Protecting Paper 283

32

Outsourcing

284

32.1 Introduction 28432.2 Why Companies Do Not Outsource

Accounts Payable 28432.3 When Outsourcing Makes Sense 28432.4 Hiring an Outsourcer 28532.5 Outsourcing: A Case Study 286

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Contents xvii

33

Management Techniques

289

33.1 Introduction 28933.2 Six Sigma 28933.3 Balanced Scorecard 290

Part Nine Department Management 291

34

Making Your Accounts Payable Department First-Rate

293

34.1 Introduction 29334.2 Typical Accounts Payable Department 29334.3 Who Runs the Department? 29434.4 Hiring Practices 29434.5 How to Assemble an Accounts Payable Dream Team 29634.6 Procedures Manual 29934.7 The Impact of Technology on Accounts

Payable Departments 30134.8 Outsourcing 303

35

Managing the Staff

307

35.1 Introduction 30735.2 Training 30735.3 Finding Challenging Work for the Staff 31035.4 Listening Skills 31035.5 Hiring Staff 31235.6 Overtime: A Serious Issue 31335.7 Managing a Unionized Staff 314

36

Staff Motivation and Morale

319

36.1 Introduction 31936.2 Motivation Techniques 31936.3 Evaluating Your Motivation Skills 32136.4 Motivating the Seemingly Unmotivatable 32436.5 Using the Staff Knowledge as Company Resource 32536.6 Dealing with Poor-Attitude Problems 32536.7 Getting the Accounts Payable Staff to Take on More Work 327

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36.8 A Realistic Approach to Motivating Accounts Payable Staff 327

36.9 Improving the Image of Accounts Payable 330

37

Working with and for Purchasing and Other Departments

332

37.1 Introduction 33237.2 Why Interdepartmental Cooperation Is Important 33337.3 Basic Approaches 33337.4 Handling the Big Issues 33637.5 Getting a Customer Service Mentality

in Accounts Payable 33837.6 Quick Answers to Common Problems 341

Part Ten Fraud 345

38

Check Fraud

34738.1 Introduction 34738.2 Check Fraud as Growth Industry 34738.3 Legal Issue of Reasonable Care 34838.4 Corporate Responsibility 34838.5 Controls 34838.6 If Preprinted Check Stock Is Used 34938.7 Check Security Features 34938.8 Short-Circuiting the Forger 35038.9 Taking Reasonable Care 35138.10 Positive Pay 35338.11 Reverse Positive Pay 35338.12 Ongoing Fraud Problems 35338.13 A Total Fraud Protection Program 35438.14 Identifying Fraudulent Checks Quickly 35438.15 Segregation of Duties 35538.16 Account Reconciliation 35538.17 Accounts Payable Controls 35638.18 Payment Pitfalls: What Your Banks May Not Tell You 35638.19 Laws Covering Check Fraud 35838.20 Positive Pay: The Next Generation 359

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Contents xix

39 Employee Fraud 36039.1 Introduction 36039.2 Be Aware of Typical Candidates 36039.3 What Can Go Wrong 36039.4 Steps to Prevent Cash Fraud 36139.5 Exercise Patience 36239.6 Call in the Professionals 36239.7 When Fraud has been Identified 36339.8 Dealing with the Aftermath 36439.9 Preventing Fraud in the Future 364

40 Vendor Fraud 36640.1 Introduction 36640.2 Master Vendor File 36640.3 Con Artist Vendors 36940.4 Scam Solutions 37140.5 Vendor Profile Forms 372

Part Eleven Accounts Payable Today and in the Future 375

41 Professionalism in the Field 37741.1 Introduction 37741.2 Evaluating the Big Picture 37741.3 Leadership and Preparation 37841.4 Technology 37841.5 Communication 37941.6 Relevant Trends 38041.7 Gaining the Attention of Management 38041.8 How to Win Approvals on Accounts Payable Proposals 38141.9 Taking Control of Your Own Destiny 38341.10 Certification 38341.11 Conferences 38341.12 Accounts Payable in the Twenty-First Century 384

42 Salaries and Titles in Accounts Payable Today 38642.1 Introduction 38642.2 Basic Data 38642.3 Bonuses 388

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42.4 Education 39042.5 Effects of Industry and Company Size 39042.6 Trends 39242.7 Reevaluating AP Positions for Grade-Level Changes 39242.8 Titles 393

Appendix Accounts Payable Resources 397

Index 399

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xxi

PREFACE

The fact that this book contains 42 chapters is indicative of the complexityof the accounts payable function today. While in the past many believedthat accounts payable was

no big deal

and all the department did was shuf-fle paper and pay bills, most savvy executives now realize this is far fromthe truth. Todays leading edge accounts payable departments are staffedby professionals who understand not only all the nuances of the invoiceprocessing and payment responsibilities, but the implications of all therelated functions, including unclaimed property (escheat), sales and usetax, issuance of 1099s and 1042s, check fraud, EIPP, T&E, p-cards, theACH, benchmarking, VAT refunds, petty cash, post audits, and more.

They also know what can go wrong if the master vendor file is not han-dled correctly, if reasonable care is not exercised when issuing checks, ifescheat laws are not followed, if payments are made from invoice copies,if the petty cash box is allowed to run wild, if policies and procedures arenot clearly communicated and followed, and if checks are returned torequestors. Of course, this is just a sampling of the things that come backto bite a company in the shorts if the accounts payable function is not han-dled correctly.

But rather than focus on what can go wrong, lets take a look at whatgoes right when savvy accounts payable professionals are allowed to imple-ment the very best processes in their departments:

Duplicate payments and check fraud are reduced when invoices arehandled properly and efficiently. Proper handling of both the setupand maintenance of the master vendor file helps in this regard.

Invoice processing and check preparation costs are reduced whenalternatives to the three-way match, e-invoicing, electronic pay-ments and effective procedures are used.

Cash flow is maximized when early payment discounts are earnedand payments are timed appropriately.

Travel and entertainment reporting costs are held in check when theprocess is automated. There are several ways to do this.

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xxii Preface

Huge inroads have been made in making accounts payable depart-ments more efficient and effective. Technology can be thanked forthis. This has in many cases eliminated some of the more clericalfunctions from the accounts payable landscape. Imaging, workflow,e-invoicing, EDI, and the Internet are just a few of the tools beingused today in accounts payable.

The reduction in the number of small dollar invoices in accountspayable is one of the best ways to make the department more effi-cient and professional. P-cards, e-invoicing, and the selective use ofsummary billing all help in this regard.

Effective use of post audits, after self audits, helps reduce duplicatepayments and recover those few erroneous payments that are made.

Compliance with sales and use tax, unclaimed property, and 1099rules minimizes the time state auditors spend reviewing a companysoperations, as well as any fines they may impose.

The goal of this book is to help accounts payable departments of all sizesachieve the goals described above and avoid some of the possible negativeoutcomes delineated at the start. It also provides information about bench-marking, Sarbanes-Oxley, OFAC, disaster recovery, Balanced Scorecards,and Six Sigma that will help the accounts payable manager run a first-rateoperation. Additionally, it strives to show readers how they can run a firstrate department, where the staff is happy, motivated, and respected through-out the organization.

