The Fast Close, Part 7 (#22)
/In this episode, we discuss how the payables function can be streamlined, so that the time associated with it as part of the closing process is minimized. Key points discussed are noted below.
Payables is one of the larger logjams that gets in the way of a fast close. A lot of controllers – whom I would call overly cautious -- prefer to wait several days – sometimes up to a week – for every last supplier invoice to come in before they continue with the close. They do this because they’re afraid they’ll miss a large invoice and thereby report too small an amount of expenses in the income statement.
There are several ways to get around this problem, and which should allow you to close payables in just a few hours. The solution revolves around your comfort level with not waiting for supplier invoices.
Record Accruals
Your first (and best) solution is to create an accrual based on what’s come in at the receiving dock, and for which you have purchase orders. You can then merge this receiving and pricing information together to create an extremely accurate accrual. It’s usually best to create a custom computer report that generates this accrual automatically, so you don’t make any mistakes. And for that matter, a computer report also requires much less time to create.
OK, that was the easy accrual, since it was based on the receipt of hard goods. What about other supplier invoices for which you don’t have hard evidence of receipt, like services? There are a couple of solutions. One is to create a contract summary file that itemizes all payments that the company is contractually supposed to make each month. Then compare it to the invoices that have already come in, and accrue anything remaining.
Another option is to track supplier billings on a trend line, and simply accrue the average amount that is likely to arrive in the mail. But -- use this one with great caution, because the actual amount may vary lot from the average. In most cases, I choose not to use it at all, since larger invoices are your main area of concern – and those are almost always covered by contracts or purchase orders that will give you better accrual information.
Obviously, the solutions I’ve just mentioned involve lots of accruals, and that may not be something that you’re comfortable with, since accruals can be inaccurate. If so, I suggest starting only with those accruals that are based on hard receipt information and supporting purchase orders, where your accrual is bound to be right – probably to within a few dollars. Once you’re comfortable with that system, work your way down into other accruals that may be less accurate, until you reach a level of discomfort.
At that point, you’ll almost certainly have reduced your payables closing time by a fair amount. If you ever want to address the accruals topic again, there’ll always be a few more accruals to investigate.
Minimize Invoice Approvals
Now, there are some other problems with the payables system that can delay the close. One of the worst involves the approval of supplier invoices. Some companies send out invoices for approval before they log the invoices into the payables system, so the close has to wait until the various managers fish the invoices out of their in boxes and approve them and send them back to the payable staff. This can take weeks. A much more streamlined approach is called negative approval – this involves logging in all invoices as soon as they arrive, and then sending a notification to the approving manager that the payable staff is going to pay it unless they hear otherwise. Realistically, they almost never hear from the managers, and everyone is happy. Best of all, payables can be processed a whole lot quicker.
If you want to push this concept a step further, consider reducing the number of approvals needed, so it’s only for items that are really large and which don’t already have an authorizing purchase order.
Pay Based on Purchase Orders
Another technique for streamlining payables is to pay based on the information in the purchase order, rather than the supplier invoice. Under this approach, the computer system automatically sets up payments as soon as goods are received, so there’s no need for a supplier invoice at all. This system is called evaluated receipts, and it’s not available on most smaller accounting packages, so it’s really only option if you have a large ERP system, like Oracle or SAP.
Use Procurement Cards
A completely different approach to streamlining the payables system is to not use it all! Instead, bypass the whole thing for smaller purchases and use procurement cards to buy all of the low-cost items. This involves a whole different set of procedures and forms and training, but on the other hand, it really reduces the payables workload, and so makes it easier to close the books.
Use a Web Portal
And speaking of completely different approaches, consider that the main problem with the payables close is waiting for supplier invoices to work their way through the postal system to get to your company. So… how about skipping the postal system entirely? You can set up a web page on your company’s Internet site, and have suppliers enter their invoices directly into your computer system. This might seem a little demanding, but you could promise to pay them a few days early in exchange.
Parting Thoughts
Out of all the preceding suggestions, the main one is to use more accruals rather than waiting for supplier invoices to arrive. If you do that, there’s no reason why you can’t close the payables function in a few hours.