Tag: Finance | Page 2

Making money is the primary goal of any company—but earning is only half the battle. The other half is reducing expenditures that eat revenue. While overhead spending of up to 35% of annual revenue may be considered normal, this percentage is only relevant in relation to net profit. If you’re only looking at 5% profit after all is said and done, you need to rethink your spending strategy.

One of the first areas to look? Identify the inefficiencies in your process. No matter how much money your teams bring in, you can’t outrun a process that’s creating cash leaks.

Download the free ebook: How Automation Can Solve Finance Teams’ Biggest Challenges

Accounts payable (AP) is one of the best areas to start improvements. Traditional AP departments limp along with expensive challenges such as invoice exceptions, data entry errors, ineffective fraud prevention, lost cash, inefficient data storage, and slow processing.

Companies are turning to automated accounts payable procedures to eliminate redundancies and improve organizational efficiency. As of 2019, the AP automation market was worth $1.9 billion—and at a compound annual growth rate (CAGR) of 11%, the sector is projected to reach a valuation of $3.1 billion by 2024.

Demand for controlled user access, which helps reduce payment-related fraud, is one of the primary catalysts for this growth. However, the sector faces challenges such as a lack of awareness of AP process automation and digital literacy skills. As digital literacy and awareness of AP automation increase, the growth will only continue.

In this article, we will look at some key aspects of the AP process:

How the traditional accounts payable process works
What an automated accounts payable process looks like
The benefits of accounts payable automation

What is the accounts payable process?

Business operations are based on the flow of expenditure and revenue within a company. Accounts payable procedures manage the expenditure and purchasing side of things. Their primary function is to ensure company expenses are paid.

The AP process involves capturing data on invoices for all invoice formats (digital and paper), ensuring invoices are coded with the correct accounts and costs, matching the invoices to purchase orders, and processing the payments.

The manual nature of the traditional accounts payment approach increases the risk of human errors, redundancies, and time wasted. With inefficient processes, the procure-to-pay (P2P) cycle can take up to three months.

The consequences of inefficient accounts payable

Disorganization in the accounts payable process can lead to many negative business impacts:

Fines and late charges
Vendor relationship challenges
Employee burnout and turnover
Supply chain and distribution delays
Manufacturing and shipping disruptions
Credit and funding issues
Cash flow fluctuations

There are also other challenges with manual accounts payable processes:

Expense reporting and tracking
Susceptibility to risk and third-party fraud
Increased spending on AP team wages
Lack of data visibility
Communication delays
Payment exceptions

What does an automated AP process do?

An accounts payable team is responsible for collecting invoices, confirming three-way matching, and conveying payment. Due to the number of stakeholders involved, cycle times for purchasing and payment are usually long and riddled with challenges.

An automated accounts payable process eliminates the bottlenecks. Through automation, your accounts payable department benefits from increased efficiency and accuracy, cost savings, and reduced exception rates.

7 Major benefits of automating your AP process

Change can be hard, but it’s necessary. In a volatile economic landscape, enhancing efficiency in your accounts payable procedure plays a crucial role in your potential growth.

Here are seven key areas where AP automation improves the process:

1. Time savings

Time is money, yet nearly two-thirds of companies are throwing away AP budgets with manual processes. Automated processes make it possible to do more repetitive tasks with fewer AP staff hours. Many tasks can be converted into touchless processes through automation:

Scanning vendor invoice headers and line-item data using optical character recognition (OCR)
Routing purchases orders and payables through predetermined business processes
Handling three-way matching with no human involvement

2. Streamlined invoice processing

Approximately 3.6% of all invoices entered manually have errors or discrepancies. Through automation, your purchasing department can set internal controls that make its AP processes streamlined and accurate, requiring minimal oversight. This increased efficiency comes with several key benefits:

Virtually no human errors
Ease of budgeting, sending and receiving reports, and auditing and preparing financial statements
Reduced risk of overpaid, miscoded, duplicate, or late payments
Automatic exceptions flagging for invoice approval, review, and reconciliation

3. Greater operational control

With the traditional AP process, it’s easy to lose track of invoices due to miscoded documents or misplaced paperwork. With such limited operational control, business owners end up paying late fees for missing or delayed invoice payments.

Accounts payable software solutions eliminate these challenges in a few ways:

Automation: Creating automated workflows for accounts payable procedures eliminates invoice exception risks. Since everything takes place in the system, losing invoices becomes a thing of the past. The platform handles invoices in the order your team uploads them. The time saved through automation can instead be directed toward other activities that increase organizational efficiency.