The book is laced with case studies and real life examples of organizationsthat have implemented the strategies discussed. Some are widely recognizedorganizations while others will only be known regionally. I appreciate hear-ing from readers, practitioners and experts alikewhether they agree with meor not. Feel free to drop me a line at [email protected] and share yourlikes, dislikes, thoughts, and observations.

August 2004

Mary S. Schaeffer

New York, NY

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xxiii

ACKNOWLEDGMENTS

This book would not have been possible without the input of hundreds, ifnot thousands, of mostly unnamed accounts payable professionals. For thelast ten years Ive been lucky enough to spend my days talking to both prac-titioners and experts about all things accounts payable. The results of thoseinteractions have been first a newsletter, followed by this book, confer-ences, surveys, more books, audio conferences, and finally a certificationprogram.

This work has been supported by IOMA, a New York based newsletterpublisher. Our accounts payable line was able to expand only becauseIOMA forged new ground, expanding from operating solely as a print pub-lisher into new horizons as market forces demanded. This effort led byDavid Foster, the companys president, and supported by an equally innova-tive publisher, Perry Patterson, has made it all possible.

Finally, a special thanks has to go to John Wiley and Sons for agreeing topublish the book in the first place. When they stepped up to the plate ini-tially, there was very little written about accounts payable, and virtually nobooks on the subject. The demand for a second edition of the book provesthey made the right decision in the first place. The process of producing thebook runs eminently smoother under the guidance of Sheck Cho, Wileysexecutive editor. He is a delight to work with.

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A

CCOUNTS

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1

PART ONE

PROCESSING

On those rare occasions when most people give accounts payable a thought,they focus on some of the topics covered in this Part. Few realize the amountof work needed to get a simple check prepared to pay an invoice. Even fewerrealize that their own careless actions cause accounts payable much unnec-essary work while simultaneously putting the company at risk for a duplicatepayment and possibly even fraud.

So, whats the big deal, most think, the company receiving the extra pay-ment will return it, right? Wrong! Most will not and they do not even informthe payor of the mistake. What is worse is that companies that make oneduplicate payment are apt to have poor controls and thus make many moreerrors. The chapters in this Part look at some of the traditional accounts pay-able processes and suggest ways to improve productivity while simulta-neously tightening controls and reducing the number of errors.

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3

CHAPTER

1

INVOICE HANDLING

1.1 INTRODUCTION

The primary function of any accounts payable department is to pay thecompanys bills. This deceptively simple concept can, and usually does, getcomplicated. When the invoice is presented for payment, most companiesmatch it against a purchase order and a receiving document, and

if

all threematch, the invoice is paid on or after its due date. This is what is referred toas the

three-way match

, a term accounts payable professionals know aswell as they know their own names.

Note

Bills for businesses come in the form of invoices and will be referred to assuch for the remainder of this book.

Some might say that this match is where the problems start, but in actu-ality, the problems can and often do start long before it takes place. Incom-plete purchase orders, purchase orders never completed, purchase ordersnever sent to accounts payable, inaccurate purchase orders, lost invoices,late invoices, early invoices, inaccurate invoices, incorrect receiving docu-ments, receiving documents not checked, and invoices sent in for paymenttwo or more times are just some of the problems that can occur before thematch takes place. You will note that all of these problems are caused

out-side

the accounts payable department, but will all have to be rectified bysomeone

in

accounts payable. And, as you read this book, you will see thatthis is just the beginning of the issues faced by the professionals who workin the department. When it comes to accounts payable, there is definitelymore than meets the eye.

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4 Ch. 1 Invoice Handling

1.2 THE INVOICE

Invoices are usually sent by the supplier as soon as the shipment ismade. However, a few crafty vendors predate them. The reason for thisis simple: The invoice does not have to be paid until a set number ofdays after the invoice date

although some in the field say the set num-ber of days is after the receipt of the invoice. Regardless of whichapproach is used by your company, it is in the best interests of your sup-plier to get that invoice in your hands as quickly as possible to start theclock ticking.

Where the invoice is sent is also an issue. Some companies have themsent straight to the accounts payable department for processing. Thismakes a good deal of sense if purchase orders are filled out entirely andcorrectly. In fact, if there are good controls on the purchase order, then

intheory

there would be no reason for the invoice ever to go anyplace otherthan accounts payable. However, in many organizations, there are problemswith the purchase order, so the invoice goes to the purchaser for approvalbefore payment.

Even in those organizations where an approval is needed in order tomake payment, invoices are sometimes sent first to accounts payable.Why? So they can be logged in and accounts payable can follow up tomake sure they are returned on a timely basis. It seems that in many organi-zations invoices have a way of disappearing into thin air, with no one everadmitting to having received them. Then, when the supplier calls lookingfor payment and the invoice cannot be located, the supplier is asked to pro-vide a copy, which it gladly does.

While at first glance this may not seem to be a big deal, it is. First, muchtime is wasted looking for the missing invoice. When it cannot be foundand a second is sent, the possibility of a duplicate payment has just beenexponentially increased. For those who think a mountain is being made outof a molehill, reserve judgment until Chapter 7, Errors and DuplicatePayments, is read. Delays of this sort also mean that any discount thatmight have been available is lost. But perhaps the biggest problem occurswhen the missing invoice suddenly appears. In many cases, both the origi-nal and the copy end up in accounts payable approved for payment.Depending on the controls in place, the second payment may or may notbe caught! The phenomenal growth of payment recovery firms (see Chap-ter 25, Post-Audit Firms) gives testimony to the fact that this is a seriousissue in corporate America today.


1.3 Purchase Orders 5

1.3 PURCHASE ORDERS

In the best of all worlds, the purchasing department fills out a documentknown as the

purchase order

(PO) when ordering goods. This documentshould contain every tiny detail regarding the order, including the price,quantity, payment terms, and all other pertinent details. A copy of thisshould be sent to accounts payable, where it will wait to be matched withan invoice and receiving document. Problems with purchase orders caninclude: not sent to accounts payable, not filled out correctly, and so on.

The other issue regarding POs is that there are many goods ordered in anorganization for which no purchase order is completed. Magazine subscrip-tions, conferences, interest expenses, and rent are just a few examples; thelist is endless. In these instances, a check request may be completed, or theinvoice may simply be approved for payment and forwarded to accountspayable. These non-PO purchases represent a major headache in manyorganizations.

Some companies, especially those that insist on having a PO for everyinvoice, use

blanket POs

,

which cover multiple orders and shipments and,typically, are used for repetitive purchases. When it comes to blanket POs,accounts payable professionals either love them or hate them; there seemsto be no middle ground. Payables and purchasing managers like to usethem with vendors from which they buy many times a month, to streamlinethe process. Others dislike them because of the lack of control. Either way,all seem to have strong opinions. Here is what some accounts payable pro-fessionals have to say about them:

Jay S. Wood of GTE Worldwide Telecommunications uses blanketPOs extensively. Wood notes, however, that due to the manner inwhich blankets are established, verification of receipt for goodsand services remains a manual process. Wood also points out thatthey issue uncommitted blankets, but they do not commit thosefunds to the vendor. The blanket can be closed, reduced, orupgraded at any time.

