Accounts Payable (A/P) accountants very well know how the supplier invoice processing sucks most of their working hour. Consider the following common routines carried on daily basis:
- Registering and setting up new vendors on the system and physical filing folders;
- Receiving work papers (PO, receiving slip, invoice);
- 3-way matching the work papers;
- Routing invoices for approvals;
- Entering data into the system;
- Separating and expediting invoices that have discounts;
- Creating month-end accruals;
- Processing checks;
- Obtaining check signatures;
- Mailing payments to vendors; and
- Filing the check copies.
The routines leave the accounts with no time for analytic works. Not to mention the important expenses audit that are often left behind. Such situation is especially common in the small and medium business environment.
“So, Putra, what is the easy way to speed up the invoice processing without imposing the company to any risks?” a client once asked.
The answer is unfortunately “there is no easy way”. All of the above listed tasks are must done in that way to ensure sufficient control. EXCEPT, small purchases that the cost of carrying all those tasks exceeds the amount of the invoice, often referred to as “low-risk purchase” or “low-risk invoice.” The good news is that, in many instances, up to 1/3 of all payment transactions fall into the category, including my client’s. A company can change the approach on how to handle low-risk purchases to speed up the process thus results in lower cost of invoice processing in the company-wide level.
“How?” You may ask.
As far as I know, using “procurement card”—instead of issuing PO and write a check—is the most effective way to process such small purchases.
What is a Procurement Card?
A “procurement card,” also known as a “purchasing card” (abbreviated as “P-Card), is simply like a consumer credit card but numbers of extra features on it.
So, instead of using a purchase order or check to purchase something (which demands the traditional long-listed tasks above), purchasers instead use a procurement card for small and frequent purchases.
The procurement card is issued to those people who make frequent purchases, with instructions to keep on making the same purchases, but to do so with the card. This eliminates the plethora supplier invoices by consolidating them all into a single monthly credit card statement.
According to Bizdoz, the use of procurement cards has seen a dramatic rise in recent years with many government organizations now using them to reduce costs. For example In 2001 the Department of Defense (DOD) had 230,000 card holders with an annual spend of $6.1 Billion.
Another report titled “2005 Purchasing Card Benchmark Survey” by Palmer and Gupta (2007) notes:
- 2003 procurement card spend = $80 billion
- 2005 procurement card spend = $110 billion
- 43% of e-procurement transactions are paid via check
- By 2008 over 70% of all organizations will have a procurement card program, up from 60% in 2005.
The study also highlights that, “although these cards currently are not in widespread use, their popularity is growing.”
Traditional purchasing card transactions below $2000, the report reveals, grew 1.4% from 2003 to 2005. The most dynamic growth was in transactions from $2000 – $10,000 representing a 6.1% growth. A/P transactions fall within this range and can extend into the hundreds of thousands of dollars.
An organizations can use procurement card as a strategic form of payment in its accounts payable (A/P), instead of issuing PO and write a check for low risk purchase. Using the approach, the company can cut the cost of invoice processing in the company-wide level.
Why Using Procurement Card?
The use of procurement card is for sure attractive. Here are why:
1. It decreases numbers of purchasing transaction – A whole range of purchasing activities are reduced in volume, including contacting suppliers for quotes, creating and mailing purchase orders, resolving invoicing differences, and closing out orders.
2. It results in fewer invoice reviews and signatures – Managers no longer have to review a considerable number of invoices for payment approval, nor do they have to sign so many checks addressed to suppliers.
3. It minimizes petty-cash transactions – If employees have procurement cards, they will—somehow—no longer feel compelled to buy items with their own cash and then ask for a reimbursement from the company’s petty-cash fund. So, the use of procurement card reduces such tendency.
4. It results in less frequent cash advances – Employees often request cash advances and the accounting staff must create a manual check for that person, record it in the accounting records, and ensure that it is paid back by the employee. This can be a very time-consuming process. A credit card can avoid this entire process, because employees can go to an automated teller machine and withdraw cash, which will appear in the next monthly card statement from the issuing bank—no check issuances required.
5. It reduces supplier list – The number of active vendors in the purchasing database can be greatly reduced, which allows the buying staff to focus on better relations with the remaining ones on the list.
6. A/P staff is available for other tasks – Having fewer A/P transactions, when start using procurement card, some of the staffs may be redirected to other tasks—particularly analytical works.
