1. © 2011 Financial Operations Networks LLC Visibility: The Real Value of Automation David W. Hay Financial Operations Networks Tuesday, April 12, 2011

2. www.TheAPNetwork.com Page 2 Visibility In 1995, Baring Bank, London’s oldest merchant bank, was forced out of business through the actions of one trader who accumulated losses of $1.3 billion by speculating in the futures market

3. www.TheAPNetwork.com Page 3 Visibility (Cont’d.) The subsequent government report pointed out that many companies encounter similar problems: Lack of knowledge about what was happening in the business Lack of control Lack of accountability And above all, “lack of visibility into the practices of the business”

4. www.TheAPNetwork.com Page 4 Visibility and AP “So what has a rogue trader in a bank got to do with AP?” one might ask…

5. www.TheAPNetwork.com Page 5 Visibility In AP Another example: ―KPMG: auditors of a large property company found 50,000 invoices unaccounted for ―The auditors “were surprised at the level of backlog of invoices that had not been processed for a listed company”

6. www.TheAPNetwork.com Page 6 The two examples may be extremes, yet every day we make decisions based on incomplete information ―A few years ago I took over for a recently departed employee and discovered invoices totaling $187,000 in her desk….invoices that had not been accrued for at year end Visibility In AP (Cont’d.)

7. www.TheAPNetwork.com Page 7 For every example of the problems created by a lack of visibility, there are examples of how a proactive use of knowledge can add significantly to the bottom line

8. www.TheAPNetwork.com Page 8 Every week, supermarkets have between 6,000-8,000 items on sale. Unfortunately, customers are often faced with empty shelf space. Retail Example

9. www.TheAPNetwork.com Page 9 One major European-based chain solved this problem by allowing its suppliers online access to the information from POS systems in stores. This “visibility” allowed the suppliers to track sales and replenish as needed, eliminating stock outages. Retail Example (Cont’d.)

10. www.TheAPNetwork.com Page 10 A manufacturer in the computer graphics industry virtually eliminated finished goods inventory by basing production and parts ordering off the sales offices 30-, 60- and 90-day forecasts. Manufacturing Example

11. www.TheAPNetwork.com Page 11 Regulation Government regulation in the post-Enron and 9/11 era have made visibility into the financial operations of companies mandatory Sarbanes-Oxley requires that the CFO sign the financial statements of a company OFAC rules require that companies check that their customers and vendors are not on the restricted parties list

12. www.TheAPNetwork.com Page 12 Sarbanes-Oxley Section 404 Specifically requires management’s annual internal control report to contain: A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting A statement identifying the framework used for management to evaluate the effectiveness of internal controls Management’s assessment of the effectiveness of internal controls A statement where the independent auditor has issued an attestation report on management’s assessment

13. www.TheAPNetwork.com Page 13 Visibility and AP (Cont’d.) How can AP add value to the organization through visibility?

14. www.TheAPNetwork.com Page 14 The short answer is through automation. However, automation alone will not solve the problem!

15. www.TheAPNetwork.com Page 15 Automation and Process Change Before starting an automation program, first look at your current systems and reengineer to enhance business processes ―For example: Issue POs for all purchases Review master data file for duplicate entries, old vendors, etc. Review how approvals are handled: is it one over one, are $ limits set, can approvals be eliminated? —i.e. if a known vendor bills a similar amount each month then auto- approve, and audit occasionally Above all, have all invoices sent directly to AP, not the approver/buyer

16. www.TheAPNetwork.com Page 16 Paper Invoice Flow Departments or Locations Suppliers Invoices

17. www.TheAPNetwork.com Page 17 Paper Invoices Not Sent to AP Delays in process, invoices can take 20-35 days to reach AP This leads to: ―Lost invoices (7% according to Gartner) ―Duplicate payments ―Lost discounts ―Lack of accruals And above all a complete lack of visibility 80% of all errors occur with paper invoices

18. www.TheAPNetwork.com Page 18 Recommended Process Departments or Locations Suppliers Centralized AP

19. www.TheAPNetwork.com Page 19 Benefits of Centralized Model All invoices sent to a central point Allows for immediate entry to AP system ―Allows for immediate accruals ―Images can be created and forwarded for approval ―Discount capture possible ―AP had the information on hand to answer vendor queries ―And … The system can be automated!

20. www.TheAPNetwork.com Page 20 Automation

21. www.TheAPNetwork.com Page 21 Computers began to be used in businesses in the 60s and 70s ―Most were single function stand alone systems, and communication was limited to 300 or 1200 baud ―Visibility was through “print out” ―Very limited “ad-hoc” reporting ―No consolidation without manual creation Often through the use of spreadsheets No real increase in visibility Automation (Cont’d.)

