Purchase-to-pay process consists of financial transactions with the suppliers in a supply chain. Purchase-to-pay process starts with the buyer making the requisition and ends with the payment to the supplier. The buyer makes a purchase requisition and it is passed on to the purchasing department for approval. After getting the approval of the purchasing manager, a purchase order is sent to the supplier. On receiving the purchase order the supplier dispatches the shipment along with the invoice. On receiving the goods, the firm checks the shipment and the invoice to confirm whether the shipment matches the purchase order and the product quality/quantity is as desired. Upon confirmation, the accounts department pays the supplier.
Some of the measures to improve efficiency of purchasing transactions are discussed below.
Focus on reducing processing time and costs
There are various ways of reducing processing time and costs in order to expedite the purchasing process. Firms should allow the buyers (an employee who is involved in purchase activities) to order goods, up to a certain permissible limit, without approval. This reduces the time and costs involved in routing and approving the purchase orders. In cases where the purchase requisitions are approved before the order is placed with the supplier, the approval again at the time of payment to the supplier should be eliminated to reduce the delay in the purchasing process.
- Use of Evaluated Receipt Settlement (ERS). In ERS, the buyer makes the payment as and when he receives the goods, thus eliminating the need for an invoice. On receipt of the goods, the buyer compares the packing slip and the goods with the purchase order, and the amount is calculated based on the price quoted in the purchase order. Then, the payment is made to the supplier. Thus, the firm pays the supplier for what it receives, and this reduces the time and costs in matching the invoices and the errors that occur due to repeated data entry.
- Use of electronic invoicing. Electronic invoicing (EDI, Electronic Invoice Presentment and Payment etc.) can reduce paperwork and processing costs. This can reduce the errors and disputes that arise due to manual processing.
A proper performance management process needs to be established to effectively measure the FTP process. This can provide some inputs to make the PTP process more efficient. There are two types of performance metrics in the PTP process: top down performance metrics, which measure the overall performance of the PTP process, and bottom up performance metrics, which measure individual or team performance. Top down metrics include percentage of payments made using checks and electronic payments, processing costs incurred, purchase order error rates etc. Bottom up metrics include time taken for processing each payment voucher, processing cost per invoice etc.
The metrics need to be aligned with the goals set by the firm. The metrics are measured against the goals set to analyze the extent to which goals have been achieved. The goals need to be based on industry benchmarks.
Automation of purchase-to-pay process
A firm can enhance the efficiency of the PTP process by automating it. Firms can implement an E-procurement system and streamline the purchasing process. But an E-procurement application can only improve the physical process of purchasing and not the financial processes. Many ERP systems contain various modules of PTP process that may help in the automation of financial components. Another application that aid the automation of financial processes is Electronic Invoice Presentment and Payment (EIPP) systems. EIPP systems enable the suppliers and buyers to exchange invoices, resolve disputes, and make payments electronically. Thus, these systems enable collaboration between supply chain partners. EIPP systems need to be integrated with the internal systems like procurement, ERP and accounts payable for effective functioning.
Outsourcing some of the components of the PTP process to a third party is an option that a firm can consider, to enhance the effectiveness of the PTP process. A firm has to identify the functions that can be outsourced so that cost savings or faster processing can be achieved. Many financial institutions offer cash management services like receiving invoices, check printing, dispute handling, reporting & analysis, managing international payments, electronic funds transfer, supplier management etc. In some cases the entire PTP process is outsourced. The benefits from outsourcing include reduction in processing costs. Outsourcing provides the firm flexibility and the ability to scale up the operations as and when needed. By outsourcing time consuming and routine activities, a firm can focus more on strategic functions and the personnel can be used for productive purposes. The risks involved in PTP operations can be reduced by sharing the operations with a third party.
Credit: Strategic Financial Management-MGU