Exception handling: With the process improvement that comes with automation, resolving errors in vendor payments is easy and fast. If there is a problem with a particular invoice, the system will automatically flag and reroute it to the appropriate person immediately.

Risk avoidance: Fraud is one of the primary risks of manual payment processes. Identifying fraudulent invoices is an elusive task, as is rectifying them once an incident occurs. A manual system makes it difficult to conduct thorough audits. In an automated accounting system, all the necessary invoice data is in one place. Unverified or suspect payments are easier to identify and investigate.

4. Discounts on early payments

Delays in the accounts payable approval process lead to supplier fines. Conversely, timely payments result in discounts. While 42% of respondents to a recent study cited early payment discounts as a top priority, achieving this objective with a manual process is nearly impossible.

An automated AP process streamlines invoice processing, allowing you to take full advantage of early payment discounts.

5. Integration solutions

Operational efficiency is improved when your procurement function integrates with your larger tech stack. Through integration, accounting can share data with other vital systems such as financial planning and analysis (FP&A) tools, enterprise resource planning (ERP) systems, and other internal databases.

6. Increased productivity

Talent plays a significant role in the success of a company. Organizations look beyond credentials to pursue innovative personnel with leadership qualities that can help steer the business forward.

In building a modern procurement team, creating an environment that maximizes each member’s potential is essential. AP automation solutions remove redundant processes so team members can focus on core business functions to increase revenue.

7. Improved vendor relationships

Delays in the processing and payment cycle lead to difficulties with supplier relationships. An automated accounts payable process improves supplier relationships in several ways:

Helping you adhere to payment schedules and supplier payment terms
Enabling invoicing through email, electronic delivery, or paper
Automating renewals and enabling lifecycle evaluations

Next steps to automating your accounts payable process

An automated AP process benefits you and your suppliers. The AP process is fast and accurate when teams use automated accounting software, saving time and avoiding potential losses from fraud or duplicate payments. For your suppliers, efficiency eliminates delays for accounts receivable. Automation ensures strong, long-term relationships with your most important suppliers.

To learn more about using best-in-class accounts payable automation software to increase operational efficiency, download our Operational Efficiency Handbook.

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Procure-to-pay (P2P) is the process an organization uses to source, negotiate, purchase and pay for goods and services. A powerful, effective procure-to-pay (P2P) cycle is critical for your business.

As Forbes Councils Member Peter Nesbitt notes, the way companies spend money has changed dramatically over the past several years. Businesses no longer rely on a top-down model for purchasing and spending. As a result, P2P cycles and technology have changed dramatically.

A well-crafted procurement process is an enablement tool for teams. It reduces friction in the supply chain and speeds the delivery of products to market. But the traditional procurement model—driven by manual processes and limited visibility—is no longer sufficient for driving growth.

Download the free ebook: The Procurement Strategy Playbook

Using technology to optimize procure-to-pay (P2P)

Thanks to next-generation P2P technology, meeting your financial goals and tracking your spending at scale are easier. These systems enable classification and analysis capabilities critical to managing business spending and reducing costs. They reduce value-sapping maverick spending, improve your functionality, and ensure your accounts payable team is focused on the right tasks to create value.

We’ll discuss:

The components that make up the procure-to-pay process
Best practices for increasing operational efficiency
How to implement next-generation technology

What are the steps in the procure-to-pay cycle?

The procure-to-pay process includes all the steps necessary to purchase materials and services for your organization. It begins with a purchase request and follows a predictable (and trackable) path to invoice approval and payment.

The 7 steps of a P2P process:

Identify needs: In the initial steps of the process, a stakeholder identifies a product or service they need. Depending on the need, they may outline requirements for the procurement department.
Requisition materials: The stakeholder submits a purchase requisition. Department heads and Finance sign off and approve that requisition so that Finance or Procurement can move forward with the purchase.
Source the materials: Effective sourcing is critical to ensure that you have a solid supplier who will offer your business the best possible deal on your goods.
Create a purchase order: Upon approval of the purchase and sourcing, the Purchasing team or stakeholder submits a purchase order to begin the transaction. This is routed to the supplier for fulfillment.
Receive the goods: Once fulfillment is complete, accounting conducts the three-way matching process to ensure the ordered goods and actual deliveries align. The financial team will ensure that no discrepancies exist that could cause problems with the process.
Approve the invoice: Once reconciled, Procurement teams approve the vendor invoice for AP processing.
Pay the vendor: The vendor gets paid for their services based on the terms of the contract. Post-payment, the accounting team may implement contract management and analysis. This is part of the supplier lifecycle management process.