22. www.TheAPNetwork.com Page 22 The introduction of ERP systems helped bring all information into one system so visibility would be enhanced Today many special purpose systems, such as AP systems, have been introduced to work with ERP or stand alone It is now possible for all relevant parties to access data in real time to enhance reporting and decision making Automation (Cont’d.)

23. www.TheAPNetwork.com Page 23 Key to an efficient automation solution is the work flow system. The work flow system will: ―Receive invoices from e-invoicing or scanning ―Route invoice to approver for action Can include hierarchy for management approval ―Contain business rules Example could be auto-pay for certain invoices ―Match invoice with PO or receiving ―Route problem invoices for action Automation (Cont’d.)

24. www.TheAPNetwork.com Page 24 Processing Details Process flow SSC or Scan/Capture Hub operators retrieve scanned image and indexing for matching with PO and GR Accounts Payable Process PO-Based Invoices Matched Invoices are uploaded to the relevant ERP system for final match and payment. Discrepant invoices are resolved by SSC Processors, referred to buyer or returned according to policy. Matched invoices are stored in SSC until scheduled upload to ERP Systems. VendorsUsers ERP Systems Pre Matched/ Approved Invoices Paper Invoices Email System Edi & File Invoices Scanning/Capture Hub Shared Service Center AP System PO & GR Invoice Matched YES Discrepancy Resolution Discrepancy Resolved YES Portal NO Contact Buyer or Return Buyer approval

25. www.TheAPNetwork.com Page 25 Don’t Forget Your Vendors Set up or source a vendor portal: ―Allow vendors to submit invoices ―Post payment information and RAs ―Built-in inquiry system, could be via email or chat ―Allow vendor to request early payment Additional enhancements could include: ―Post information on invoice process ―Delivery of POs and PO change information PO flip capability, where PO is converted to an invoice ―New vendor package ―Policy manual information

26. www.TheAPNetwork.com Page 26 Don’t Forget Your Users Post relevant documentation: Company policy documents T&E policy News and information about your own department Calendar ―Cutoff dates for payments ―Holiday schedules

27. www.TheAPNetwork.com Page 27 Technologies Solutions

28. www.TheAPNetwork.com Page 28 The Real Benefits of Automation Allows for full visibility into the entire PO-to- payment process Greatly reduced processing time ―Discount capture is possible ―Late payments reduced ―Lower costs Not only in AP costs, but the greatest benefit comes from a reduction in cost of materials

29. www.TheAPNetwork.com Page 29 In this model requester and buyers are: —Buying the same product from different vendors at different prices —Buying the same product from the SAME vendor at different prices AP is often the last to know when a new vendor is added Invoices Paper World

30. www.TheAPNetwork.com Page 30 Visibility with Centralized AP Full visibility from receipt of AP through payment Allows for full spend analysis and vendor management Discount capture possible All relevant parties have access to data SOX and audit goals met

31. www.TheAPNetwork.com Page 31 Visibility’s Biggest Benefit Spend analysis Allows for better pricing through volume discounts Reduce the number of vendors Supply standardization ―For example buying less expensive pens, paper, etc. Lets look at an example …

32. www.TheAPNetwork.com Page 32 Benefit Example Our sample company has: ―Sales of $250 million ―Profit before tax of $25 million ―Cost of goods purchased – 45% of revenue Many companies achieve a 10% reduction in price paid for goods and services ―In this example if 10% reduction is only 50% of spend, the return to the bottom line is $5.6 million

33. www.TheAPNetwork.com Page 33 Measuring Activity Use the information in your system to measure how you are doing against targets Decide what the key metrics are that you are trying to measure They could be: ―% of invoices backed by a PO ―Invoice errors ―Invoices received from unknown vendors ―Vendor calls received by AP staff

34. www.TheAPNetwork.com Page 34 Visibility… Accurate view of your key business metrics Red/Yellow/Green tolerances set by Administrator Today’s Date: April 12, 2011 Trade Discount Acquisition75%85%70% Cycle Time (Average Days)12 days10 days8 days Discrepant Invoices300220200 Number of Processed Invoices20,00027,50019,000 Supplier System UtilizationClick Here Invoice Match and Pay Metric DescriptionLast MonthMTDTargetStatus

35. www.TheAPNetwork.com Page 35 Benefits Summary The C-Suite has all the information they need to manage the business SOX and other regulations can be made Staff can make better buying decisions, enhancing the bottom line Improved vendor relations Improved internal customer relations

36. © 2011 Financial Operations Networks LLC Thank You!