Eliminating the Manual Procure-to-Pay Process Saves Money and Provides Visibility

Originally appeared in Site-K Construction Zone

Uncertainties in the economy, changes in equipment prices, and fluctuations in market expectations contribute to one result: managers of construction equipment and construction firm executives are under pressure to find ways to reduce expenses in order to stay profitable.

Much of what is in the news today is pointing to an economic slowdown in the United States late in 2020. While some sectors of the construction industry – warehouses, data centers, pipelines, and wind and solar projects – look like they will be strong, according to economists at Associated General Contractors, others like medical facilities and infrastructure (barring a well-funded government infrastructure initiative), may not fare so well.

The South is looking toward strong construction, while the Midwest will likely lag. In addition, construction costs are expected to rise again from their already high levels. Between June 2018 and June 2019 the price of construction equipment rose 5.8 percent and there is no sign that equipment prices will come down anytime soon.

Back-office processes are another factor that contribute to loss of control in spend management. Late invoice payments are one problem that seems to plague the construction industry more than it does other industries, in part because of the volume of paper-based invoices that are still the norm. A recent Rabbet study found that late payments cost construction companies $64 billion a year.

Saving Time and Money

While there is nothing construction firms can do to prevent the economic slowdown or even bring equipment costs down, changes in the procure-to-pay process can result in significant gains. According to Gartner, procure-to-pay (also known as purchase-to-pay) “is a fully integrated solution designed to support an end-to-end process that begins with goods and services requisitioning and ends with ready-to-pay files for upload into an accounts payable system.”

Unfortunately, many construction companies are still using manual processes in their accounts payable departments. If you have not done so already, now is the time to think about automating the entire procure-to-pay process. Doing so can reduce payables costs by up to 82 percent, process time by 70 percent and the exception rate by 50 percent.

A fully automated accounts payable solution takes electronic purchase orders from e-invoicing to approval workflows and ERP integration, all the way through to automated payments.

The Procure-to-Pay Process

The process starts with an electronic purchase order. If your organization is currently not using purchase orders, you probably are having difficulty managing employee spend and are seeing a lot of maverick spend – purchases that are outside of your established procurement guidelines.

A formal purchase order process leads to better management of budgets, order tracking and receipt of products and payments. An electronic purchase order is the first step in improving the efficiency of your procure-to-pay process. Automation allows the purchase orders to be matched to delivery receipts and invoices, meaning discrepancies are found and can be corrected before the invoice is sent.  This should eliminate, or at least curtail, exceptions once invoices are sent.

Here’s how an automated procure-to-pay process works:

  • Procurement generates a purchase order, which goes to the supplier, while a digital copy remains in the PO system.
  • When the goods are received, the person receiving the product enters the PO or packing list information into the electronic PO system to receive the goods.
  • An invoice is received and matched against original purchase orders and receipt of goods. Companies will need to set “workable tolerances.” If the match falls within the workable tolerances, it can be paid. If there is a problem, the e-invoice will be routed to the authorized person for further action.
  • Once the AP department ascertains that the invoice matches the PO and the receipt of goods, it will be submitted for approval and payment.

Three-Way Match Process and Cost Comparison

Ideally, you want a three-way match between the purchaser order, receipt of goods, and the invoice. Here’s what can go wrong with this three-way match when using a manual process:

  • AP receives a paper or e-mailed invoice before the goods are actually delivered.
  • In order to verify a match, someone has to enter certain information – PO number, vendor information or item code – in order to find the original PO.
  • If the data matches, the invoice can be sent on for approval and payment.
  • However, if the information does not match, the invoice cannot be processed and someone has to spend time and effort determining what the problem is. Only when the issue is resolved can the invoice be processed.

The end result of automation should be a reduction in days sales outstanding because invoice exceptions – one of the biggest reason for late payments – are virtually eliminated. Waiting for invoices to be paid restricts cash flow and can prevent a company from being able to purchase necessary equipment or supplies.

Best-in-class companies are processing 65.3 percent of their invoices straight through, according to a 2019 Ardent Partners report. The average company is only processing straight-through invoices 24.2 percent of the time, the report says.

The report also found that it costs the average company $10.08 to process an invoice, while best-in-class companies are only spending $2.18 to process an invoice.

Costs savings are not the only benefit of automating your procure-to-pay process. Automation also gives you 100 percent visibility of your invoices in real time. But perhaps most importantly, the reports generated by an automated system provide the information you need to gain greater control over cash flow and working capital.

Why Automate?

Here’s a look at the top five benefits of automating your accounts payable process:

Remove Paper

Paper is the bane of every accounts payable professional’s life. It has to be collected, categorized, sorted, scanned, copied, routed, processed, stored, and then retrieved later. Multiply that by thousands and you’ve got a costly, storage-intensive administrative burden that takes people, time, and expensive equipment to manage. Automation cuts out paper and plugs those resources drains fast. In fact, PayStream Advisors has found that the average cost of processing a paper invoice even higher than Ardent Partners and says it can be as high as $20, versus $4 for paperless invoice processing.

Eliminate Manual Tasks

Paper processes are touch-heavy; yet, even when you digitize the data, there are manual tasks slowing things down. For example, how many manual steps does it take to get invoice data into your financial system, ready for processing? And how many opportunities for error are there? AP automation software enables you to remove the need to touch and process all invoices.

Increase Speed and Eliminate Bottlenecks

When you automate the friction out of processes, you see the immediate improvement where problems typically occur further downstream in the workflow. You also get things like analytics transparency, better cash flow management, and better payment discount capture.

Access Instantly

When your invoices are spread across multiple locations in different departments, you don’t have a clear view of your payment liabilities.  The best accounts payable automation solutions receive and index invoice data digitally and make better cash flow forecasts, so you have instant access to the information you need in one central location.

Allows Benchmarking

You can’t have meaningful improvement without measurement. So take “before” and “after” snapshots of your performance and track the effects of automation on metrics like first-pass rate and number of exceptions and errors, as well as bigger trends like the percentage of paper invoices compared with electronic. Then you can report effectively to management, show tangible returns on investment, and replicate successes.

This feature appeared in the March 2020 issues of the ACP Magazines:

California Builder & Engineer, Construction, Construction Digest, Construction News, Constructioneer, Dixie Contractor, Michigan Contractor & Builder, Midwest Contractor, New England Construction, Pacific Builder & Engineer, Rocky Mountain Construction, Texas Contractor, Western Builder