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ch03_4773.qxd 12/29/06 50 9:09 AM Page 50 Accounts Payable Best Practices A more responsible approach is to record late fees in a separate general ledger account that is charged to the accounting department. By summarizing all late fees in a single account, management can also see if late payments are a significant expense for the company—information that would be impossible to locate under the old system. The prime difficulty with this best practice is that the accounting staff does not like to document its own failures, and so might “accidentally” charge late fees to other accounts. Accordingly, have the internal audit department periodically test the payables recording system to ensure that late fees are being stored in the correct account. Cost: Installation time: 3–24 Issue Standard Account Code List Accounts payable can be a difficult area in which to replace employees while still experiencing high levels of productivity. The problem is caused by the time it takes a new person to learn the accounts to which invoices should be coded. Even when experienced accounts payable clerks are hired, they still must memorize the account codes, which will slow them down considerably. Even an experienced, long-term employee may occasionally misdirect a supplier invoice to the wrong account, so some solution is necessary to resolve the issue. The easiest way to resolve the problem is to reduce the chart of accounts (which can be a very lengthy document) down to a single page of key accounts to which invoices are to be coded. Most invoices can be applied to a very small number of accounts, so this is usually a very viable option. When the shortened list is posted at each accounts payable clerk’s desk, it becomes a simple reference tool for finding the correct account, which improves productivity while reducing the error rate. A more sophisticated way to resolve the problem is to encode the accounting software with an account number for each supplier. Under this method, the clerk does not have to worry about the account to which anything should be coded because the computer already contains the information. However, there are two problems with this approach. One is that some software packages do not contain this information, and expensive programming is necessary to install it. Second, the account code may change, depending on what the supplier is billing. Given the trend toward supplier consolidation, it is increasingly likely that a company will go to one supplier for a wide range of products and services, so that several account codes may apply to a single supplier. A simple list of approved account codes is an easy way to improve the productivity and reduce the error rate of the accounts payable staff, especially that of new employees. Cost: Installation time: ch03_4773.qxd 12/29/06 9:09 AM Page 51 3–25 Link Supplier Requests to the Accounts Payable Database 51 3–25 Link Supplier Requests to the Accounts Payable Database A significant task for an accounts payable person, especially one working for a company that pays its bills late, is to answer payment queries from suppliers. They want to know when their invoices were paid, the amount of the payments, and the check numbers that were issued. For a company that is seriously delinquent in its payments, this can be a full-time job for the accounting staff, which is also a clear loss of productive time. A recent innovation that largely eliminates verbal responses to suppliers is to have suppliers call a phone number that links them to a keypad-activated inquiry system that will answer their most common questions. For example, they can enter the company’s purchase order number, their invoice number, or the supplier’s name; the system will then respond with the specific payments made, the date on which the check was cut, and the check number. The system can even be extended to list the date on which payments are scheduled to be made. However, there are some issues to consider before installing an automated supplier response system. One issue is that this is a very recent innovation and most suppliers will not be used to it—they want to talk to a person and will deluge the company’s operator to voice this opinion. To quell this type of response, the system should include an option to exit the automated system and contact a person. This allows the more technologically versed suppliers to use the automated system, while other users can still talk to an employee. This option is also necessary for those cases where there are unusual circumstances. For example, a company may not be paying due to a lack of receiving documentation, or because the quantity billed was incorrect; it is better to discuss these problems with a person instead of a computer, since special actions may need to be taken to resolve the situation. The other problem is the cost of the installation. It requires an interface computer that links to the main accounting computer system, as well as modem access and software, to translate supplier requests into inquiries that the accounting database can answer. These costs can be considerable, especially when there are expected to be many callers and many requests for information. The price range typically starts at $20,000 for the smallest installations and can be many times higher for large systems. Nonetheless, this is a good approach for companies that feel they can bring about a major efficiency improvement by routing suppliers straight to the accounts payable database for information. An alternative to having suppliers access accounts payable information through a phone connection is to do so through an Internet site. This approach is somewhat more flexible than a voice-activated system that is generally limited to a few simple status messages. Instead, a Web page can itemize the exact status of each payable item, assign a code to it that explains the reasons for any delays, and