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Questioning the Cost of Purchasing

Questioning the Cost of Purchasing

Arena’s Neil Maude explains how to spot some commonly unrecognised and costly pitfalls in the way organisations source, purchase and pay for goods and services.

The tough economic climate has forced businesses of all sizes and types to identify savings. Sensible business leaders are taking a strategic approach, considering their processes and culture rather than implementing ad hoc cost-cutting campaigns that deliver little long term benefit to the bottom line.

The process of sourcing, buying and paying for goods (commonly referred to as ‘purchase-to-pay’ or ‘P2P’) is a good starting point. Often costly, onerous, paper-driven and lacking in transparency it can be difficult to control and use for informed decision making. Significant savings can often be made through combining a cost-conscious culture with an efficient P2P process that is supported by smart technology.

Below I've explained a few warning signs that could reveal some, possibly unexpected, problems.

Authority

Reviewing and authorising expenditure before costs are committed is essential in making sure that money is not spent unnecessarily, incorrectly or even fraudulently. Whilst you do not want to burden your workforce with excessive controls over routine and low value purchasing, you do want to know that management has reviewed and approved high value items.

Tell-tale signs that your authorisation process is not robust enough:

  • Invoices are received from suppliers without purchase order numbers or reference of authority
  • Your finance team frequently needs to seek approval for items that are already purchased ("spent control")
  • Managers are frequently surprised and unaware of items in the purchasing pipeline

Conversely, beware of over-controlling your purchasing policy. Regulation is good but a straight jacket is bad!

Transparency

Making sure that the right people have access to financial information is vital. Managers must be able to easily review committed costs to support budgeting, accountability and maintain healthy cashflow. This should not be restricted to last month’s paid invoices but include pending (approved but not yet placed) and open purchase orders plus outstanding purchase requests. Providing your managers with a detailed picture helps them to make quick and informed financial decisions, keeps projects running to schedule and maintains productivity by placing data at their fingertips - giving you a real competitive advantage.

Tell-tale signs that financial information is not accessible enough for your management team:

  • Behaviour: Look out for managers who often over spend; alternatively, those who seem over cautious and reticent about buying necessary resources to finish or start projects
  • Stalled projects: Often smaller items will have been purchased and the project will have started but problems arise when larger purchases cannot be afforded within the allocated budget
  • Management feedback: Finding out that managers are working on instinct, spending lots of time gathering data, guessing or roughly estimating their committed budget is a warning sign
  • What can you see? Can you access detailed information about your organisation’s entire cost pipeline - beyond last month’s financial statements?

Accounts Payable

Accounts payable is a key element in the P2P process but it is very dependent on the initial P2P steps - errors here can incur large costs. The crucial thing is to ensure your team can access sufficient information about what’s been purchased in order to do to a good job when an invoice arrives.

Tell-tale signs that you need to review your accounts payable procedures:

  • Large numbers of invoices are received without purchase order numbers. Costly time is spent verifying details and seeking retrospective management approval
  • Your team is manually matching the details of hundreds of invoices to purchase orders. This is time consuming, repetitive (especially when working with paper) and prone to errors
  • You are frequently losing discounts for early payment of invoices. This could be due to slow processes, poor visibility of cashflow and a lack of management resources for forward planning

In conclusion

No matter how well controlled your P2P process is, it is worthwhile questioning its efficiency and related costs. How easy is it for your employees to buy the resources they need? How long is spent filing and retrieving documents, searching for information and validating invoices? How easily can your managers budget, plan, forecast and authorise spending? Are your purchasing controls being circumvented or is buying delegated because the process is too cumbersome? How much does a transaction cost your business? These are all worthwhile questions to ask and you may be surprised by what you find.

Top signs that your P2P process is costly and inefficient:

  • Reliance on paper or electronic forms that are not linked to a database: Does your finance team spend a lot of time chasing approvals and recreating, filing and retrieving paper documents?
  • Frustrated employees: Are employees struggling to get what they need to do their jobs productively or to find information for accurate budgeting?
  • Supplier enquiries: Do you receive high numbers of calls from suppliers about incorrect or late payments?
  • Non-specialist purchasers: Are there people outside of your finance team who spend a disproportionate amount of time buying things for people?
  • Invoice volumes: How many invoices are received and processed each month by your accounts payable team? Could you reduce the average cost per invoice?
  • Payment lead times: Once an invoice is received, how long does it take to authorise?

Asking these basic questions can result in multiple outcomes, and most organisations find areas for improvement. Armed with this understanding, the introduction of technology can simplify P2P and help you to nurture a culture where employees recognise and buy into the need to follow correct procedures.

Next steps

There are several software applications currently available that can help with addressing these challenges. On the market there are some very sophisticated and expensive systems that can cover stock control and supplier management (SAP and Oracle for example) in addition to more basic day-to-day purchasing processes. These are commonly used by businesses such as large retailers, manufacturers and distributors. At the other end of the spectrum we find organisations working with costly, inefficient and paper driven finance processes that lack the support of a document management system. Middle ground options, developed for non-stock purchasing organisations - in particular those in the service sector - are noticeably absent.

For this reason, Arena has developed its own mstore for Purchasing software to provide a straight-forward and cost-effective solution that is quick to implement for rapid returns in the form of efficiency, productivity, visibility and cost reduction. Our experiences in indexing, archiving, storing and retrieving millions of purchasing documents at organisations such as 151 Products Ltd and AtlasFram Group has given us a unique insight into the challenges of developing efficient and practical workflows.

About Neil Maude

Electronic Document Management General Manager
Tel: 0800 863 8000 | Email: neilM@arenagroup.net

Neil joined the Arena Group in 2006 and has almost 20 years of experience in the electronic document management industry, working with both private and public sector customers.  Neil sits on Arena’s board of directors and manages the delivery operations of Arena’s EDM business.  His team spend their time developing software, implementing solutions for customers and providing after-sales software support services, both in the UK and internationally.

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