May 2010 Volume 2, Issue 9 Inside This Issue

In the News Sarbanes-Oxley and Small Businesses .........2 AP Answers Faxed Invoices .................3 TAPN Tools Project Proposal Report ...........................3 Did You Know? TAPN Resources ..............4 Continuing Education Opportunities........................4

ERS: Who Says AP Needs an Invoice?

Invoices are essential to the accounts payable departments success. They clearly tell AP what was purchased, the quantity, the price, and break out additional charges like delivery and tax. Without an invoice, AP would be unable to function, right? Wrong. While taking invoices out of the process can be a bit of a culture shock, it can bring significant cost savings. For example, purchasing cards help organizations eliminate the high volume of low-dollar invoices that can clog AP. However, things get trickier if you are an organization with a large volume of inventory invoices and your goal is to eliminate many of them. When you want to maintain the level of control you get with the traditional invoice approval process but want to cut out the invoice, consider adopting evaluated receipt settlement. ERS: The Essentials A traditional AP process relies on the supplier invoice to initiate payment. With evaluated receipt settlement (ERS), disbursements are based on records you generate internally. The fundamental question is how good are your records in the receiving and purchasing departments, says Chris Evanoff, Principal of consultant firm Soltec. ERS begins when the purchasing department sends a purchase order to the supplier. Purchase orders are extremely important in ERS. POs must include firm prices for goods, which are negotiated ahead of time by the purchasing department. Upon receipt of the PO, the suppliers customer service department will verify with the accounts receivable department that the price on the PO is correct. Customer service forwards the order information to the shipping department, who ships the goods along with a complete packing slip. No invoices are issued. When the goods arrive, the receiving department verifies the correct goods were received and enters the information into their financial system along with the packing slip number. Then, using the price listed on the PO and the quantity shipped by the supplier, a self-generated invoice (called a self-invoice) is entered into the accounts payable system. Finally, the self-invoice is paid based on payment terms included on the purchase order. This self-invoice eliminates the need for the supplier to submit an invoice, Evanoff says. Under ERS, we only pay for what we receive. Goodbye Mismatches ERS has several advantages over a traditional invoice process. Under ERS, theres no such thing as a mismatch, Evanoff says. Mismatches totally go away. In a traditional process, the accounts payable department encounters mismatches if the invoice price differs from what was on the purchase order, the received quantity differs from what is on the invoice, or a series of other problems. When these occur, AP is rarely able to address the matter themselves. Instead, they forward the invoices for approval. Approval delays are common, leading to late payments and missed discounts. However, with ERS discrepancies are addressed before the transaction arrives in AP. There are a series of quality checks at each step in the process to ensure the disbursement is ready to be paid when AP receives the self-invoice. These quality checks are performed at the following areas: Purchasing The importance of purchase orders in the ERS process cannot be understated. POs should include all costs to produce and ship the product, including freight charges. Evanoff says that only collect or pre-paid freight should

Does your company use Evaluated Receipt Settlement to pay any of your suppliers? Yes ................................... 20% No .................................... 48% What is evaluated receipt settlement? ............... 32%

TAPN Poll

Speech is conveniently located midway between thought and action, where it often substitutes for both.. John Andrew Holmes

The Accounts Payable Network

2100 RiverEdge Parkway Suite 380 Atlanta, GA 30328 Phone: 770-984-1184 Fax: 770-984-1174 membercare@TheAPNetwork.com

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The shipping departments primary function is to ship the order along with an accurate packing slip...

be allowed if you are paying that supplier via ERS. Your purchase orders must have firm pricing that cannot be affected by unexpected charges. All miscellaneous charges should be accounted for in the price stated on the PO. It is the purchasing departments responsibility to negotiate these firm prices and payment terms with the vendor, and to make sure that information is included on the PO. Because ERS can only work if there is a PO, it is best suited for inventory purchases.