note the name of the contact person in the accounts payable department who is responsible for processing the supplier invoice. It can also list any missing information that is delaying payment, such as a purchase order number or bank account number for the supplier, which can be entered by the supplier directly into the Web ch03_4773.qxd 12/29/06 52 9:09 AM Page 52 Accounts Payable Best Practices site, and which will be automatically loaded into the accounting database to assist in the completion of processing. The Web page may even list the name of the person who is responsible for approving the invoice, as well as this person’s contact information. A company may not want to add this last piece of information, since it can greatly increase the volume of phone calls to these people, who will in turn bother the accounts payable staff about payment—something that it is trying to avoid through the use of this Web site. Cost: Installation time: 3–26 Outsource the Accounts Payable Function Many controllers do not want to waste time managing such a mundane function as accounts payable. It does not directly contribute to the mission of any company, nor does it impact customer service. In short, it is a baseline clerical function that merely takes up management time with no particular payback. By off-loading this function to a supplier who specializes in accounts payable processing, a controller can reduce the management time devoted to this functional area and allocate more time to other more profitable company functions. Besides reduced management time, it can also be less expensive to outsource to a qualified supplier. A well-run supplier has an excellent knowledge of accounts payable best practices and uses that knowledge to drastically cut the processing effort needed. This is an especially attractive option for those companies that are in difficult financial circumstances and that would prefer to pay just a per-transaction fee, rather than an entire staff. This essentially converts a large fixed cost to a variable cost that will not be incurred if there are no transactions to process. Outsourcing accounts payable usually means that the entire company staff devoted to this work will be shifted to the supplier who is taking over the work, though it is also possible that the supplier will not need these people, or will ‘‘cherry-pick” only the most qualified. If the latter is the case, then the controller should meet with the staff to honestly appraise their future prospects with the supplier or to provide outplacement counseling. The supplier should also be available at these meetings to answer any employee questions, as well as to enroll employees in supplier benefit plans and to convert them to the supplier’s payroll system. Besides the staff conversion, the controller must also determine how to manage the supplier. This is not a case of handing the work to the supplier and then paying the supplier’s bills—on the contrary, some oversight will always be necessary to handle any problems that may arise, such as complaints from suppliers that are not being paid, verifications that discounts are being taken, and approvals of all payments prior to payment. These activities are most commonly handled at the level of an assistant controller, though the controller may manage the supplier directly if the transaction volume is minimal. In all cases, some continuing oversight by the remaining accounting staff is necessary. ch03_4773.qxd 12/29/06 9:09 AM Page 53 3–28 Shrink the Supplier Base 53 One should also consider the degree and form of ongoing interaction with the supplier necessary to ensure that accounts payable are processed correctly. For example, if a company has a fully integrated accounting and manufacturing software package, it will be impossible for the supplier to process accounts payable on its own accounting software, because these transactions must be completed on the company’s software package. The best way to resolve this problem is to give the supplier remote access to the company’s computer system, so that it can process accounts payable as though it were an on-site service. However, this arrangement will require an extra expenditure to train the supplier’s employees in how to use the system. Another option is to have the supplier perform only the most mundane accounts payable tasks, such as matching documents, and leave any data-entry or check-cutting work to the in-house staff. This option eliminates the worst drudge work from the function, while still allowing for greater control over it. Yet another variation is to allow the supplier to cut checks in payment of accounts payable, though this reduces some company control over cash flows. The best way to resolve the problem is to have company management approve check runs before they are printed and mailed. Clearly, there are a variety of approaches to the extent to which the accounts payable function can be outsourced. Cost: Installation time: 3–27 Outsource VAT Reclamations It is in the best interests of all countries that collect value-added taxes (VAT) to retain these remittances as long as possible, even if a company is entitled to a refund for various reasons. To this end, the reclamation process is not only long, but also varies from country to country. In many cases, a company does not want to go through the effort of reclaiming funds, choosing instead to ignore the problem. The aggravation of reclaiming VAT taxes can be shifted to a third party that specializes in VAT recoveries. Such parties usually charge a minimum fee per collection effort, as well as a percentage of the amount collected. Since a company would otherwise rarely collect the money at all, paying this fee is a reasonable way to reclaim VAT. Examples of VAT reclamation companies are Ireland-based Fexco (www.fexcotaxreclaim.com), Meridian (a subsidiary of PRGSchultz Inc., located on the Web at www.meridianvat.com), and England-based The VAT Clearinghouse (www.thevatclearinghouse.com). Cost: Installation time: 3–28 Shrink the Supplier Base Part of the job of the accounts payable staff is to maintain a complete and accurate database of suppliers, which typically includes address and payment information. ch03_4773.qxd 12/29/06 54 9:09 AM Page 54 Accounts Payable Best Practices If data is entered incorrectly, the accounting staff is usually notified by a supplier that has not received a payment (because it was sent to the wrong address), has been paid the wrong amount (because of an incorrect early payment discount rate), or has been paid at the wrong time (because of an incorrect due date). This type of problem is inevitable in even the best-run company and will require some time to research and fix. However, the problem is greatly exacerbated in a company that has many suppliers, because there are so many chances for the supplier information to be incorrect. Another problem with having many suppliers is that there is typically little control over adding new suppliers (after all, that is how there came to be so many suppliers in the first place!). The accounting staff must deal constantly with adding new data to the supplier database, consolidating supplier records that have been entered multiple times, and (especially) making a multitude of small payments to a plethora of suppliers. Wouldn’t it be much easier if there were just fewer suppliers? This is a best practice—reducing the number of suppliers. It is much easier to maintain accurate data in a relatively small number of supplier records, while there are few new suppliers to add to the database. In addition, the volume of purchases from the smaller number of suppliers tends to be larger, so there are typically fewer, larger invoices that can be keypunched more easily into the accounting database and paid with fewer, larger checks. Essentially, shrinking the supplier database reduces a variety of data-entry tasks. Unfortunately, shrinking the number of suppliers is not easy. The first problem is that the accounting staff must convince the purchasing staff to adopt a supplier reduction strategy, which the purchasing staff may not be so eager to pursue, especially if they prefer the strategy of sourcing parts from multiple suppliers. In addition, company employees may be in the habit of buying from any supplier they want, which can require a considerable amount of retraining before they are willing to buy from a much shorter list of approved suppliers. The effort required to reduce the number of suppliers is frequently far in excess of the productivity gains realized by the accounts payable staff, so most controllers do not pursue this best practice unless there is already either an active supplier reduction campaign in place, or else the head of the purchasing department appears to be amenable to the idea. Even then, a supplier reduction strategy does not take place overnight. On the contrary, it can take years to effect a massive cutback in the supplier base. Accordingly, this strategy should only be adopted when there is multidepartmental support for the idea as well as a long implementation timeline. Cost: Installation time: 3–29 Withhold First Payment until W-9 Form Is Received Within one month after the calendar year is complete, the accounts payable department must issue completed 1099 forms to a variety of business entities, detailing how much money the company paid them during the year. The IRS uses its copy ch03_4773.qxd 12/29/06 9:09 AM Page 55 3–30 Automate the W-9 Form 55 of this information to ensure that the revenue reported by the recipients is correct. The trouble for the issuing company is that many potential recipients do not want to report income to the government, and so will refuse to fill out a W-9 form or to supply a taxpayer identification number to the company. Thus, completing 1099 forms by the IRS-mandated due date can be a substantial problem. A simple way to avoid this issue is to withhold payment of a company’s first payment to a supplier until it completes and submits a W-9 form to the company. By doing so, the accounts payable staff avoids the year-end hassle of determining who receives a 1099 form. This step does add work to the check-processing function, but eliminates so much more work when the 1099 forms are issued that the extra labor is worth it. This best practice can put the accounts payable staff under some pressure from the materials management department if that group is trying to obtain rapid delivery of crucial parts from a new supplier who wants payment in advance. In most other instances, there will be little in-house opposition to this system. Cost: Installation time: 3–30 Automate the W-9 Form One of the more painfully manual processes in the accounting department is sending a W-9 form (Request for Taxpayer Identification Number and Certification) to suppliers, as well as tracking forms that have been completed and received from suppliers. The traditional approach is to mail a blank form to each new supplier, along with a cover letter asking that it be completed, and then store all returned forms alphabetically. The IRS provides the following guidance in regard to the automation of W-9 forms: “Requesters may establish a system for payees and payees’ agents to submit Forms W-9 electronically . . . ” The requester must make reasonably certain that the person accessing the system and submitting the form is the person identified on the W-9. Also, the IRS requires an electronic signature by the payee that authenticates and verifies the submission. In ascending order of automation, here are some alternatives for automating the W-9 process: 1. Include in credit application. The W-9 can be integrated into a credit application package, as long as the form clearly states that the W-9 signatory is not also approving of other demands listed elsewhere in the credit application. This tends to increase the W-9 response rate, but is still an entirely manual solution to the problem. 