Procure-To-Pay Optimization: Get your money's worth
Companies in today’s marketplace are facing an unprecedented level of global competition, uncertainty and emerging risks that could affect both their financial and operational integrity. Many are facing ongoing pressure to meet regulatory demands while cost-cutting and aiming to increase profitability. However, meeting the objectives above is proving more difficult when working with siloed systems and a lack of real-time data visibility.
Our blog discusses how to optimize procure-to-pay processes to identify the hidden costs causing a squeeze in your profitability, and the opportunities for further revenue based on more advanced operational procedures.
Obstacles for P2P optimization
The procure-to-pay process is essential to any business. Yet, many are overlooking the potential savings and value hidden within the process itself. In fact, nearly three-quarters of medium to large enterprises still use a form of manual invoice processing.
Full digital transformation is still a hard sell, despite the changes many businesses have made over the last two years. Companies with legacy systems, longstanding processes and a conservative culture may be reluctant to ‘fix what’s not broken’.
For others, making the leap to more streamlined processes is definitely on your radar, but the perceived cost to make the switch is too much, or the complexity of your existing processes makes it almost impossible to see a new way of working.
But in proceeding with some or all of the above, your business could be missing out on the monetary value driven by optimizing your processes.
The gap between procurement and accounts payable
In today’s business world, eliminating delays and bottlenecks from essential processes is crucial – if you want to maintain your market share and protect your company’s bottom line.
While many companies choose to isolate their procurement and accounts payable functions in separate teams, the data between them siloed, this isn’t viable once you begin looking forward to shift your focus toward value creation.
If upstream processes are separated from that downstream, true optimization cannot be achieved.
Benefits of P2P optimization – where is the cash hiding?
So how can you quantify optimizing your procure-to-pay processes into hard cash? By implementing ongoing improvements, you can refine your processes to reach their maximum efficiency and potential. Let’s look at the benefits of optimizing your P2P process below.
Research by Spendmatters suggested that mid-market companies can reduce 2-3% of their Spend through effective spending control and by implementing strategic cost control mechanisms.
There are three areas where you can control your costs directly:
- Budget: By ensuring that budgets are part of your procure-to-pay process, you can ensure spending is within the allocated budget. This way you can control overspending scenarios by requiring approval from finance. This can be put in place automatically by various software, like CloudTrade’s P2P solution.
- Category and spend based approval controls: Another way to control cost is to ensure that purchase requests are approved by the right person before the PO (Purchase Order) is sent to the supplier. Additionally, for large spending, you can ensure that purchase request is authorized by senior management. That allows further review and analysis.
- Cost avoidance through improved contract management: Companies lose a lot of money every year on automated renewals of the product or services, which are not required anymore. This can be easily solved by keeping track of all the contracts, including their expiration dates, and then a monthly review to ensure that you are at the top of your renewal cycles.
Putting process automation in place eliminates the need for human intervention for the likes of repetitive, tedious tasks. It also removes the need for human error and improves speed, since your software never needs to take a break. It can process at rates far faster and with less mistakes.
Reduced purchase order cost
The cost of processing a purchase order can vary from $35.88 to $500. (Procuredesk)
With automation, this may be reduced by 50%.
Reduced invoice processing cost
How much does it cost to process an invoice? We estimate that the average cost-per-invoice could work out to around $18.50 (£13.60), when you take into consideration how much time is lost doing the actual document handling in your business - and more importantly, the hidden costs around this process that results in a higher cost-per-invoice.
Invoice processing costs includes the time it takes to scan and enter the invoice into your accounting system, match the invoice with the purchase order, and then send for further approvals so that AP can pay the vendor (suppliers).
By simplifying the purchasing process and having vendors (suppliers) submit invoices electronically, you could reduce this cost significantly to around $2.20 (£1.60) per invoice.
Early payment discounts
Optimizing your P2P process means you can process documents faster, realising more early payment discounts. You’re ready to pay your vendors faster because your invoices get processed faster. Assuming you have agreed early payment discounts and sufficient cash flow to pay your vendors, you can reap the benefits here.
Avoid disruption costs
It is easy to quantify the cost of disruption both in terms of disruption to the business and the cost of expediting orders. All of this can be avoided with an improved P2P process. By optimizing the procure-to-pay process, you can ensure that orders are delivered on time, orders are acknowledged and delivery of items confirmed.
Reduce procurement costs
An optimized process enables the procurement team to increase the spend under management because they can now review the spend before the purchase order is issued. Also, an optimized process provides improved spend visibility to the wider team and decision-makers.
So once you know how much spend you have under management, you can easily calculate the savings.
The chance of fraud is significantly higher in the A/P process. Without tight controls and relevant checks in place at each stage of the process, someone can easily set up a fraudulent company and keep on paying small amounts over time.
It is hard to quantify the savings from preventing fraud, because you won’t know the extent of it until it happens. But with an improved P2P process driven by automation, you can program any issues to be flagged to your team for review, protecting your business from fraudulent activity from fake invoices, for example.
Unlock the real value in P2P to build a healthier bottom line, save hours processing invoices and purchase orders, standardize processes, and reduce waste & fraud.