In a competitive and ever-evolving marketplace where success can be measured in razor-thin margins, the cost of doing business is a constant concern for everyone from CEOs to interns. And for companies looking to cut costs while maximizing the Return on Investment (ROI) of every dollar spent, finding ways to marry modernization to smart, strategic spending is job one.
One of the most effective and efficient ways to achieve a stronger ROI is by automating the Procure-to-Pay (P2P) process. By connecting and leveraging information sharing between Procurement and Accounts Payable, P2P automation improves efficiency, reduces errors, and lowers costs. And there may never be a better time to implement a strong P2P solution for your business; a 2018 study by Levvel Research (formerly PayStream Advisors) found that just 19% of organizations surveyed have completely integrated, centralized P2P solutions in place. By understanding and tapping into the power of procure-to-pay automation, you can strengthen your ROI and position your company for maximum competitiveness and profitability.
What is Procure-to-Pay Automation?
Also known as purchase-to-pay, the procure-to-pay process is the manner in which companies and other organizations identify potential vendors, choose the best ones for their needs, order goods and services, then pay for them. It’s a process that naturally brings together two separate points of potential cost reduction for any modern company: Procurement and Accounts Payable.
The P2P process can be broken into a simple series of steps:
- Supply Chain Management. Creating, developing, and managing relationships with vendors to obtain favorable terms and pricing.
- Vendor Evaluation and Selection. Reviewing potential vendors to identify those likely to provide long-term value for the company via stability, reliability, and customer service.
- Requisition of Goods and Services. Creating and submitting for approval an official internal request for goods and services.
- Purchase Order. Generating the documents necessary to officially request from the vendor a specific amount of goods or services, as well as terms and conditions to be met by the vendor fulfilling the request. Some companies may use two- or three-way matching (connecting POs to Receiving Documents to Invoices) to simplify the verification process.
- Receiving Goods. Taking delivery of physical goods and documenting the details, as well as adding the items into the inventory management and accounting systems.
- Reconciliation. Reviewing the invoice received from the fulfilling vendor and comparing it to the original purchase order to verify all information is correct, including costs and fees.
- Payment via Accounts Payable. Processing the purchase order, submitting payment to the vendor, and adding the amount paid into the company’s accounting system.
Tackling this process manually—the standard in the days before widespread computerization—was tedious, time- and labor-intensive, and rife with potential for both costly human error and even costlier fraud.
“In addition to connecting your procurement team to your finance department, procure-to-pay automation takes what used to be a difficult process—squeezing maximum ROI from every transaction—and transforms it into a rich opportunity not just for cost reductions and reduced payment cycle times, but for data-driven strategic planning that guides efforts to build value at the enterprise level.”
Procure-to-Pay automation seeks to improve the entire process, and generate more value via reduced costs and greater efficiency, by streamlining your workflow through software-based centralization and artificial intelligence. Modern automation solutions pair well with or easily replace/upgrade existing enterprise resource planning (ERP) systems, and allow you to gain a wide range of benefits for every part of your business.
With automation software in place, the P2P process looks more like this:
- Purchase Requisition. A centralized catalog of approved goods and services, sorted by pre-approved vendors, lets staff choose the products (or services) they need and submit a request electronically. Each request is automatically added to the system’s central document library, tracked, and fully visible through direct access and search.
- Approval and Submission. Each request is automatically routed to staff with power to review and approve requisitions. The request is flagged at every step of the process, and reminders are generated if a request languishes too long at any one step.
- Purchasing. A purchase order is created, already linked to the request and approval, and submitted to the appropriate vendor.
- Receiving. Goods are received and the transaction is logged both in inventory and financial records. Order receipts, shipping documents, and packing lists are compared to the original PO and vendor invoice automatically, and errors and exceptions generate automatic alerts.
- Accounts Payable. Thanks to centralized, cloud-based data and document management, the payment process is much faster. AP staff can easily verify all relevant information for each transaction and issue payment with confidence.
Benefits of P2P Automation
In addition to connecting your procurement team to your finance department, procure-to-pay automation takes what used to be a difficult process—squeezing maximum ROI from every transaction—and transforms it into a rich opportunity not just for cost reductions and reduced payment cycle times, but for data-driven strategic planning that guides efforts to build value at the enterprise level.
1. Total Visibility
Every transaction is much more than just an expenditure: it’s a gold mine of information that can help you save money and meet your goals for process improvement as well as greater profitability. With a real-time procure-to-pay solution in place, you’ll be able to track every single transaction at every step of the procurement process. Human error will be greatly reduced, since the system automatically flags duplicate requests, outstanding invoices without a corresponding PO, and orders for items that are already be in inventory.
You can identify potential bottlenecks, develop new process flows to handle exceptions such as budget increase requests, and search, collect, and use information on buying patterns to identify potential process improvements. You can also identify opportunities to negotiate more favorable terms or pricing with a vendor, or create detailed and accurate budgets and financial reports.
A common problem in companies without centralized procurement, maverick spend (also known as tail spend or maverick buying) is death by a thousand cuts. Using only approved vendors, segregating purchase request, invoice approval, and ordering duties, and limiting access makes it much more difficult for staff to create invisible spend that eats into ROI.
2. Fraud Reduction
In an ideal world, no one would try to “get one over” on anyone else. But fraud is an unfortunate and very concrete “cost of doing business” that affects companies on a global scale. Adding centralized automation to your procurement function reduces fraud risk by drawing hard lines between request, approval, and purchasing powers, while also making it difficult for “phantom” vendor invoices sent by scammers to enter the system.
3. Better Supply Chain Management
As part of a larger automation suite, a P2P solution not only helps you manage procurement and financial data, but create a full database of knowledge for your vendors, too. Centralized document management, connected to your ERP system, makes it much easier to keep track of each vendor’s terms and conditions, current and potential discounts, and overall performance. Underperforming vendors can be rehabilitated or replaced, while those who offer the opportunity for long-term, mutually-beneficial relationships can be prioritized. It’s easy to see real ROI improvements through re-negotiated contracts that offer better terms and conditions as well as more favorable pricing.
4. Less Risk, Improved Compliance
Reducing a company’s exposure to risk is an indirect but very valuable aspect of ROI enhancement. Automation reduces or removes human error, fraud, invisible spend, and sub-optimal supply chain management from your procurement and accounting systems. It also allows you to generate accurate financial reporting documents, along with a fully detailed audit trail, for each transaction.
With a well-developed procurement solution that includes not just AP automation, but contract management and customizable workflow options, you can rest easy knowing your books are accurate, your vendors are meeting their obligations as well as your expectations, and every dollar spent is returning as much value as possible.
Get More Value from Every Transaction
Smart sourcing, a commitment to continuous improvement, and robust financial and data management are essential to earning the best possible return on your spend. These tasks are made infinitely easier with the help of P2P automation, freeing your procurement team and finance department to support your company’s strong bottom line instead of chasing costly problems that can damage it.
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