2. Fax transmission. This is the approach used by nearly everyone—fax the form and cover letter to the supplier, and hope it is faxed back. This approach eliminates the mail float associated with the traditional approach, but does not ensure that all fields are completed, does not result in an electronic record, ch03_4773.qxd 12/29/06 56 9:09 AM Page 56 Accounts Payable Best Practices and provides no automated method for tracking who has not returned a completed form. Still, it is sufficient for companies with just a few suppliers. 3. E-mail a PDF of the form. Go to the IRS Web site at www.irs.gov, click on the “More Forms and Publications” link on the left side of the page, locate the IRS’s official W-9 form in PDF format, and download it. Then e-mail it to suppliers. This approach will hopefully get the W-9 to exactly the right person, but still does not yield an electronic record or ensure that all fields are completed. 4. E-mail an electronic form. Use Adobe Acrobat Professional ($449 from Adobe, and somewhat less through resellers) to create an electronic form that can be e-mailed to suppliers, and that requires that all fields be completed. It can even be programmed to download the resulting information back into the corporate systems, though this takes some additional effort. 5. Direct suppliers to an electronic form. Create an electronic W-9 form on the company Web site, and direct suppliers to it. It will be necessary to issue a password to the supplier to ensure that an authorized person is completing the form. This approach does it all—it ensures that all fields are completed, creates an electronic record that can be easily integrated into internal systems, and reports on missing W-9 forms. The main problem is a considerable amount of custom programming, so it is cost-effective only for companies dealing with a large number of suppliers. Cost: Installation time: 3–31 Automate Payments for Repetitive Invoicing The typical company has a small proportion of invoices that arrive at regular intervals and are for the same amount, month after month. Examples of such payments are rent invoices or lease payments. These payments usually go through the typical accounts payable matching process, including searches for approval documents, before they are paid. However, it is possible to utilize their repetitive nature to create a more efficient subprocess within the accounts payable area. The simple best practice that streamlines repetitive supplier invoices is to create a payment schedule to bypass the approval process and automatically issue a check in a prespecified amount and on a prespecified date. This can be done by creating a table of repetitive payments in the accounting computer system; but there is no reason why the programming expense cannot be avoided by just listing the payments on a piece of paper and posting it in the accounts payable area. In either case, there is no need to look for approvals, so there is less labor required of the accounts payable staff. However, there are two problems. First, the repetitive payment schedule must note the termination date of each payment, so that checks are not inadvertently issued after the final payment date. These payments can be time-consuming when ch03_4773.qxd 12/29/06 9:09 AM Page 57 3–32 Install a Payment Factory 57 the supplier returns them, if the company even notices the overpayment at all. Second, the repetitive payments may change from time to time, so the schedule must note both the dates when payment amounts change and the amounts of the changes. For example, rental payments frequently contain preset escalation clauses, which must be recognized by the repetitive payment schedule. An especially fine use for repetitive invoicing is the remittance of garnishments to various courts on behalf of employees. In the case of child support payments, these garnishments may go on for years, and usually in the same amount through the entire period (unless the court orders that a different amount be withheld from time to time). Repetitive invoicing is quite useful here, because a company is liable to the court to make these payments, and can be subject to onerous penalties if it does not do so. By shifting the burden of making this payment to the computer system, there is less risk of not making the payment. Automating repetitive payments that occur in the same amounts and on the same dates is a good way to remove the approval step from the accounts payable process, though this improvement typically only covers a small percentage of the total workload of the accounts payable staff. Cost: Installation time: 3–32 Install a Payment Factory In a typical accounts payable environment, a company allows its subsidiaries to manage their own payables processes, payments, and banking relationships. The result is higher transaction costs and banking fees, since each location uses its own staff and has little transaction volume with which to negotiate reduced banking fees. An improvement on this situation is the payment factory, which is a centralized payables and payment processing center. It is essentially a subset of an enterprise resources planning (ERP) system, specifically targeted at payables. It features complex software with many interfaces, since it must handle incoming payment information in many data formats, work-flow management of payment approvals, a rules engine to determine the lowest-cost method of payment, and links to multiple banking systems. Key payment factory benefits include a stronger negotiating position with the company’s fewer remaining banks, better visibility into funding needs and liquidity management, and improved control over payment timing. The payment factory is especially effective when the payables systems of multinational subsidiaries are centralized, since cross-border banking fees can be significantly reduced. For example, it can automatically offset payments due