Best practices for your P2P cycle

Rather than just checking the boxes, routing the request, and moving forward without attention to detail, take the time to optimize your P2P process. Ensure the best tools and processes—namely, procure-to-pay software—are in place to manage your P2P cycle effectively.

The best P2P management practices usually include:

A documented intake or requisition process
An approval process with a standard list of approvers
Budgetary review through finance or procurement
A strategic sourcing program to identify the best suppliers
Negotiating and contract prerequisites for each purchase
Purchase order review and shipment reconciliation process
Centralized vendor payment and contract management

Procure-to-pay software increases the effectiveness of a well-executed purchasing process. It simplifies the overwhelming process of managing the sourcing, purchase, and payment of goods and services.

Using software is the best way to create a scalable solution that grows along with your company. Even better, P2P software often results in net savings well above the investment in automation.

P2P software automates many repetitive tasks that bog down your purchase-to-pay process, including:

Vendor sourcing and selection
Purchase requisition and purchase order approvals
Invoice approval and invoice processing

5 goals to strive for in your P2P cycle

These best practices improve the procure-to-pay process flow and realize better cost savings for your organization. Identifying your desired outcomes of a program—whether its streamlining operations, increasing cost savings, creating scalability, or improving inventory management—helps you make decisions about your program.

1. Increase visibility in your purchasing process

Visibility is critical in tracking the success of your procure-to-pay cycle. It enables your stakeholders to track each purchase through the process. It also creates an audit trail and a source for data reporting.

Order.co provides real-time spend data, coded down the line, product, user, or location level. This data helps your finance team make critical decisions about your purchases. This next-generation visibility—which offers insight into the latest changes in your inventory, availability, and purchases—helps your finance team and other decision-makers see and adjust to changes in your procurement function. It ensures that you’re buying what you need, with competitive pricing and high levels of compliance.

2. Automate the accounts payable department

Automation has become increasingly common across many industries, and the procure-to-pay cycle is no exception. Automating your accounts payable function can result in as much as a 60% increase in productivity and an 83% reduction in purchase order processing time.

Order.co automates many of the steps involved in the P2P cycle. It also helps organizations implement strategic sourcing to ensure the best sourcing for high-volume or high-cost goods. This automated sourcing has helped many clients save an average of 8% on their procurement costs.

3. Use a dynamic system to manage the payment process

Vendor payments are a critical part of your P2P process. Optimizing the payment process with the right workflow reduces payment errors, eliminates time-consuming research and corrections, and ensures payments align with business needs and cash flow.

A dynamic procure-to-pay solution allows businesses to manage payments according to changing business considerations, consolidate payments into a single invoice, and reduce the time spent handling the accounts payable process.

4. Optimize ordering and logistics

Transparency is crucial to maintain effective ordering processes. It ensures you have the right items coming in at the right times.

An effective P2P process helps you optimize your ordering across your organization. It also provides insights into standard pricing, total cost, and other critical metrics for maintaining inventory control without sacrificing cost efficiency.

Order.co allows organizations to order the goods they need across departments or locations, providing continuity and cost efficiency.

5. Coordinate and manage delivery schedules.

Monitoring delivery schedules through an automated notification system helps you better plan inventory receipt and distribution. It also increases supply chain resiliency, allowing the business to respond to changes in availability, delivery status, and quantity without disruption to normal operations.

How technology software enables P2P

Maintaining an effective procure-to-pay cycle with a manual process becomes more complex as the business grows. By implementing technology, you can automate repetitive tasks and reduce the errors associated with processing purchases and tracking deliveries on a spreadsheet.

Using P2P software, businesses can automate much of the process, including:

Purchase requisition and purchase order creation
Purchase approvals
Vendor sourcing and e-procurement
Delivery tracking and reconciliation
Three-way matching
Invoice coding, processing, and approval
Supplier lifecycle management

Using software to drive the procure-to-pay process also gives your business access to powerful analytics and robust reporting tools that improve the procurement function, save money, and increase efficiency.

Order.co streamlines your P2P cycle

Digital transformation has revolutionized the P2P cycle. With a procure-to-pay solution like Order.co, businesses have the power to implement total spend management, eliminate inefficiencies, and protect the bottom line—all while allowing locations to quickly and easily order the supplies they need. Schedule a demo of Order.co today to get started.

