Why Automate Payables and Receivables? Electronic Are More Accurate and Less Costly. (Financial Management)

By Hurt, Suzanne | Strategic Finance, April 2003 | Go to article overview

Why Automate Payables and Receivables? Electronic Are More Accurate and Less Costly. (Financial Management)


Hurt, Suzanne, Strategic Finance


Internet-based financial resource management (FRM) software will automate day-to-day invoicing, payments, and reporting-all the processes corporations and banks use to manage their financial transactions and cash. Yet these processes remain manual at most companies. Eighty-six percent of today's 78 billion annual enterprise payment transactions are still paper based, according to the National Automated Clearing House Association (NAGHA). Disputes over billing are lingering, bills are going unpaid, checks are still "in the mail." Accounts receivable departments are chasing money they should have collected months earlier. Accounts payable people are awash in paper. Treasury departments waste energy on mundane reports, phone calls, and paper processes.

When will electronic payment catch on? Gartner Inc. predicts that about 11 billion business invoices will pass between companies this year. With about four invoices for every payment, that's approximately four billion payments annually, with roughly 15% handled electronically, up from 12% in 2000. By 2004, 40% of business-to-business payments are expected to be made electronically.

Managing financial resources this way can change the outlook of one department as well as the bottom line of an entire company by getting money into the bank and putting it to work faster. Right now, U.S. companies spend more than $180 billion a year processing paper-based invoices, according to a Gartner study. When a company goes electronic, the cost per invoice drops to $2.50 from $5, and transaction time drops to one day from more than 40. That can mean millions of dollars in savings for retailers, service providers, or other bill-intensive organizations.

FRM software gives customers the opportunity to save money, too, by allowing them to qualify for discounts and pay more efficiently.

DISCOUNTED PAYABLES

GE has long been adamant about "electronifying" its payments. A Gartner case study about GE (Gartner CS13-4085, May 2001) reported that 70% of calls to GE's accounts payable department were from internal managers asking about the status of a vendor payment, with another 20% from vendors asking the same questions. Moreover, the company's staff spent over 50% of their time matching invoices to purchase orders and shipping receipts. GE financial managers knew there could be significant cost savings by replacing paper checks with electronic payments. Cash discounts from vendors for paying quickly would alone produce an estimated $2 billion a year.

Although GE had an EDI (electronic data interchange) relationship with some of their larger vendors, they knew they couldn't ask their mid-sized and small vendors to support an expensive EDI model. So they implemented a Web-based electronic invoice presentment (EIP) system, telling their suppliers that GE would pay in 15 days in return for a 1.5% discount if invoices were presented online using GE's EIP system. Invoices presented as paper would be paid in 60 days. Within a six-month period, more than 15,000 of GE's vendors, who represented 45% of the company's vendors, signed up for electronic presentment. During this same period, the company reduced its cost of payables processing by 12%.

Likewise, financial services companies use FRM tools to reduce their legal expenses by earning "fast payment" discounts. Legal e-billing systems cut invoice processing time by up to two-thirds, which means most companies can turn around a payment in as few as 10 days. The financial services companies earn the discount, while the law firms have fewer outstanding receivables and better cash flow. Legal e-billing also automates routine tasks, such as reviewing invoices for anomalies and mistakes. Companies can set thresholds in their legal e-billing systems to automatically catch errors--such as wildly high line items or mistakes in pay periods--that once forced payment administrators to pore over paper bills for hours. …

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