between company subsidiaries, resulting in smaller cash transfers and similarly reduced foreign exchange charges, wiring costs, and lifting fees (a fee charged by ch03_4773.qxd 12/29/06 9:09 AM Page 58 58 Accounts Payable Best Practices the bank receiving a payment), while also routing payments through in-country accounts to avoid these international fees. There are several problems with payment factories—the seven-figure cost of the software, gaining the cooperation of the various subsidiaries who will no longer have direct control over their payment systems, and different banking relationships. Major suppliers of payment factory systems include SAP, Trema, and Wall Street Systems. How can you adapt the payment factory to a low-budget situation? First, centralize your accounts payable operations. Second, minimize the number of banking relationships. Third, try outsourcing the foreign exchange operations with one of your remaining banks. Cost: Installation time: 3–33 Eliminate Manual Checks The accounts payable process can be streamlined through the use of many best practices that are listed in this chapter; however, a common recurring problem is those payments that go around the entire preplanned payable process. These are the inevitable payments that are sudden and unplanned and that must be handled immediately. Examples are payments for pizza deliveries, flowers for bereaved employees, or cash-on-delivery payments. In all of these cases, the accounting staff must drop what it is doing, create a manual check, get it signed, and enter the information on the check into the computer system. To make matters worse, due to the rush basis of the payment, it is common for the accounting person to forget to make the entry into the computer system, which throws off the bank reconciliation work at the end of the month, which creates still more work to track down and fix the problem. In short, issuing manual checks significantly worsens the efficiency of the accounts payable staff. One can use three methods to reduce the number of manual checks. The first method is to cut off the inflow of check requests, while the second is (paradoxically) to automate the cutting of manual checks. The first approach is a hard one, since it requires tallying the manual checks that were cut each month and following up with the check requesters to see if there might be a more orderly manner of making requests in the future, thereby allowing more checks to be issued through the normal accounts payable process. Unfortunately, this practice requires so much time communicating with the check requesters that the lost time will overtake the resulting time savings by the accounting staff from writing fewer manual checks. The second, and better, approach, is to preset a printer with check stock, so that anyone can request a check at any time, and an accounting person can immediately sit down at a computer terminal, enter the check information, and have it print out at once. This approach has the unique benefit of avoiding any trouble with not reentering information into the computer system, since it is being entered there in the first place (which avoids any future problems with the bank ch03_4773.qxd 12/29/06 9:09 AM Page 59 3–34 Increase the Frequency of Check Runs 59 reconciliation). It tends to take slightly longer to create a check in this manner, but the overall time savings are greater. A third alternative is to make the process of creating a manual check so difficult that requesters will avoid this approach. For example, the request may require the signature of a senior manager or multiple approving signatures. In addition, the accounting department could charge an exorbitant amount for this service to the requesting department on the corporate financial statements. Further, a report itemizing all manual check requests can be sent to senior management each month, highlighting who is bothering the accounting staff with these items. Any combination of these actions should reduce the use of manual checks. Cost: Installation time: 3–34 Increase the Frequency of Check Runs The issuance of a manual check involves a great deal of extra work for the accounts payable staff, because they must perform a number of tasks that are normally spread over a much larger number of checks in the typical check run, plus handle the manual logging of the check into the computer system. If they forget to enter the manual check, then even more time is lost during the bank reconciliation process, when the check will appear as an exception, and must be investigated and reconciled. One way to reduce the number of manual checks is to investigate how many of the checks could have been included in the normal check run if there had been more frequently scheduled check runs. For example, if check runs are performed only on Fridays and a check request appears on Monday, could the person demanding the check wait a few days until a midweek check run, or would he still require an immediate payment? In many cases, adding one or two check runs per week will be more cost-effective than issuing a large quantity of manual checks. The correct solution will vary by company, depending on the volume and nature of each manual check request. An alternative approach is to shift the date on which check runs are completed, rather than increase their frequency. For example, what if most manual checks are demanded by the sales staff, who return from out-of-state sales trips on Fridays and want to be paid the following Monday? The solution may be shifting the standard check run to the end of the day on Monday, in order to eliminate these manual payments. Yet another alternative is to offer electronic payments if those requiring payments can wait until the standard pay date. Since an electronic payment clears the bank much faster than a check, this can be an inducement for those requesting checks to wait until the normally scheduled pay date. Cost: Installation time: