Outsourcing the accounts payable (AP) function has many benefits, in particular enabling organisations to streamline essential operational processes and be more efficient. As with many outsourced functions, AP often requires expertise and technology that necessitate significant capital expenditure if they are to be made available in-house, whereas a third-party specialist will have up-to-date systems and a team of experts experienced in using them.
Risks versus benefits of outsourcing
However, while there are many clear advantages, outsourcing also risks reduced visibility of the AP process.
What does this mean?
Finance departments handing their AP to a third party will do so with Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) in place, which will require the third party to provide metrics and performance reports so that adherence to service levels can be monitored.
These are a key part of the outsourcing process, but metrics and reports don’t show exactly what is happening throughout the process, and whether this is resulting in potential risks that are going unnoticed.
For example, accuracy is key when processing invoices, not only to ensure they all flow through the system and get paid on time, but also to reduce the risk of duplicate or erroneous payments. Making sure that all invoices and credit notes have been received and put on the system, and posting invoices on the right vendor account for the correct amount and currency, are all part of the daily process - but the stats don’t show how often mistakes are made and corrected, nor how often they are made but not rectified.
The lack of detailed visibility means an organisation outsourcing its AP cannot tell how accurate its process is beyond the dry performance data. This poor transparency means that issues cannot be identified, managed proactively and mitigated in the future. As a result it can be difficult to achieve efficiencies, therefore reducing the likelihood of negotiating lower costs from the outsourcing provider, as well as increasing the risk of payments made in error.
Because of this risk, a company needs to have controls in place with the outsource provider to ensure invoice processing is accurate and management information is available to identify risks and drive continuous improvement.
Supplier statement reconciliation
Supplier statements list the invoices and credits on each supplier’s accounts receivable ledger. Reconciling supplier statements is a way to check that the AP ledger is accurate and one way to resolve the visibility issue outlined above.
Supplier statement reconciliation ensures that all invoices and credits notes listed on the statement of account sent by the supplier have been received, that the correct amounts are posted and that nothing is duplicated. An invoice posted to the wrong vendor account for example can lead to the wrong supplier being paid and a duplicate payment being made to the correct vendor when it queries the non-payment of its invoice.
Reconciling supplier accounts prevents these errors by identifying discrepancies between the purchaser’s system and the vendor’s accounts. It also identifies payments that have been made but that have not yet been allocated by the vendor, as well as any discounts owing and returns that are still to credit the account.
Overall, supplier statement reconciliation results in supplier balances being accurate and sees that profits are maximised.
Unsurprisingly however, to achieve this level of accuracy is very time-consuming if it is undertaken manually, and this limits the number of statements that can be handled, and therefore the capacity to identify and rectify any issues that might be occurring offshore. Therefore supplier statement reconciliation is often not part of an outsourcer’s contract or it is only performed on a limited number of supplier accounts.
Furthermore, if supplier statement reconciliation is undertaken manually by the outsource provider then all the AP department will know is the number of suppliers’ accounts that have been reconciled; there will be no detail on how many and what type of errors were identified. Having visibility into the errors is key to understanding whether there are issues in the outsource provider’s processes that need to be addressed to mitigate the risks.
Transformation with technology
Automated supplier statement reconciliation transforms this traditionally labour-intensive process by deploying technology to do the ‘heavy lifting’ and comprehensive reporting to manage the exceptions and provide visibility of the exceptions. The result? A significant increase in the number of documents that can be checked, while the AP team can undertake higher-value tasks requiring human input and intuition. In particular, this includes managing the exceptions such as missing invoices and credits, miss-postings, duplicates and value discrepancies.
Transparency is improved, giving management teams greater visibility so they can quantify and resolve any errors. In other words, raising productivity enhances quality control.
Strong supplier relationships
Automating supplier statement reconciliation has a direct impact on the profitability of a business because it reduces both the need for third-party audit recovery of missing credits and the risk of duplicate and over-payments.
It also helps to build strong relationships with suppliers, who can be sent reconciliation reports, or log into their online portal, so they can see the status of their invoices at any time.
In turn, this cuts down the number of calls to the AP department, who can focus on proactively resolving exceptions. Recognised as a valuable business activity (rather than the manual data entry that is required if supplier statement reconciliation is not automated), this has a further benefit of motivating the AP team.
A better way to do business
Automated supplier statement reconciliation enables organisations to enjoy the benefits of outsourcing their AP function while retaining control and the capacity to drive improvements to controls to reduce future risk. This means that undertaking automated supplier statement reconciliation is also good for the outsourcing company, not least because it shows its commitment to the client and ability to provide a good service.
With vendor payments often being an organisation’s largest cash outflow, automated statement reconciliation is a better way for everyone to do business.