The funds on the blanket PO are similar to funds in a checkingaccount. They are there to pay the vendor, but GTE can discontinuethe relationship with the vendor at any time and close the blanket

hence, the reason the funds are uncommitted to the vendor. On someoccasions, Wood said, We issue committed funds for a particularvendor, when we contract with the vendor for a particular service orsupply at a preset price.



Any invoice received against a blanket PO requires an approvaland verification from an authorized individual responsible for thegoods or services on the PO. Adds Wood, Once they approve theinvoice, we process it and decrement the PO. Each PO has a life ofone year, if it is not canceled sooner. Funds can be added to extendthe life of the blanket, so long as it has not expired. We use blanketPOs for such things as office supplies, equipment leases, officecleaning, and maintenance.

Vicki Lindsey, accounts payable manager of RPC Inc., is anotheradmirer. We use blanket purchase orders for places that we buyfrom many times during a month. We give the vendors a purchaseorder number at the beginning of the month and tell them that every-thing we buy through the last day of the month should have thatnumber. At the beginning of every month the vendors call us for anew purchase number. When our people pick up the merchandiseduring the month, they bring a delivery ticket back with them. Weattach it to the purchase order; and when the invoice arrives, we sim-ply match it with all the delivery tickets. [This] works well for us;weve done this for many years. You can also do weekly purchaseorders, if preferred.

An anonymous accounts payable manager from Chicago does notseem to agree. I think theyre a dumb idea! They simply tell a ven-dor that someone may order up to some amount from you, but oftenthere are no controls in place to check to see whether expendituresare adding up to or exceeding the approved amount. Purchasing peo-ple like them because they think it helps control expenditures. Allthey do is create paperwork.

As can be seen from these radically different points of view, blanket POscan work in some organizations but are not without their inherent problems(i.e., the control issues). Review your own operations before deciding whetherblanket POs will work in your organization.

1.4 RECEIVING DOCUMENTS

The third part of the proverbial match, the receiving documents are, mostoften, the weakest link in the whole process. The reason is that the receivingdepartments in many organizations do not accurately check the goods that


1.5 Proper Invoice Handling 7

come through the department. Whatever is marked on the packing slip isoften marked off as having arrived; no one in the receiving department actu-ally counts.

1.5 PROPER INVOICE HANDLING

Those wishing to reduce the time spent with the receiving documents needto determine what changes can be made in the way their invoices are han-dled. The following suggestions offer accounts payable managers strategiesto become more efficient in dealing with their companys invoices:

Insist that all items sent for payment be coded.

Many accountspayable clerks end up taking on the responsibility for codingsomething that is supposed to be done either by an accountant, apurchasing agent, or the person submitting the bill for payment.Insist that all invoices sent for payment include a valid general led-ger (G/L) code.

Enter invoices one at a time.

Batch entry can cause problems. Enter-ing invoices grouped by vendor as one invoice can cause problems.When there is a question about an individual invoice, it will be diffi-cult to answer under such circumstances. It will also be difficult forthe vendor to determine which invoices have been paid and whichones have had deductions taken.

Assign complete responsibility for accounts alphabetically.

Thisapproach clearly delineates who is responsible for what and makes iteasy to forward vendor inquiry calls, as well as invoices for payment.

Use adjustment letters to describe discrepancies to vendors.

Manyof the calls from vendors to accounts payable stem from differencesbetween the amount of money they believe they are owed and theactual amount they receive. Formulate adjustment letters to vendorsand subcontractors to explain any deductions taken. This will greatlyreduce the number of phone calls asking for explanations, and willmake it easier for the accounts payable clerk when such calls docome in. The clerk will be able to easily determine why the deduc-tion was taken in the first place. Another side benefit to these lettersis that statements from these vendors will no longer contain openitems that the company has no intention of paying.



Work more closely with suppliers.

By letting suppliers know whatthe accounts payable requirements are for invoice processing, youwill be able to streamline the voucher processing. This effectivemove can also lead to better relations with those suppliers.

Make better use of computer systems.

Paper-based systems are time-consuming and often inefficient. Teach people to look up invoices onthe system, to wean them off the need to see the paper. The resultwill be a decrease in time spent both processing and searching forinvoices in the files.

Enter data directly from invoices.

In some organizations, much timeis gobbled up entering data into a data entry form. The informationis then taken from these forms and entered into the computer sys-tem. This often-unnecessary step is just one more example of anunneeded process that can introduce errors into a system.

Require all invoices be sent directly to the accounts payable depart-ment.

Doing this one simple step, rather than having the invoice sentto the department that actually initiated the purchase, can save anenormous amount of time.

1.6 WHEN ACCOUNTS PAYABLE RECEIVES INVOICES LAST

Whether invoices should all be sent first to accounts payable and then tothe person who needs to authorize the transaction, or vice versa, is an issuefor debate. The traditional view is that if the invoices come to accountspayable first, the department can then track the invoices and follow upwhen they are not returned in a timely manner for payment. But whyshould accounts payable have to spend its time making sure others do whatthey are supposed to do?

(a) CHANGING PHILOSOPHIES.

A small, but growing, number of compa-nies are shying away from the traditional route and insisting that otherdepartments handle their own invoice-processing responsibilities, withoutthe accounts payable department overseeing their workflow. When thishappens, accounts payable often gets invoices late, long after the companyhas any reasonable chance of qualifying for an early-payment discount.Worse, the invoice frequently gets lost, and when vendors call accountspayable looking for payment, they are told the invoice was never received


1.7 Entry by Month-End 9

and that another copy should be sent. Ultimately, in some companies, boththe original and the copy end up being paid.

There is some hope on the horizon, thanks in part to technology, whichis playing a big role in the changes in accounts payable. In those instanceswhen invoices are received electronically, it almost doesnt matter who getsthem first, as they can be forwarded effortlessly. With online lookup capa-bilities, everyone can check.

(b) ORDER OF BUSINESS.

Although accounts payable would like to receiveinvoices first, this procedure is no longer followed by many companies.Either a new accounting system is installed or a change in corporate philos-ophy necessitates the change. Whatever the reason, accounts payable pro-fessionals should insist that the following procedures be instituted shouldtheir company take the accounts-payable-last route:

Vendors should be supplied with new bill-to addresses that reflectthe name and/or the department of the authorizer.

Calls about payment status should be referred to the authorizer,unless there is a good online tracking system.

Even with a good online tracking system, payment calls may still berouted to the authorizer, as accounts payable may be able to tell thecaller only if a payment is scheduled, not why it has or has not beenscheduled.

Other departments must understand and fully accept their responsi-bilities in regard to vendor payment and stop blaming paymentdelays on accounts payable.