7. It reduces mailroom volume – Even the mailroom will experience a drop in volume, since there will be far fewer incoming supplier invoices and outgoing company checks.
In addition, the payable staffs can contact a supplier, just before an invoice is due for payment, and see whether the supplier will accept payment of the invoice with a procurement card. By doing so, the company has just extended its payment interval (depending on the cutoff period for the procurement card), since it can now wait an additional period until the monthly procurement card statement arrives before making a payment.
Knowing the Procurement Card’s Features
A worth questioning on the use of procurement card probably is the possibility of getting misused by bad purchasers.
As there is always a risk of having bad purchasers purchase personal items (for personal use) with a cash advances or excessively expensive purchases by using credit card, the procurement card adds a few features to control precisely what is purchased. Here are two built-in controls a procurement card offers:
- Purchase Limitations – For example, it can have a limitation on the total daily amount purchased, the total amount purchased per transaction, or the total purchased per month. It may also limit purchases to a specific store or to only those stores that fall into a specific Standard Industry Classification (SIC code) category, such as a plumbing supply store and nothing else. These built-in controls effectively reduce the risk that procurement cards will be misused.
- Expenses Statement – Once the card statement arrives, it may be too jumbled, with hundreds of purchases, to determine the expense accounts to which all the items are to be charged. To help matters, a company can specify how the credit card statement is to be sorted by the credit card processing company. For example, it can list expenses by the location of each purchase, by Standard Industrial Classification (SIC) code, or by dollar amount, as well as by date. It is even possible to receive an electronic transmission of the credit card statement so that a company can do its own sorting of expenses.
Note: The purchasing limitations and expense statement changes are the key differences between a regular credit card and a procurement card.
In addition to the basic features, certain procurement card providers (issuers) even offer more detail data through which the company is able to do control activities on the transaction using the card, such as followings:
- Vendors’ Status Data – Certain procurement card providers (issuers) even provide what is called “Level II” data; this includes a supplier’s minority supplier status, incorporated status, and its tax identification number.
- Transaction Details – Another features to look into when reviewing the procurement card option is the existence of “Level III” reporting, which includes such line-item details as quantities, product codes, product descriptions, and freight and duty costs—in short, the bulk of the information needed to maintain a detailed knowledge of exactly what is being bought with a company’s procurement cards.
Though the use of procurement card is so much convincing to many organizations, but Thich Nhat Hanh ever said that, “good-and-bad, is an inter-are” which means, in this context, the benefit of using procurement card comes with the issues that require solution.
Overcoming the Challenge of Using Procurement Card
Susan Avery, in 2005, has stated that according to the Aberdeen Group purchasing card benchmark report, best practice purchasing card programs “do not confine” purchasing to the traditional spending of low-dollar, high-transaction goods and services, due to numbers of reason.
One hurdle in the A/P procurement card payment conversion is in the area of what is called “supplier enablement”—often referred as to “purchasing card supplier enablement” or “p-card supplier enablement”—on which every supplier must be contacted and informed of the payment change from check to the procurement card, even if the supplier is already a purchasing card supplier.
A collaborative research study by the First Annapolis Consulting and the National Association of Purchasing Card Professionals (NAPCP), in 2010, suggests:
“In terms of impeding an organization’s card program growth, 61% of end-user respondents reported that suppliers’ resistance to (or non-acceptance of) card payments is, at a minimum, somewhat of a problem. Not surprising, the transaction acceptance fee factor is overwhelmingly the number-one reason suppliers give end-users for resisting or not accepting card payments. Further, nearly 50% of respondents stated they sometimes or frequently encounter suppliers that impose a surcharge in conjunction with card acceptance. End-users employ varying approaches in response to the challenges; for example, educating suppliers on the benefits of card payments—a task that is often completed by program management and/or procurement staff.”
As of today, in 2013, banks offer help in the procurement card supplier enablement and many other software companies provide technology to make the conversion efficient and easy for the users.
The procurement card supplier enablement is mostly solved but, in a controller (like me) sight, the following issues must be carefully considered by the business owner in order to ensure that the procurement card program operates as it is expected:
1. Overcoming Procurement Card Misuse – When procurement cards are handed out to a large number of employees, there is always the risk that someone will abuse the privilege and use up valuable company funds on incorrect or excessive purchases. There are several ways to prevent this problem and reduce its impact. One approach is to hand out the procurement cards only to the purchasing staff, who can use them to pay for items for which they would otherwise issue a purchase order. However, this does not address the large quantity of very small purchases that other employees may make, so a better approach is a gradual rollout of procurement cards to those employees who have shown a continuing pattern of making small purchases. Also, the features of the procurement card itself can be set up either by limiting the dollar amount of purchases per transaction, per time period, or even per department.