supplier misses a discrepancy, then he is subject to eat the difference. While this policy may seem unfair to the supplier, the benefits of ERS are worth the risk. Besides, it makes the suppliers records better and ensures fewer discrepancies later in the process, Evanoff adds. Suppliers will make sure that everything is accurate upfront, rather than waiting until downstream to fix errors. Shipping The shipping departments primary function is to ship the order along with an accurate packing slip (some vendors will send a bill of lading or advanced shipping notice). ERS depends on a packing slip that states the purchase order number, a unique packing slip number, a full item description (including part numbers and units of measure), the quantity shipped and the same price per unit listed on the PO. In an ERS agreement, suppliers understand that not including a packing slip will likely impact their payment. Receiving Your organizations receiving department is the last line of

defense against inaccurate information making its way to accounts payable. Each day, the receiving department will review the packing slips on the previous days deliveries and make sure the orders are correct. If there are any issuessuch as an incorrect item shippedreceiving will contact the supplier. Shipping will then extend the price on the purchase order by the quantity of goods received, which becomes the final price. They will then enter the packing slip information into their accounting system. This information becomes the self-invoice that is forwarded to AP for payment. Accounts Payable By the time the self-invoice reaches AP, all thats left to do is perform a two-way match between it and the purchase order. Rare discrepancies can be solved by contacting the purchasing or receiving departments. There is no need to contact the requestor or other approvers. Because most financial systems require an invoice number, many departments use the packing slip number. Payment due date is based on terms established in the PO,
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In an ERS agreement, suppliers understand that not including a packing slip will likely impact their payment.

Supplier Customer Service Once the supplier receives the PO, their customer service department is responsible for ensuring the price, terms, and conditions stated on the PO are accurate. If there is a discrepancy, they should contact the purchasing department immediately via email or telephone to resolve the issue. Once customer service forwards the PO to receiving, the price cannot be altered. Under ERS, the message to the supplier is that there is only one price. The price on the PO, Evanoff says. This is the price that will be used to generate payment. If the

AP Monthly is a publication of The Accounts Payable Network, the complete resource for executives and managers responsible for accounts payable. TAPN provides deep and comprehensive resources to help you meet your accounts payable objectives and challenges. Annual Subscription: U.S. - $129.00 Canada - $159.00 All others - $229.00 VP & Managing Editor: Rob Rogers Editor: Patrick Harbin Production Editor: Mary Arnold

In the News
Sarbanes-Oxley and Small Businesses Sarbanes-Oxley may not find its way to small businesses. On Dec. 11, 2009, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009. Included in the bill is a provision to permanently exempt small businesses from complying with Sarbanes-Oxley Section 404(b). The focus of the bill is to establish a new consumer agency to regulate mortgages, car loans, and credit cards. However, Reps. Scott Garrett and John Adler added a provision to the bill that would exclude businesses with market capitalizations of $75 million or less from SOX. After passing in the House, the bill was forwarded to the Senate on Jan. 20, 2010. As of April 2010, the bill is still considered a piece of active legislation, but has not been voted on by the Senate. For now, small businesses are still expected to comply with SOX beginning June 15, 2010.

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with the clock starting on the receipt date. Other Benefits In addition to eliminating invoice exception routing, ERS can also cut down processing costs, streamline your pricing system, and speed up your time to payment. ERS reduces your processing time and cost by cutting out the traditional invoice approval process. Rather than routing invoices around the company for approval, you are making payments directly from receipts that accompany the goods. This also means fewer employees are needed for manual tasks like data entry and mail filing. According to Evanoff, one of the most significant benefits of ERS is discount capture. In most organizations, lost discounts are the result of slow invoice processing times. Because there is no exception routing in ERS, suppliers can be paid within days of the customer receiving the goods. Under ERS, there is no such thing as a lost discount, Evanoff says. Every purchase order that has discount terms will be paid upon receipt of goods.

ERS allows you to streamline your prices on inventory goods. Because ERS requires firm, predictable prices, you will no longer have miscellaneous charges on invoices that you didnt plan for. All extra charges are negotiated up front and included in the purchase order. Also, your suppliers may be willing to offer lower prices due to your ability to guarantee that all payments will be made within terms. Thanks to the efficiency of ERS, both the supplier and the buyer stand to benefit. Its one of the few processes that truly is a win-win, Evanoff says. When you look at the total savings, typically for every $5 you save, your suppliers save $1. Change is Needed Despite the benefits of using ERS, there are significant challenges organizations need to overcome. For example, receiving should be equipped to input the packing slip data into their receiving system, which must be fully integrated with your financial system, and generate a self-invoice. Meanwhile AP needs to be able to process the self-invoice.