Ongoing communication between accounts payable and approvingdepartments is essential.

(c) CLOSING THOUGHTS.

Dont be surprised to find some resistance to amove to the accounts-payable-last route. Other departments may not wantaccounts payable to get invoices last; many like the comfort of havingaccounts payable keeping track of payments for them.

1.7 ENTRY BY MONTH-END

Month-end cutoffs can cause real problems for the accounts payabledepartment. Items that are not entered may not be paid on a timely basis,



resulting in lost discounts or, worse, late fees. Those who deal with thisissue on a regular basis know this is often the result of an invoice sitting onsomeones desk either until the last minute or until the vendor calls lookingfor payment. In addition, many executives let the bills pile up, then send abig batch down to accounts payable at the last minute. When this coincideswith a month-end cutoff, it is almost guaranteed to cause problems. And, ifthis should happen at quarter- or year-end cutoff, tensions are bound toincrease, especially if the vendor needs to show the payment on its quarter-or year-end reports.

There are ways to avert this type of crisis. They include:

Ask other departments that might have a lull at deadline time ifsome of the data entry work can be shifted there.

Hire temporary workers to help with the overflow.

Ask key suppliers to send the invoices a little earlier.

1.8 TIMELY APPROVALS

How often have you lost a discount because, although the invoice wasreceived on a timely basis, you didnt have the necessary approval to pay itequally promptly? Once the invoice is received in accounts payable, it hasto be sent to the appropriate party for approval.

E-mail can be used to facilitate this process. Some companies reportsuccess with using a transmittal sheet for control purposes. However, thebest way to draw attention to this is to set up a special general ledgeraccount for late fees. This draws attention to this largely hidden matter.Because the late fees will be aggregated in one place, it is relatively easy toshow the financial impact. Of course, this account only shows part of theeffect; the amount of lost discounts will not be similarly quantified. Still, itgives accounts payable professionals a starting point for quantifying theresults of sloppy practices.

1.9 UNIDENTIFIED INVOICES SENT TO ACCOUNTS PAYABLE

A real time-waster for accounts payable professionals is the invoice thatshows up bearing no clue as to who ordered the goods and whether theitems were ever received. These are generally for items ordered without apurchase order. This puts accounts payable managers on the spot

if they


1.10 Use Best of Terms 11

allow it. A number of professionals indicated they do not pay suchinvoices, nor do they spin their wheels trying to determine who placed theorder. When vendors call looking for such payment, they are simply told tocontact the party who ordered the goods.

This solution may not be acceptable in all organizations, but it makeslife a little easier in those accounts payable departments where it is used. Itshould be noted, however, that the lack of the desired information on theinvoice may not be the fault of the company employee. It may simply bedue to carelessness on the part of vendors that often are not fastidious inpreparing invoices. Why should your staff be responsible for another com-panys slipshod practices?

Whether or not the severe approach is used, the following steps can alle-viate headaches caused by unidentified invoices.

1.

Send a memo or an e-mail to everyone in the company asking that allinvoices include the name of the party ordering goods. This enablesthe accounts payable department to obtain necessary approvals andtrack down other needed information.

2.

If managers agree, inform the appropriate staff that invoices receivedwithout this information will not be processed for payment.

3.

Make sure that your policy is explained to all new hires.

Accounts payable professionals who are successful in getting theirinvoice handling under control will have taken one step on the path to asmoother-running department.

1.10 USE BEST OF TERMS

Pay according to the terms recorded on the purchase order and the quantityreceived. Some suppliers include terms on their invoices that, if notchecked, would result in payments made earlier than the date agreed to bythe purchasing department. Others include terms that are more stringentthan those agreed to with purchasing. These are two reasons why getting acompletely filled-out purchase order is so important.

Always

pay accordingto the purchase order, unless the terms on the invoice are better. Then usethe terms on the invoice and inform purchasing so they can use this infor-mation the next time they order. Using this approach will result in the bestof both worlds for the company.



1.11 STRATEGIES TO USE WHEN SHORT-PAYING INVOICES

Accounts payable managers often pay an invoice for less than the amounton the original invoice. They take a discount if the invoice is paid early andmake deductions for short shipments, defective goods, promotional pro-grams, or for a variety of other reasons. The result of these actions isanother phone call into the accounts payable department, requiringresearch time to determine the reason for the short-pay. Add these phonecalls to the already overworked accounts payable staff, and the workloadthreatens to defeat even the most dedicated members. Fortunately, there areeffective solutions to this problem. Several accounts payable professionalshave found techniques to eliminate this phone call simply by sending a let-ter or issuing a debit memo or just say no.

(a) LETTER.

The simplest way to handle short-pays is to include a letteralong with the payment explaining why the invoice was paid short.Accounts payable professionals who use this approach successfully use aform letter. The letter contains a long list of common reasons for short-paying an invoice, and the accounts payable professional simply checksthe appropriate box. These letters also typically include several lineswhere someone can add any appropriate additional comments.

Those who use this letter are advised to keep copies of them, becausecollection managers who do not agree with the conclusions noted in the let-ter are likely to call to argue their cases. Having the letter readily at onesdisposal will make handling of such calls much easier.

(b) DEBIT MEMO.

Require debit memos for payment deductions taken oninvoices.

(c) JUST SAY NO!

A small group takes the view that no invoice should bepaid until it is prepared correctly. This group of accounts payable profes-sionals is well aware that any time an invoice is not paid for the originalamount, but manually changed, the odds of a duplicate payment increasetremendously. Rather than put their companies at risk, they require an orig-inal corrected invoice.

1.12 GOODS IMPROPERLY ORDERED OUTSIDE PURCHASING

One of the areas ripe for overpayments (and duplicate payments as well)is that of goods ordered outside the purchasing umbrella. While it is


1.13 Nonpurchase Order Buying 13

sometimes appropriate for departments to order goods, many profession-als recommend that a purchase requisition be filled out at the time of orderto notify the accounts payable department of the upcoming bill. Purchas-ing may then create a purchase order and mark it as bill only

no

receiver forthcoming. Unfortunately, most people wait until the invoicearrives and then do an after-the-fact purchase order. This is a waste oftime and only serves to paper the file, to make the auditors think there arecontrols in place.

(a) WHY SHOULD A COMPANY CARE?

For starters, there is a big pricingissue. Most companies negotiate contracts with lower per-item prices totake advantage of the volume of goods purchased. When employees buysomething outside of this contract, they usually end up paying more for theitem than they would have if purchasing had arranged the transactions.Sure, it may only be a few dollars each time, but those few dollars have away off adding up real fast.

This type of ordering can also circumvent company pricing guidelines.If everything goes through purchasing, information can be accumulated soas to negotiate better vendor pricing.

(b) HOW CAN A COMPANY STOP THIS ACTIVITY?

