How Can E-invoicing Help Companies Manage their Financial Supply Chain?

The importance of integrating and streamlining supply chain processes is not a new concept; for industries, such as manufacturing, a tightly integrated supply chain has long been a key business objective. The financial supply chain still lags behind its 'conveyor-belt' cousin in terms of its own efficiency and cost. This oversight is starting to gain attention, however, as business owners and managers realise that there is money to be saved (or made, depending on how you look at it) in this area.

As traditional supply chain management continues to evolve, best-practice companies are now beginning to understand the benefits of including their financial flow as part of their overall supply chain.

Inefficiency of Paper

Electronic payment solutions exist today that can add significant financial and operational advantages for both the buyer and the seller, not only in terms of time-savings, but also in terms of cost, increasing visibility, and compliance with national and international accounting standards. Yet, for a variety of reasons, most companies today still manage their financial flows manually, using old-fashioned paper-based invoicing and payment systems. As a result, initiating, tracking, and reconciling these paper-based invoices and payments can end up being a significant part of a company's treasury costs.

The same is true for all of the other companies that are working together in the same supply chain. If all of these companies are using paper-based systems, it is extremely difficult to track accounts payable and receivable efficiently, and everyone loses out. Even where companies make an effort to match remittances with invoices for their suppliers, this approach requires a major amount of time and resources.

For any company, the key tenets of the finance supply chain are simple: suppliers want to receive payment quickly, and buyers want to know what goods have been ordered so that they can keep track of their cash positions. It seems an easy goal, and yet it remains elusive for many companies.

Benefits of E-invoicing

E-invoicing is increasingly being used as a way to reduce operating costs and improve treasury management. At its most basic level, e-invoicing is a business-to-business transaction in which invoices are issued and paid over the Internet. As companies continue to look for new ways to use the Internet to gain business advantage, e-invoicing stands out as an example of the kind of low-risk leveraging of online technology that can lead to substantial short-term return on investment (ROI).

But cost-savings are really only the beginning. Few people disagree about the potential cost savings of e-invoicing over a paper-based payment process, but early adopters also point to other compelling benefits, including improved customer and trading partner relationships. If any invoicing disputes can be resolved quickly (and via a more collaborative resolution process), the result is an overall improvement in customer service.

E-invoicing proponents have also experienced improved treasury management and cash forecasting, plus improved supplier spend information for strategic sourcing purposes, the reduction of debtor days, automation of invoice approval and payment (according to defined business rules), clearer visibility of the entire financial supply chain, and enhanced interaction with both customers and suppliers.

In addition, with electronic invoices, data accuracy exceeds all previous standards. There are no re-keying errors, and business rules can be put in place to reject invalid invoices (e.g. those without a purchase order number) as they arrive. This change marks a significant improvement.

Improvements to Supply Chain

In the typical financial supply chain, a supplier receives an order, sends out the goods (along with an invoice) by post, the buyer receives the goods and the invoice, the invoice is manually inputted into the accounts payable system, and then manually checked against the purchase order, before the invoice can be processed for payment. The inefficiencies in this system are obvious, before you even consider how many invoices are lost or delayed in the post, or incorrectly keyed into the accounts payable system.

The drawbacks of this model are obvious: paper invoicing is labour intensive, inefficient, error prone, outdated, and expensive. In fact, paper invoicing can cost between £2 and £10 per invoice in time lost due to postal delays, lost items, incorrect data entry on receipt, and multiple checks along the way. The delays mean that it can take weeks just to get the information into the buyer's computer system, leaving the buyer without a good view of its commitments in the meantime, and with the supplier unlikely to be paid on time.

With recent breakthroughs in e-invoicing, invoices can now be sent directly from the supplier's billing system and entered straight into the buyer's accounting system. This direct link means that invoices are received within hours of leaving the supplier, thereby eradicating the delays caused by post or manual data entry. With this model, the buyer also has a full view of forward commitments, making it far easier to report on invoices.

Regulatory Impact

There is another good reason for streamlining the finance function: compliance. The financial supply chain is now a critical component of risk management for the CFO and treasury. Treasurers are responsible for managing a growing level of operational risk within the business and for complying with recent regulation, such as Sarbanes-Oxley, which aim to improve transparency and accountability in business processes and corporate accounting.

Although regulations, such as Sarbanes-Oxley, regulate specific processes and business practices not technology, for most corporations today it is technology that defines and executes business processes. As a result, it is crucial that modern corporations fully understand how technology can be used to define and execute key business processes - including billing - since the choices made in this area will have a direct impact on their ability to comply with not only best-practice guidelines, but with legal requirements as well.

In Europe, the EU Invoicing Directive, which came into effect in January 2004, makes it clear that member states should accept the use of e-invoicing. This legislation has opened up the potential for data about payables and receivables to flow between (and within) companies, thereby allowing different computer systems to be connected together. As a result, companies can now receive data that is both accurate and timely, and in line with their specific reporting requirements.

The key to compliance with regulations, such as Sarbanes-Oxley, is having good internal accounting practices, appropriate internal controls, and transparency. It is no exaggeration to say that any organisation over a certain size must embrace the automation of repetitive business processes and eliminate paper if it is to meet the requirements of Sarbanes-Oxley.

Electronic invoices benefit from having an electronic audit trail, which not only speeds up dispute resolution, but also makes auditing much simpler and cheaper for all concerned. VAT accounting becomes easier and more accurate, and data is kept up to date, which means that a company can report on its position to internal and external audiences much more accurately.

Conclusion

E-invoicing is the way of the future. Buyers will benefit from an existing (and growing) global supplier network, as well as significant cost-savings and rapid ROI gained through improved processes. Other benefits will include better reporting and forecasting, improved cash flow management, support for corporate governance, and the opportunity to leverage existing investments in ERP and EDI. Suppliers who choose to bill electronically can also be assured of invoice delivery and immediate invoice processing (with fewer disputes), as well as cost-savings and improved cash flow.

Proponents are claiming that it's time that paper invoicing was phased out. As more and more companies begin to embrace a financial supply chain that actually adds value to the organisation, the days of old-fashioned, error-prone systems are numbered. When you think about it, why would anyone choose an out-dated financial system that drains key resources, wastes time and buries companies in unnecessary paperwork? It just doesn't make sense.

Article by Stefan Foryszewski is a Senior Vice President, Client Services and co-founder of OB10, the global e-invoicing network.