Many organizations implementing ERS struggle with accounting for sales tax without an invoice. Evanoff recommends either registering to direct pay sales tax to the state (48 states offer this) or calculating the sales tax at the front end and including the amount on the purchase order. However, he adds its often a moot point since ERS is best suited for raw material inventory purchases, which are usually tax exempt. ERS requires little change on the suppliers side. The biggest changes involve configuring their billing systems to not generate invoices and instructing accounts receivable on how to process a payment that does not have a corresponding invoice. Evanoff says that if organizations are willing to change, then ERS can help them eliminate most of their incoming inventory invoices. It doesnt matter how big of small your company is, he says. The question is can you make payments to suppliers based on your existing records? If yes, then all you need to do is ensure that those records are 100 percent accurate.

TAPN Tools
Project Proposal Report Is there a process improvement that youd like to propose? Perhaps you want to implement accounts payable automation technology or change how your department is organized. Whatever your goal is, one of the hardest parts about a new project is getting started. Before approaching management, you need to gather information about the potential benefits and challenges surrounding implementation. This is where the project proposal report is useful. You can use this tool to make the case for your proposal to management. Find this tool in the Request For Proposal and Project Plan Templates section of AP Tools or at www.tapn.com/ RFPTemplates. For a detailed description of this tool, check out Start Your Improvement Project Right - Project Proposal Report on TAPN at www.tapn. com/ProjectProposal.

AP Answers
Q: What are your recommendations about faxed invoices? Are they acceptable or frowned upon? A: Generally it is not a sound practice to pay from faxes because it increases a companys risk of duplicate payments. Some companies do not allow payment from a fax copy at all, while some only allow it under certain circumstances. A good business practice is to pay only from original invoices, not from copies or faxes, nor from statements. This is not always possible, but policies should encourage this, and controls should be put in place for the exceptions. For example, if you are paying from a fax, require high-level approval and careful search of the vendor record by invoice number, amount and date. If payment from faxes or copies is allowed at all, also be sure to increase the control requirements on all invoices.

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Did You Know? TAPN Resources

ERS Resources
Evaluated receipt settlement is a radical departure from business as usual in accounts payable. Although less than one-fourth of organizations have implemented ERS, those that use it have seen significant benefits. TAPN features several resources to help your organization migrate some of its inventory purchases over to ERS. The feature article Evaluated Receipt Settlement provides an overview of the practice, historical context, and some implementation suggestions. Access this article at www. TAPN.com/ERS. Several AP Profile case studies include success stories with ERS. The most notable is Starbucks Coffee Company, which had to overcome some issues (such as their suppliers still sending invoices) before the program could truly grow. Access this article at www. TAPN.com/Starbucks. There is also an ERS category in AP Answers, with answers to common questions about processing credit memos under ERS and maintaining the integrity of your organizations audit trail. Access these answers at www.TAPN. com/APAnswers.

Vendor Master File

Accurate, complete and upto-date vendor master file information is essential to the success of your organization. TAPNs Master File Solutions Suite (MFS2)ensures the quality of your vendor master file. TAPNs partnership with Equifax leverages Equifaxs powerful database and data management services with TAPNs knowledge of AP processes and best practices to create the optimum vendor master file cleanse and append solution for accounts payable, finance and purchasing professionals. For more on MFS2 , visit www.TAPN.com/MFS2 or call 866-827-6389.

Continuing Education Opportunities

Earn CEUs for Certification
IOMAs Accounts Payable Automation 2010 When: June 9-11, 2010 Youre under more pressure than ever to cut costs! Attend this years AP Automation conference, and you will: Hear case studies from world-class AP departments and thought leaders Learn best practices for automating your AP department Gain insight into the new and exciting AP automation options now available Come away with more ways to save your company money! To register call us at 866-8276389 or visit us at www.tapn. com/KeyAutomation2010. Accounts Payable Risk Management Summit 2010 When: June 23-24, 2010 High-level training from your conference room Do you have a system in place to review and update your policies and procedures? Do you follow all of your policies regularly? Do you have a business continuity plan in place? Have you trained your entire financial team to be on the lookout for fraudsters in your organization? Do you have adequate internal controls in place to protect your organization and ensure accurate financial statements? This must-attend event is for finance professionals who want to protect their organization from risks that threaten AP departments. This 9-hour program covers: Risks associated with change management The importance of internal controls Information reporting and withholding Protecting your organization from p-card fraud Maintaining a clean and risk-free vendor master file How to create a disaster recovery plan The threat of check fraud to your organization Ways you can defend against vendor fraud

Earn AP Certification CEUs

To register for this virtual summit call us at 866-827-6389 or visit us at www.tapn.com/APRisk2010.

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