Communication and man-agement backing is the key to eliminating this type of behavior. In order tomake sure that everyone abides by the ground rules, consequences mustdetermined, and then be paid, by those who go outside the proper channels.This, of course, is very difficult in the corporate environment; but perhaps acharge could be leveled against the personal bottom line of the executivewho is ultimately responsible. Or if a bonus is tied to bottom-line profit-ability, this might be an effective route. Getting such a policy implementedwill be virtually impossible for an accounts payable manager withoutstrong upper management backing. The accounts payable professional canspell out for management the actual effect of the purchases made outsidethe channel, if executives resist.

1.13 NONPURCHASE ORDER BUYING

There are times, however, when it is appropriate for a party other than thepurchasing department to acquire goods or services for the company. Theoverriding principle in such instances is that there be someone who is ulti-mately responsible for authorizing and monitoring such expenditures.



Check requests are the way most companies handle this issue. Theserequests should, however, be kept to a minimum. If complete coding infor-mation is required on the check request, accounting will have the necessaryinformation to include for complete vendor analysis.

1.14 ENCOURAGING OTHERS TO FOLLOW ACCOUNTS PAYABLES GUIDELINES

Many accounts payable departments have trouble getting the rest of thecompany to follow their payment procedures. To help with this, draft aneasy reference guide for all standard procedures, to make them not onlymore user-friendly, but easier to locate. Such a guide can help reduce theenormous amount of time spent educating other professionals in the orga-nization in the proper procedures for disbursements.

1.15 INVOICES WITHOUT INVOICE NUMBERS

An invoice missing an invoice number often leads to duplicate payments.Many accounts payable professionals, when paying an invoice with noinvoice number, simply make one up. While dummying in an invoice num-ber might make the system work, it does have its pitfalls, especially forthose who routinely use the date as their invoice number. A better way tomake up a dummy number is to include some unique identifier that refer-ences the vendor; for example, a combination of digits from the vendorsphone number and the date. And, when paying an invoice with no invoicenumber, check to make sure it hasnt already been paid to prevent makingduplicate payments.

Companies that are serious about avoiding duplicate payments on theinvoices that arrive without invoice numbers incorporate an invoice num-bering scheme into their processes. Such a scheme should be uniform anddesigned to ensure that duplicate invoice numbers are never assigned.Additionally, the scheme should be shared with everyone who might possi-bly have a need to assign an invoice number.

1.16 INVOICE AMNESTY DAY

One of the dirty little secrets in most accounts payable departments is thatinvoices with problems tend to disappear. Rather than pretending that this


1.17 Keeping Difficult Invoices from Disappearing 15

doesnt happen, successful department heads are introducing an invoiceamnesty day, free of finger-pointing and recriminations. Once a year, oninvoice amnesty day, each staffer is asked to clean out his or her desk andsubmit invoices that have been sidelined for whatever reason

no ques-tions asked.

By instituting an invoice amnesty day, you will be surprised at the num-ber of invoices that crawl out from under rocks. Such a move may alsoimprove morale as the hidden invoices often weigh heavily on staffersminds.

1.17 KEEPING DIFFICULT INVOICES FROM DISAPPEARING

Whenever an organization finds itself inundated with paper, some of it isbound to get lost in the shuffle. This is especially true if that paper requiresaction to be taken and the appropriate action is not clear. Accounts payableprofessionals handling difficult invoices fall into this group. Manyaccounts payable managers complain that invoices have a way of disap-pearing into never-never land. Some techniques in use today that minimizethis problem are:

Rotate desk assignments every six months or so

. It helps improvetraining and backup, prevent fraud, and brings a lot of potentialproblems to the light of day.

Have an invoice amnesty day

! With no questions asked, allow staff-ers to return all problem invoices to the manager. If there are norepercussions, staffers will feel free to return work they do not knowhow to handle.

Maintain a database of discrepant invoices

. When it becomes appar-ent that the invoice is discrepant, the processor can create an e-mailto send to the buyer. This serves two purposes: (1) You know whatkind of hidden liability you have out there; and (2) it requires pur-chasing to take ownership of the problem. The processor then filesthe invoice in a discrepant file until the buyer e-mails back that theinvoice is repaired and ready for payment. This allows the proces-sor to transfer responsibility and keeps the invoices out of theblack hole. Processors are also required to register their backlogeach week. (Obviously, if the processors do not comply, there willbe a problem.)



Do spring cleaning

. Sad to say, there is no method more effectivethan cleaning out someones desk in his or her absence. Although itmay be embarrassing at times, doing so nails the point home. Someaccounts payable clerks have a penchant for hiding problems andthinking they are resolved by keeping them out of sight. But keep inmind that desks, invoices, credit memos, statements, and relateddocuments are all company property, hence available for review.That said, assign each person one drawer for personal use and

never

g

o in that drawer.

Set up the desks uniformly.

Assign one place for statements, oneplace for problem invoices, one place for credit memos, and so on. Inthis way, you can tell at a glance how someone is doing just by look-ing at his or her desktop. This encourages the clerks to keep current.

Check the desks

. This approach is very controversial, as some feel itis an invasion of privacy. One accounts payable professional relayeda humorous anecdote about this issue. I had an accounts payableclerk (one of my best) tell me that she thought the rummaging ofdesks was intrusive, demeaning, and totally unnecessary. I eventu-ally promoted her to accounts payable manager. One of the firstthings she did was inspect the desks once she found out how manyitems were being hidden. The same clerk also said, There is nosuch thing as pending items. All that means is that nothing is get-ting done about the problem. Delete the pending file.

1.18 USING VENDOR STATEMENTS: THEORY

Vendor statements can be useful tools for accounts payable professionals,if used correctly. Used improperly, they can lead to duplicate paymentsdefinitely not a desirable outcome. Given the controversy and interest thatsurrounds their use in the accounts payable field, a review of best vendorstatement practices, as well as commentary from accounts payable profes-sionals who use vendor statements on a regular basis, is in order.

Never pay from statements is the mantra in many accounts payabledepartments, the reason being that statements often contain invoices thathave been paid or that have been issued and possibly mailed but notcashed. One variation on the never-pay-from-statements best practiceoccurs with those vendors that send numerous small-dollar invoices to the


1.19 Using Statements: Reality 17

company. Typical examples might include overnight delivery services,messenger services, and so on. In these cases, some companies havedecided to pay only from statements. Once a month, or week, or whatevertime period is appropriate, the vendor sends a statement and the companypays it. Any invoices received from statement vendors are discarded. Ven-dors whose payments are based on statements are never paid from aninvoice.

The other best practice regarding the use of vendor statements is to peri-odically request a vendor statement showing all activity. In this manner, theaccounts payable professional can identify any outstanding credits. Manysuppliers do not list credits on their statements unless specificallyrequested to include them. And, if companies dont know about a credit,they are unlikely to utilize it.

1.19 USING STATEMENTS: REALITY

Heres a look at how some companies are using statements:

To reconcile vendor statements

. This will make you aware of anydiscrepancies on your account. Sometimes invoices never reach theaccounts payable department at all. If you do not have an invoicethat is listed on the statement, call and request a copy. Also, thestatement will show a credit balance if a duplicate payment is made.Reconciling vendor statements has always been a useful tool.