2. Purchasing on Capital and Special Inventory Items – Capital purchases typically have to go through a detailed review and approval process before they are acquired; since a procurement card offers an easy way to buy smaller capital items, it represents a simple way to bypass the approval process. Thus, procurement card are not a good choice for capital purchases. The use of a procurement card can actually interfere with existing internal procedures for the purchase of some items, rendering those systems less efficient. For example, the use of an automated system linked to the inventory system that does not allow manual intervention, such as an automated materials planning system—adding inventory items to this situation that were purchased through a different methodology can interfere with the integrity of the database, requiring more manual reconciliation of inventory quantities. Thus, the use of procurement cards is not a good idea when buying inventory items.
3. Summarizing General Ledger Accounts – The summary statements that are received from the procurement card processor will not contain as many expense line items as are probably already contained within a company’s general ledger. For example, the card statements may only categorize by shop supplies, office supplies, and shipping supplies. If so, then it is best to alter the general ledger accounts to match the categories being reported through the procurement cards. This may also require changes to the budgeting system, which probably mirrors the accounts used in the general ledger.
4. Purchases from Unapproved Suppliers – A company may have negotiated favorable prices from a few select suppliers in exchange for making all of its purchases for certain items from them. It is a simple matter to ensure that purchases are made through these suppliers when the purchasing department is placed in direct control of the buying process. However, once purchases are put in the hands of anyone with a procurement card, it is much less likely that the same level of discipline will occur. Instead, purchases will be made from a much larger group of suppliers. Though not an easy issue to control, the holders of procurement cards can at least be issued a “preferred supplier yellow pages,” which lists those suppliers from whom they should be buying. Their adherence to this list can be tracked by comparing actual purchases to the yellow pages list and giving them feedback about the issue.
5. Paying Sales and Use Taxes – Occasionally, a state sales tax auditor will arrive on a company’s doorstep, demanding to see documentation that proves it has paid a sales tax on all items purchased. The requirement becomes a serious issue when procurement cards are used, because the sales tax noted on a procurement card payment slip shows only the grand total sales tax paid, rather than the sales tax for each item purchased. Please take a note. This is an important issue, for some items are exempt from taxation, which will result in a total sales tax that appears to be too low in comparison to the total dollar amount of items purchased. One way to address this issue is to obtain sales tax exemption certificates from all states with which a company does business; employees then present the sales tax exemption number whenever they make purchases so that there is no doubt at all—no sales taxes have been paid. Then the accounting staff can calculate the grand total for the use tax (which is the same thing as the sales tax, except that the purchaser pays it to the state, rather than to the seller) to pay, and forward this to the appropriate taxing authority.
6. Overcoming the Reluctance on the Banker Side – If one think that a procurement card is easy to implement (just hand it out to employees), she might be wrong. It is better to keep a significant difficulty in mind. In fact, the banks that issue credit cards must expend extra labor to set up a procurement card for a company, since each one must be custom designed. Consequently, they prefer to issue procurement cards only to those companies that can show a significant volume of credit card business—usually at least $1 million per year. This volume limitation makes it difficult for a smaller company to use procurement cards. This problem can be partially avoided by using a group of supplier-specific procurement cards. For example, a company can sign up for a credit card with its office supply store, another with its building materials store, and another with its electrical supplies store. This results in a somewhat larger number of credit card statements per month, but they are already sorted by supplier, so they are essentially a “poor man’s procurement card.”
7. Negotiating Procurement Card Rebates – Last but not least. If a company has shifted a large part of its purchases to procurement cards, then this represents a significant revenue source for procurement card companies. Once a company has built up a sufficient volume of procurement card business, it is in a position to negotiate for better terms with its procurement card supplier. One of the best such deals is to obtain a rebate percentage that is tied to the volume of payments made with a specific procurement card. Such opportunity is particularly available for a company that can surpass about $5 million per year in procurement card purchases. If so, then such company can bargain for a small rebate percentage that can increase as its purchases increase.
Although the problems are minor in relation to the possible benefits of using procurement card, they can lead into a failure. Therefore, realizing and then preparing the company to overcome the issue is the best.
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