Review statements for any items older than 30 days

. Assume any-thing fewer than 30 days crossed in the mail. Call for copies ofinvoices older than 30 days.

Use the evaluated receipt settlement, also known as pay-on-receipt.

The staff does not look at any invoices. Instead, target 100 of yourlargest and/or most strategic suppliers and reconcile these state-ments on a rotating schedule of 50 per quarter. Also reconcile othersuppliers as the need arises. Remember, some suppliers send astatement of only the outstanding invoices. No overpayments ofcash on account items are listed. Or you can request an aging ofyour account, and this usually lists all open items.

Review statements. Doing so helps maintain a quality relationshipand resolving issues.



As can be seen, reviewing statements is a worthwhile task and can paybig dividends when previously unknown credits surface. Identifying theseitems is one way that accounts payable can make a positive impact on thebottom line.

1.20 FILING: BATCH VERSUS ALPHA FILING

The need to quickly and easily research invoices, as well as route, pullvouchers with special attachments, and handle remittance stubs, all buildoff a process that can make or break your department. Ultimately, how youhandle the process essentially boils down to whether you want to use abatch or alpha filing system.

Some companies file invoices (with check copies attached) by vendor.This is a timely process that adds little value. Alternatively, if a good track-ing system can be incorporated into the accounting system, backup is notfiled alphabetically by vendor, but with the batch it was processed with.Then, should the backup be needed, a quick check of the system revealswhere the information is filed.

1.21 REDUCING THE NUMBER OF INVOICES

As anyone even remotely involved with the accounts payable function cantell you, payables departments are being inundated with an increasingamount of work. Companies acquire other companies, or simply expand,and the workload grows. Yet in many cases, the accounts payable departmentis expected to handle additional responsibilities with no extra staff. In fact, atsome companies they are expected to handle the increased workload with asmaller staff.

In the doing-more-with-less environment permeating most of corporateAmerica today, accounts payable professionals are adopting a variety oftechniques to reduce the number of invoices coming into their departments.

In most organizations, these initiatives are long-term projects andrequire approval from upper management. So before implementing any ofthe following initiatives, review your options: First decide which will notonly work in your organization, but are most likely to fly; only then begin acampaign to educate and implement.

(a) SUMMARY STATEMENTS. Most accounts payable managers are loatheto pay off a statement. They want an invoice that can be used for the


1.21 Reducing the Number of Invoices 19

three-way match. In fact, some wish they could eliminate statementsbecause occasionally they are used, in error, in place of an invoice, result-ing in a duplicate payment. However, there are circumstances when pay-ing from a statement makes a lot of sense.

If you do a good deal of business with a given supplier and most of thetransactions are small-dollar amounts, you might consider ignoringinvoices with that particular vendor. A number of accounts payable manag-ers report that, instead of paying many small invoices from the same ven-dor each month, they pay once a month from the end-of-month summarystatement. This can greatly reduce the number of small, bothersomeinvoices in the department. It also helps reduce errors, as small invoices arethe ones that tend to get paid twiceand are never uncovered.

It also makes things easier for the supplier. Instead of getting manysmall checks from your company during the month, they receive one largerone. And, if you are remitting to a lockbox, the supplier will save bankingfees. You might make this point when trying to negotiate such a deal. Inaddition, if your supplier knows when to expect that single check, it will bebetter able to predict its cashflow. By pointing out the benefits, you mayeven be able to get your terms stretched a little!

(b) CORPORATE PROCUREMENT CARDS. Perhaps even more bothersomethan many small payments to a few large vendors are many small paymentsto a wide variety of vendors. Most companies find that over 90 percent ofinvoices paid represent less than 10 percent of funds disbursed. In growingnumbers these companies are turning to corporate procurement cards. Useof these cards will drastically reduce the number of invoices sent toaccounts payable for processing.

This application will work with some of the large vendors discussed pre-viously in the summary billing section. If you can get them to accept creditcards, your life will be made quite a bit easier. Only one payment will needto be made to cover payments to a variety of vendors. And, best of all, thesepayments are typically made at the end of the billing period.

Most accounts payable professionals using these cards report that oncethe original reluctance to their use is overcome, the cards are embracedwholeheartedly. When management realizes that the strict controls that canbe imposed limit their exposure, they are more likely to go along. It is alsoa positive experience for employees who are empowered to use the cards.As card issuers continue to refine their cards, and solutions are found tosome of the accounting issues that cloud this usage in some corporations,



you can expect use of the cards to skyrocket. (See Chapter 24, PurchasingCards, for more details on this subject.

(c) EVALUATED RECEIPT SETTLEMENT (ERS). Evaluated receipt settlement(ERS), also called invoiceless processing, is a concept that a few companiesswear by and the rest avoid like the plague. ERS requires partnering withyour supplier and cooperation from both the purchasing and receivingdepartments.

The concept is simple: Normally, accounts payable waits for an invoice,matches it to the purchase order and receiving document, and then pro-cesses the invoice for payment if everything is in order. With ERS, theaccounts payable department simply mails the payment to the vendor atthe agreed-upon time if the purchase order and receiving document match.The invoice is never mailed or included in the process.

Obviously, this can be done only with vendors that agree to implementthis process. It also requires accuracy on the purchase order and in thereceiving department. Goods arriving from a vendor must be checked care-fully before receiving signs-off, as the receiving document will be the onlyone received from the vendor. Also, purchasing cannot be sloppy about fill-ing out its purchase orders; the POs must include the payment terms spelledout in detail. If you dont have your house in order, dont even considerimplementing this technique. (See Chapter 2, Alternatives to the Three-Way Match, for more details on this technique.)

(d) E-INVOICING. In growing numbers, companies are turning to elec-tronic invoicing, sometimes called e-invoicing or Web invoicing. This pro-cess removes paper from the accounts payable department; improvesaccuracy in the process, as human rekeying is eliminated from the process;and allows for tracking of the paper through out the chain. Thus, theseinvoices tend to be approved more quickly and paid on time. As a side ben-efit, e-invoicing helps companies qualify for a greater number of early pay-ment discounts.

(e) IMAGING AND WORKFLOW. Thanks to falling prices, companies thatjust a few years ago found imaging too expensive are now reevaluating it.This is not to say that this technology is cheap, but that it is now moreaffordable for certain organizations.

Those companies that have been most successful with imaging use itto scan an invoice into their system the minute it enters their door. The


1.22 Handling Bills with Remittance Advices 21

original paper document is never touched by human hands again. Theimaging system indexes the information, allowing for easy documentretrieval at a later date.

The necessary information is taken from the invoice electronically. Thisdrastically reduces rekeying errors. The document can then be passed aroundthe organization as needed, and can be accessed by different individuals anddepartments. Copying costs are eliminated and storage costs greatlyreduced.

The conversion to an imaging system can, however, be time-consuming.But it can also prove a valuable expenditure of time, as many take thisopportunity to review their current workflow processes and eliminateunnecessary steps. Employees will have to be retrained to use the newmachines, and some may be resistant to the changes. But once the systemis up and running, most are pleased with the results.

The accounts payable world is, as is the rest of the business community,changing quickly. It is no longer cost-effective to do things the way theyhave been since time immemorial. Anything that reduces the ever-growingvolume of paper crossing accounts payable managers desks is welcome.The techniques just discussed are a few of those sweeping accounts pay-able departments.

1.22 HANDLING BILLS WITH REMITTANCE ADVICES

Bills for services such as telephone and utilities often require that a stub besent, along with the check, so the receiving company can apply the pay-ment correctly. This is something that most accounts payable professionalsdo as a matter of course when paying their personal bills. However, it canbe a major time-waster when paying such bills for a company. Many com-panies have found solutions to this annoying problem, some of which maywork in your organization. They include:

Eliminate the process of sending payment stubs with your utilityand telephone bills. Reference the account number and the invoicenumber with the invoice date.

Contact the utility company and ask for a consolidated statement ofall accounts. Cut one check for all accounts and return the stubs tothe utility. This does not completely eliminate the problem, but itdoes limit the extent of the damages.



Use a subscription service. This technique works well for thoseorganizations that have many subscriptions.

Pay electronically. Some companies are starting to use automatedclearinghouse (ACH) debits for this process.


23

CHAPTER

2

ALTERNATIVES TO THE THREE-WAY MATCH

2.1 INTRODUCTION

As companies look to streamline their operations and eliminate nonvalue-added tasks, they turn their focus to the proverbial three-way matchdescribed in Chapter 1, Invoice Handling. The process can introduceerrors in situations where there were no problems, which is costly andtime-consuming. Few would object to spending time and money to makesure a large bill is paid correctly, but spending $40 to make sure a $425invoice is paid correctly just doesnt make good business sense.

Consequently, innovative professionals studying the situation devisedalternative solutions to address this issue. The obvious answer is to elimi-nate small bills. This is not as ludicrous a solution as it might appear at firstglance, and companies are switching to corporate procurement cards indroves as a means of eliminating small-dollar invoices. (The use of thesecards has become a leading topic of discussion among accounts payableprofessionals, one that is examined in detail in Chapter 24, PurchasingCards.) Assuming the invoices remain, however, companies are using atechnique called

assumed receipt

for small-dollar invoices and evaluatedreceipt settlement for both large and small invoices. Both require proce-dural changes.

2.2 ASSUMED RECEIPT

When accounts payable receives an invoice, it assumes that the goods havebeen received, and rather than go through the tedious three-way matchingprocess, the department processes the invoice for payment. Some also callthe approach

negative assurance

because copies of the invoices are sent to


24 Ch. 2 Alternatives to the Three-Way Match

the appropriate party, and if that individual does not tell accounts payablenot to pay, the payment goes out as scheduled.

A number of innovative companies are beginning to send the notifica-tion by e-mail rather than the traditional paper copies of the invoice. Whilethis approach may seem new to many, some companies have been usingthe process for several years. This technique is also sometimes referred toas

positive receiving

.

(a) HOW ASSUMED RECEIPT IS BEING USED.

As might be expected, million-dollar invoices are rarely paid without in-depth verification, even at compa-nies using assumed receipt. Most companies set guidelines for the verificationprocedure. For example, at one company, the policy applies to all invoicesless than $5,000 that do not have an associated purchase order (PO) or anyother preapproval mechanism in place. At Tandem, the policy applies to allnon-PO-based invoices of less than $1,000.

As part of the assumed receipt process, a system-generated paper notice,along with a copy of the relevant invoice, is sent to the person who orderedthe goods or services. The recipient then has 10 business days to respond toaccounts payable to indicate that the invoice should not be paid or should berecoded. If there is no response, the system releases the invoice to payagainst its payment terms. Some take this a step further and dont send cop-ies of invoices for amounts less than $500.

Another innovation is the move to an intranet/e-mail delivery of thenotice, with image availability of the invoice via the intranet/e-mail plat-form. With this mechanism in place, no copies need to be sent; but if therecipient had any questions about the item, he or she can view an image ofit on the companys intranet.

Not only does the policy allow accounts payable professionals to sim-plify and speed up the approval and payment process for small-dollarinvoices, it frees the staff to spend a higher proportion of their time manag-ing the payment of large-dollar invoices, which represent the bulk ofspending.

(b) DISADVANTAGES.

The major concern for most companies consideringsuch a program is the increased possibility of fraud. However, if good con-trols are in place and all participants regularly check the informationaccounts payable provides, the likelihood of this is minimal.

(c) GETTING STARTED.

Obviously, the first step in getting an assumedreceipt program up and running is to educate users. But because this is a



relatively new process, few in management will know what this entails.Thus, your first task will be to educate those who will ultimately make thedecision to go forward. A clear and comprehensive communication processacross the company is key to a successful implementation. Developing asystem-generated notice is also a critical step in the project implementationprocess.

Management is not the only group that will need to be educated. Onceyouve gotten the green light to implement the program, you will have tomake sure that all the participants understand the program and knowexactly what they are supposed to do. It wont hurt to point out how theprogram will benefit them, as well. To help in your efforts to educate allthose involved, gather information about other companies that have imple-mented this policy, regarding their experience and any associated risks.

And if your company is uncomfortable with this approach, use asmaller-dollar limit to start the process; and increase it later, as appropri-ate. Significant benefit could be derived from using even a $500 cutoff forthe policy.

(d) RESULTS.

How effectively do these programs work? Is there anincrease in duplicate and fraudulent payments associated with their use?One company using assumed receipt estimates that no more than 100 pay-ments (under $5,000) have been put on hold or removed from the system.There have been no instances of paying for merchandise that had not beenreceived (departments would have seen the charge on their monthlyaccounting statements). How does the company know this? It brought inan audit recovery firm in September 1996 to do up to a three-year study ofits accounts payable system. It stopped after reviewing only four monthsworth of invoices, stating that any further time spent would be wasted,since the firm found only one error, where the vendor had accidentally cal-culated an extra item into his handwritten invoice for $123. The accountspayable manager reports that based on the fact that check runs for thesefour months were in the tens of millions, and that this was obviously ahuman error, the company determined that its system was working verywell. Few would disagree with her.

2.3 EVALUATED RECEIPT SETTLEMENT

Whether due to reengineering initiatives or at the behest of a large and pow-erful customer, more accounts payable managers are being directed to adopt



evaluated receipt settlement (ERS), also known as

paperless invoicing

,

invoiceless processing

, and

pay-on-receipt

. Although most reengineeringconcepts will reduce the cost of processing an invoice, argues Mark Becker,a senior consultant with Soltec, they do nothing to eliminate the single larg-est inefficiency in accounts payable

the invoice itself.To illustrate the uselessness of the invoice, Becker poses the question:

What value does an invoice add to the procurement and disbursementprocess? In theory, this is true. It assumes, of course, that purchase orders(POs) are filled out completely and that terms of sale are included on thePO. For ERS to work, this is essential.

(a) HOW ERS WORKS.

The underlying principle behind ERS is simple.When a company receives something it ordered, it pays for it as agreed inadvance with the seller. Becker explains the concept in a little more detail,as follows:

A company agrees to purchase goods and services using a PO with establishedprices and terms. When the goods are received (or the service is performed), the cus-tomer makes payment without the need for the supplier furnishing an invoice. Thepayment to the supplier provides the remittance information, including the suppliersshipping document number (e.g., packing slip number, bill of lading number), whichreplaces the invoice number for cash application purposes.

It is imperative that both the purchasing and receiving staff understandthe importance of their functions should a company move to ERS. Packingslips must be verified and forwarded to accounts payable for matchingagainst purchase orders, which must be completely and accurately filledout. Any discrepancies or returns must be clearly identified on the packingslips. Without these two important components, any ERS initiative willmake more, rather than less, work for the accounts payable staff.

(b) CHANGES TO THE PROCESS.

Most companies that implement ERS haveto make some changes to their workflow. As readers may have alreadyguessed, ERS results in a two-way, instead of a three-way, match. This is abig timesaver that ultimately reduces the number of errors introduced intothe process.

The lack of an invoice number can present a problem, however, thoughinnovative managers have found workable ways to solve it. Many accountspayable departments that insist on an invoice number to pay have had suc-cess in using the packing slip number as the invoice number. Conversely,



other sellers that must have an invoice number have been successful inusing the invoice number as the packing slip number.

Pricing can be a key issue as well. ERS requires the establishment offirm delivered pricing on POs, says Becker. This means that miscella-neous charges such as pallets, setup, and tooling must either be eliminatedor factored into the items unit price by the supplier. This is a big advan-tage to accounts payable. Firm-delivered pricing eliminates all of thework associated with tracking and payment on miscellaneous charges,explains Becker.

With the emphasis on completed POs and accurate data, many accountspayable managers using ERS report a reduction in the number of problemswith suppliers.

ERS tends to be used more in certain industries than others. The auto-motive industry and all those industries supplying it are some of theformer. The implementation process is usually not as hectic or as complexas certain other process improvements. Soltec clients are successfullylaunching ERS pilot programs in three to four months, with as much as a40 percent reduction in their invoice-transaction volume, says Becker.Full launch for all suppliers is occurring two to three months after thepilot launch. Compare this with an SAP installation, which can take yearsand disrupt virtually the entire company.

(c) SUPPLIER RELATIONSHIPS.

One of the first steps in launching an ERSprogram is to evaluate supplier relationships. This is typically done by thepurchasing department, with little input from accounts payable. However,when it comes to setting up guidelines for the operation of the ERS,accounts payable managers should do everything in their power to beincluded in the discussions. Why? Because they are the ones who are goingto have to live with decisions are made

and work with them every day.One barrier to success of ERS is that, in their zeal to get ERS up and

running, upper management may cave in to unreasonable requests made bysuppliers. In fact, they may not even realize that the demands are unrealis-tic. If the operating procedures are not written with input from someonewho has in-depth knowledge of the way accounts payable functions, youmay find yourself saddled with procedures that are difficult, if not impossi-ble, to use.

When ERS is implemented properly, it can be a real boon to accountspayable. You will soon have fewer suppliers, and so will be able to developa closer working relationship with the chosen few. This will be a real ben-efit when it comes to reconciling payment discrepancies.



(d) OPERATIONS ACCOUNTING.

Once the program is operational, the on-going requirements often fall on the shoulders of the accounts payablestaff. Preparation of the remittance advice changes, as the information thatis normally included, such as an invoice number, is no longer available.Most companies faced with the dilemma of which identifier to put on theremittance advice go with the suppliers packing slip number. This allowsthe supplier that receives the payment to correctly identify and apply themoney.

Some suppliers, especially those that rely heavily on invoice numbers,will make the packing slip number and the invoice number the same. Otherinformation that may be present on the remittance advice includes: theshipping date, the discount dollar amount as per the packing slip, the grossdollar amount as per the packing slip, the net dollar amount as per thepacking slip, and the type. Additionally, the remittance advice may includethe following optional data: quantity received, unit of measure, unit price,item number, purchase order/release number, extended price for each itemreceived, receiving location reference, and sales tax.

This identifier should be selected when the program is being estab-lished, and should be comprised of information easily accessible to theaccounts payable department. This is the type of detail that is often over-looked when accounts payable is not involved in setting up the program.

(e) CORPORATE AND LOCAL PURCHASING.

When using ERS, correct andcomplete information on the purchase order is imperative. Unfortunatelyfor accounts payable professionals, although they must rely on this docu-ment, they have virtually no control over it. It is therefore crucial toimpress upon the top brass in purchasing the importance of filling out thepurchase order completely and correctly.

Accounts payable professionals will need to complete a thorough reviewof the purchase orders to make sure they contain all necessary information,including freight charges and one-time, lump-sum payments. They must alsocontain firm prices and timely price updates. Volume-sensitive pricing,prices quoted at market, and retroactive increases or decreases all must beindicated on the purchase order.

Working consistently with purchasing on this matter will put theaccounts payable professionals in the best position to make ERS work intheir company.

(f) SUPPLY AND MATERIAL CONTROL.

In many organizations, receiving doc-uments receive scant attention. The checking of the contents of a shipment



against the packing slips is not as thorough as one would hope for. When dis-crepancies arise because of this, it is the accounts payable professional who isstuck reconciling the differences. Once again, dependent on information overwhich they have no control, accounts payable managers find themselves inthe delicate situation of trying to get another department to do a better job sothat their own job may be a little less hectic.

Again, it is necessary to impress upon the receiving department theabsolute necessity of doing a thorough match of the goods received againstthe receiving documents. Otherwise, it is possible to pay for goods neverreceived. If at all possible, insist on having the receiving practicesreviewed during the planning phase for ERS. At that point, adequate con-trols can be installed if needed. Use Electronic Data Interchange (EDI)technology to record shipments whenever possible.

(g) AUDIT CONTROLS AND PROCESSING.

Whenever a new process is intro-duced, you can count on hearing from both your internal and external audi-tors. Thus, it is not a bad idea to invite them in at the planning stage sothey can voice their concerns and you can answer them. It is much easierto design a system taking these matters into account than it is to go backand jerry-rig the system to handle them. Moreover, they can alert you topossible Internal Revenue Service issues at the get-go. So, not only doesincluding the auditors early make them happier, they are less likely to tryto find holes in the system down the road.

Many who use ERS audit by exception and utilize sampling techniques,claiming that doing so substantially reduces auditing. This is a blessing tothe accounts payable staff, who traditionally spend untold hours pullingdocumentation for auditors. It is in the planning stages that parametersneed to be established to detect major errors. The likelihood of duplicatepayments is reduced with ERS as there is no invoice, and possible dupli-cate invoice, to pay.

(h) INFORMATION SYSTEMS.

Without a doubt, instituting ERS will forcechanges to your information systemssimply, it will not be possible toimplement ERS without making these changes. Review your current pro-cedures to de

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