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The ability to manage cash can be the difference between life and death for a company. Exerting control over inflows and outflows with diligently managed accounts payable days is an important practice to keep your business stable, protect the company’s future growth, and maintain employee confidence in the company’s short- and long-term objectives.

Smart cash-flow maintenance also helps to maintain good relationships with suppliers, opening avenues for discounts and easier negotiations. Regardless of industry, having good contacts is the best way to increase investment in your business interests.

Let’s look at the days payable outstanding (DPO)—also known as Accounts Payable days (AP days)—measurement and how it impacts cash flow.

First, let’s review the accounts payable process and how DPO fits in.

Download the free tool: Financial Audit Preparation Checklist

What are accounts payable?

Accounts payable (AP) are accounts in a general ledger that represent a company’s commitment to paying off short-term debts owed to suppliers or creditors after purchasing goods or services on credit instead of with cash up front. The company can acquire what it needs now, and pay suppliers within an agreed-upon time frame (usually Net 30 to 90).

On a balance sheet, accounts payable are listed under the company’s current liabilities, because goods were bought on credit. The debts have to be paid on time to avoid default.

Like any other liability account, accounts payable will have a credit balance. When an account payable is paid, accounts payable will be debited and cash will be credited. The credit balance in accounts payable should be the same amount as the vendor invoices that have been recorded but have yet to be paid.

The AP department in an organization is responsible for tracking and verifying invoices, communicating with suppliers, and making the scheduled payments.

Under the accrual method of accounting, expenses are reported when they are incurred, not when they are paid. The company that receives the goods or services on credit has to report the liability no later than the date they were received. That date is used to record the debit entry to an expense or an asset account.

The accounts payable process

The accounts payable process ensures that the transactions listed in your accounting system are accurate and legitimate. The most important information exists in the following documents:

Purchase orders issued by the company
Receiving reports issued by the company
Invoices from vendors
Supplier contracts and other agreements

The accounts payable department is responsible for the following monthly activities:

Processing accurate and legitimate vendor invoices
Accurate recording in the appropriate general ledger accounts
The accrual of obligations and expenses that have yet to be completely processed

What are accounts payable days (days payable outstanding)?

To better keep track of payments, companies can fall back on a reliable formula to help them pay bills and other obligations on time.

Accounts payable days, also known as days payable outstanding (DPO), is a financial ratio that shows the average number of days an organization takes to pay its bills to suppliers.

A low DPO may be considered a healthy DPO, but this isn’t always the case. They can then use the cash they have on hand to make short-term investments, increasing their working capital and freeing up cash flow.

At the same time, a too-high DPO value may signal an inability to pay bills on time. It can indicate a general cash shortfall. Each business should aim for a DPO that best suits its context. If the number of payable days changes, it could indicate that the payment terms with suppliers have changed.

If a company is paying its suppliers quickly, it may mean that the suppliers are demanding fast payment terms, either because short credit terms are part of their business models or because they feel the company is too high a credit risk to allow longer payment terms.

Days payable outstanding formula

Companies calculate DPO by multiplying the average accounts payable (the total of the beginning accounts payable and the ending accounts payable) by the number of days in an accounting period. This formula reveals the total accounts payable turnover.

That number is then divided by the cost of goods sold (COGS). Also known as cost of sales, COGS is the cost of acquiring or manufacturing the products that a company sells during a period. The ratio indicates how well the company manages its cash outflows.

DPO and the cash conversion cycle (CCC)

DPO value plays a role in calculating the cash conversion cycle (CCC). This is a metric that expresses the amount of time that a company takes to convert inventory investments and other resources into cash flow from sales.

While DPO focuses on the company’s current outstanding payables, the CCC (also known as the net operating cycle or simply cash cycle) follows the entire timeline. This extends from when the cash is converted into inventory, expenses, and accounts payable through to sales and accounts receivable, and then back into cash in hand when received.

Public companies reference DPO in their annual financial statements, income statements, and balance sheets.

How DPO is used

A well-run accounts payable process affects every level of a company’s cash position. Paying bills on schedule helps to develop a relationship with suppliers and improves your credit rating. Suppliers may also deliver better privileges, such as higher discounts, in return.

A company’s DPO metric can be used to demonstrate credit worthiness to potential lenders or credit-based suppliers.

It’s important to find the right balance in determining the right number of accounts payable days for your business. We covered the dangers of a higher ratio in the previous section. But keeping DPO low restricts the amount of cash available to reinvest in future opportunities.

In contrast, increasing accounts payable days demonstrates to creditors that the company is not in a position to borrow cash for short-term capital. A weaker company may face liquidity issues.

AP automation technology can help you manage your DPO so you can maximize your working capital while maintaining good vendor relationships.

Firsthand insights from AP automation technology adopters

Whatever the state of your company, having a clear system to pay vendors at the right times is a vital component of any business. Order.co can help companies with tasks such as organizing payment schedules, easily creating informative reports, and tracking payment variances to avoid exceptions and delays.

Order.co also automates the ordering process, freeing up more time for important day-to-day operations. Automated, proactive delivery tracking provides timely updates about the status of your shipments. Customers can complete orders 95% faster than before they began to use Order.co.

Our users have seen transformative effects on their businesses since they started using Order.co. These organizations are using our automation to streamline their processes, speed up order fulfillment, and optimize supply spending.

Here are a few case studies:

Zerocater

Before implementing Order.co, Zerocater needed one or two business days a month just to record payments and manage invoices. With our platform in place, the number of invoices they needed to complete decreased considerably—from 200 invoice payments to Amazon each month to just three or four. This reduction made it easier to track spending and wade through the ordering process. (More than 80% of our clients pay just one invoice per week or month.)

The Zerocater team also took advantage of Order’s real-time analytics features to add substantial visibility to their budgets. Their managers can see where every dollar goes and handle issues proactively.

SoulCycle

In their previous system, managers at SoulCycle had to jump through several unnecessary hoops to complete transactions. Each vendor site had its own rules and logins to keep track of. Users had to manually track transactions and its effect on their monthly budgets. This made payment reconciliation a long and challenging process.

Once the company began using Order.co, everything changed. Orders were fulfilled faster since employees could place orders from one approved catalog into one cart shared across every vendor. Reporting on expenses went from a five to six-hour monthly exercise to a fast single payment with one consolidated invoice.

BLANKSPACES

BLANKSPACES’ purchasing process was time-consuming, disjointed, and difficult to parse. Each month, purchases went unrecorded. Miscommunications between locations were common. But after working with Order.co, the purchasing workflow became simpler in a matter of minutes.

Acquiring supplies became much more cost-effective. The pre-established vendor network included with Order.co made setting up accounts payable schedules a breeze. In the words of facilities manager Elizabeth Nowlin, “Once we’ve added a product to Order.co, we know everything has been taken care of.”

Visibility and process are the first critical steps in attaining a successful DPO. By implementing a software system, you can optimize the procure to pay process and keep cash flow in check. To learn more about using Order.co to streamline your most important AP tasks, request a demo.

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Having the right financial professionals on your team is critical to securing your company’s bottom line. After all, these are the people responsible for managing your accounts payable ledger and future planning, as well as optimizing your budgets by aligning spending, curbing fraud, and eliminating maverick spending that harms your profitability.

Spend analysis is a method the best financial professionals use to examine their companies’ core financial operations and maintain long-term financial health.

This type of analysis shows organizations how they spend their money on products, materials, and services. It allows finance and procurement teams to identify their primary expenses and purchases.

Download the free ebook: How to Show Your CFO You're Saving Money

With this data, firms make better forecasts, ensure budgetary compliance, and improve their financial performance.

Does your business need a comprehensive process to optimize and track the budget and control maverick spend? In this guide, you’ll learn several ways your business or procurement department can conduct a spend analysis of your accounts payable ledger.

In this article, we’ll discuss:

How to define accounts payable (AP) spend analysis of general ledger (GL) balances
The top four benefits of spend analysis for businesses
How to conduct a seven-step spend analysis process

What is an accounts payable spend analysis of general ledger balances?

An accounts payable spend analysis is a critical process within strategic sourcing. AP spend analysis helps companies improve their financial processes by:

Reviewing payment, purchasing, and spending practices
Gaining clarity into the organization’s overall cash flow
Improving efficiency and optimizing buying power
Managing long-term risks and enforcing contract compliance
Reviewing budget and forecasting needs
Tracking income statements and account balances

Accounts payable ledgers explained

An accounts payable (AP) ledger, sometimes called a creditors’ ledger, shows the past transactions between a company and its suppliers. It includes information such as amounts owed, dates, and other details relevant to the repayment of short-term liabilities.

Compiling an AP ledger brings together all available vendor payment information in one place. This makes it easy to track all your creditor payments, due dates, and associated information. The ledger also acts as a budgetary control tool that compares to the general ledger for accuracy. This is a dual control process, where one employee enters transactions and another employee checks for issues or errors.

4 Benefits of spend analysis

Spend analysis provides businesses with a qualitative advantage over their competitors. For this reason, nearly 60% of organizations are considering using advanced and predictive analytics in their practices.

Many of these companies cite the following benefits from analyzing their spending data:

1. Increased spend visibility

Spend visibility is more than tracking company spending. It is a detailed analysis that provides insights into how money travels through the business. It also helps companies identify suspicious activity or fraud.

Spend analysis provides a full history of how an organization spends each dollar during the entire purchase cycle, from sourcing to payment. For instance, if you hire a construction contractor for your company, detailed transaction reporting will identify the employee that approved the quote.

2. Identifying outstanding saving opportunities

Spend analysis identifies new opportunities to reduce companies’ total budgetary costs. The data they receive allows financial professionals to understand spending at the line-item level and develop a pipeline to optimize that spending.

This analysis can also create or capture value through process optimization, where the procure-to-pay process is automated to reduce invoice and purchase order life cycles. This improves supplier relationship management and increases productivity, accuracy, and cost reductions.

An enterprise-level platform helps companies conduct spend analyses to track their cash flow and save money. Xpres Spa, an airport spa destination, says that Order.co’s software has helped the company save 9.6% on its products while simplifying delivery to airports.

“From our first meeting in spring 2016 to now, Order.co has helped us find savings and solutions to match ever-increasing demand,” said Tesh Ramsarup, Director of Operation Services for Xpres Spa. “The knowledge gained over the past three years has allowed us to make decisive choices to provide our people with the best tools and our customers with exceptional service—all while being conscientious of spending.”

You can read the entire case study here.

3. Superior spend forecasting models

Spend analysis constructs better forecasting models that predict ways businesses can take advantage of savings in future quarters.

Spend forecasting integrates historical data analysis with market intelligence and forecasting trends from various sources. It provides decision-makers with reliable insights they can use to optimize their supply chain, slash costs, and make strategic spending decisions. This enables companies to optimize profits and attain a market advantage.

In the past, financial teams created their spend forecasting models manually—they combined months of analysis to identify cost-cutting strategies. Unfortunately, many opportunities expired before they could capitalize on them.

The digital era provides real-time descriptive analytics (analysis of historical data). Companies use descriptive analytics to identify patterns they can leverage to create steady forecasting models and improve their financial performance. With holistic data categorization, simplified trend analysis, and improved spend forecasting methods, organizations build reliable spend data performance sets from specified periods.

4. Ability to track diversity reporting

When spending data is organized into a centralized platform, a wealth of data becomes available for analysis and action. Diversity is one such category. By identifying and collecting diversity information from current supplier relationships, businesses can examine and improve their diversity numbers across all accounts. This data both informs future spending and helps businesses communicate the positive impacts of their strategic partnerships.

How to conduct a spend analysis process of your accounts payable ledger

Now that you know why a spend analysis is critical, we’ll walk you through completing a spend analysis at your company. Here are seven steps to get you started:

1. Use the right accounting system to conduct a spend analysis

Your finance team should have the tools they need to do a comprehensive spend analysis of your financial statements.

You’ll recognize the right accounting system tool when it offers these advantages:

Contract management improves because the tool extracts insights from actual data and journal entries instead of only from forecasted pricing and vendor performance benchmarks.
Supplier relationships are efficient and strategic. Software like Order.co monitors vendor balances, tracks merchandise inventory, eliminates redundant relationships, and shifts your focus to shared economic opportunities.
The tool offers insights for reducing waste, increasing efficiency, and lowering procurement costs. At the same time, it improves general cost reduction initiatives across your entire organization. Ultimately, you will be able to increase the value of your company assets at a lower cost and strengthen your bottom line.
Indirect spend, ad hoc spend, payable balances, and project-based budgets integrate into your spend data for analysis.

Accounting software is designed to help your organization view all your spend data in one place for easier access and better analysis.

For example, NY Kids Club uses the Order.co platform to manage and control all their spend analysis, journal entries, and balance sheets.

2. Define your objectives

The next step for your AP spend analysis process is to define your objectives. Clear goals make data gathering and analysis efforts easier. Here are some common objectives to follow during your spend analysis:

Understand your spend at a basic level, including your cash flow, debt amounts, and current liabilities, so your team can identify savings opportunities
Track key vendors so your finance team or procurement office can define and execute a strategic vendor plan
Discover key spend areas that affect your earnings before interest, taxes, depreciation, and amortization (EBITDA)—including COGS (cost of goods sold) and SG&A (sales, general, and administrative)

3. Identify all spend data sources

Next, create an inventory of all the systems where your spend data lives, including payable journals, payable subsidiary ledgers, and general ledger accounts. This should include all your departments, accounts payable, general ledger, p-cards, credit cards, and eprocurement system.

This step will help AP capture all your spend data for analysis. If your business has separate business units, locations, or verticals, you’ll likely have to integrate multiple channels.

Take care to create uniformity in your data sources throughout the next steps. Without uniformity across your organization, data integrity is easily compromised. For example, inconsistency in coding materials or describing products ordered can make it difficult to accurately analyze that data later on.

A simple inventory table should capture the total amount of data in subsidiary ledgers and may include the following data sets:

System name
Business units
Type of spend

An effective software platform helps your company keep internal control of your data from subsidiary ledgers, general ledger accounts, income statements, and a variety of bookkeeping sources.

4. Create a spend category tree

Next, establish a spend category tree. This tree can span continents, cost centers, functions, organizational belongings, and responsibilities. Since you’re pulling data from multiple systems, you will probably have different fieldsets.

Identify the data you want to capture. Then use a shared schema to capture what that data means. This step will ensure the information gathered across data sources adheres to a unified standard for analysis.

Most enterprise resource planning (ERP) systems use unified methods to categorize spending transactions into buckets. The most common approach used is a general ledger chart of accounts. You can also use your own in-house or industry-specific schema if that fits your purpose better.

Here are two additional standard schema classification options:

United Nations Standard Products and Services Code (UNSPSC): This global, open standard is an efficient way to classify your products and services. It is free to browse and download in PDF form. You can also download alternative formats from the UNSPSC website for $100.
North American Industry Classification Schema (NAICS): Federal agencies use this code to classify businesses. It’s the primary classification schema system used by the US government for reporting statistics.

5. Identify and extract data

Extract the spend data from all your ledgers. For instance, pull data from your subsidiary ledger, general ledger, and accounts payable ledger via your ERP system.

You can also draw this data from your company’s invoice management system. This should include all invoices and invoice rows associated with supplier information, dates, totals, currency, accounts, and cost centers. Your accounts payable process should capture all this information on invoices down to the item level.

6. Cleanse your data

Cleanse, correct, and standardize the data in your accounts payable ledger. Fix any misspelled item or supplier names. Also, eliminate any duplicates and manage errors in your supplier list. This step will help you better control accounts in your AP departments.

7. Categorize your purchases

Categorize your AP data. Classify all information starting on the account level.

Next, analyze your suppliers. Depending on how you’ve constructed your spend category tree, suppliers may fit into one or several categories.

Create categories for invoice numbers, vendor accounts, vendor balances, and income statements. Pay attention to whether suppliers belong to multiple categories.

Use Order.co to simplify accounts payable spend analysis

Businesses that conduct spend analyses have a distinct advantage over their competitors—they see improved spend visibility, cash flow, and vendor relationships. Spend analysis produces superior forecasting models and diversity reports.

Before starting a spend analysis, select a reliable accounting platform. It will help your finance team conduct a thorough, error-free analysis. Choose software that will cover all the bases:

Buying and approving products
Setting budgets for each accounting period
Enforcing approvals by user, location, product, and category
Providing real-time analytics for actionable purchasing insights

A platform like Order.co enables your finance team to conduct a spend analysis that tracks your spend and saves you money.
For more information on using data and technology to drive business growth, download our complimentary ebook, “Creating a Growth Machine.”

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When it comes to your company’s financial health, revisiting the basics can bring new perspectives to current problems. Consider a sports analogy:What do the world’s most famous coaches make their players do in the off season? Practice the fundamentals. Coaches have their teams practice rookie-level drills because it trains their minds and bodies to react with cat-like reflexes. They solidify the fundamentals to the point they're instinctual.

The same concept applies to any profession, whether you’re a novice or an expert. Even if you know the fundamentals, there is a reason for the adage, ‘Use it or lose it.’

That is why we are going back to the basics in this article to re-examine T-accounts.

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What is an accounts payable T-account?

A T-account is named for the visual presentation of double-entry bookkeeping. The left side of the ‘T’ is where a debit is recorded in the general ledger, and the right side is for credits. Each account — whether it’s accounts payable, accounts receivable, payroll, assets, etc. — will have its own T-account setup. The account title sits above the top bar of the ‘T.’

In double-entry bookkeeping, each accounting entry affects at least two of the company’s accounts. When a debit is entered onto the left side of one account, it sends a credit to the right side of another account. The reverse is also true. If you enter a transaction on the credit side in one account, there will be a corresponding entry on the debit side of another account. In this way, debits and credits increase or decrease the corresponding accounts to keep the books balanced.

Examples of accounts payable T-account

T-accounts are a useful visual representation of many types of balance activities. Some common types of T-account representations are:

Assets: Cash transactions, accounts receivable, physical inventory, hard assets like furniture, or technical assets such as computers and phones

Liabilities: Accounts payable, loans, and notes payable

Revenue: Receipt of payment from customers for goods or services

Expenses: Costs incurred to run the business such as rent, supplies, insurance coverage, incidentals, travel, and utilities

Equity: The conversion of company funds into financial instruments, such as shares sold as part of employee stock purchase plans (ESPP) or incentive shares

T-Accounts and their role in accounting systems

The most common method for bookkeeping is the double-entry accounting system of T-accounts. For the balance sheet to be balanced, a business transaction entered into the system must take away from one account and add the same amount to another and vice versa. The most common reason for balance sheet discrepancies is a ledger account entry erroneously placed on the debit side or credit side of the wrong account.

The idea of an accounts payable T-account gets a little confusing for even the most seasoned professional bookkeepers. When using a T-account, you must ensure the correct figure is applied to the correct side of the ‘T.’ It’s common to think of a debit entry as a subtraction to an account and a credit entry as an addition to an account. But this is not always the case:

Entering a debit (left side) transaction to cash accounts, accounts receivable, or asset accounts like inventory and PP&E increases the account. When you enter a credit (right side) into these accounts, it decreases the amount.
For the liabilities or shareholders’ equity accounts, debit entry decreases the amount and a credit increases it.
Income statements also rely on the accuracy of the accounts payable T-account journal entry to reflect accurate figures.
Accounts that track expense accounts, revenue accounts, gains, and losses use the debit/credit method in the same way as accounts receivable. A debit transaction increases the revenue accounts and a credit entry decreases it. Conversely, a debit will decrease the amount for expense accounts, whereas a credit will increase it.

Case in point: If your business issues common stock, you debit the cash account and credit the shareholders’ equity account to reflect this. But if an employee leaves before their shares are fully vested, they forfeit their shares and you record it as a debit to the shareholder’s equity account and a credit to the cash account.

How do AP T-accounts help spend management?

T-accounts allow a business to easily track its spending. You can see journal entries over a given period of time and view business transactions. But a T-account doesn’t necessarily help your business make wise decisions regarding managing its spending intelligently.

Accounting software tracks your company’s balance sheet and income statements. But it can only give you dynamic figures that provide superficial insight into ways to improve spend management.

The biggest problem with every fast-paced business is identifying areas that are leaking cash unnecessarily. Obvious signs in your financial statements — such as the accounts payable figure being much higher than the accounts receivable — stand out. But without 100% visibility into your spend management, you’ll be left high and dry on how to curb your spending. Worse yet, you may find some balances inflated or deflated, painting a picture that may not reflect reality. Working capital, cash flow, and your bank account suffer as a result.

Streamlining accounts payable

Streamlining your accounts payable and accounts receivable processes may sound like a daunting task, especially when you work with a significant number of vendors. But eliminating maverick spend means finding ways to gain clarity on your company’s balance sheet. Simplifying your procurement process across different accounts with vendors is the first step toward reducing the time spent on the short-term process. This will significantly reduce money spent in the long term.

To help you understand what we mean, let’s take a look at the story of one of our customers, [solidcore]. As a health and wellness company, [solidcore] was expanding quickly with increasing demand for their products and services. In one year, they doubled the number of locations from 25 to 50. With such explosive growth comes a lot of chaos if you’re not properly prepared.

At first, [solidcore] held multiple accounts across multiple vendors and multiple users. Spend tracking was chaotic. The accounts payable department recorded receipts in the general ledger one by one, leading to a backlog. Without a proper purchasing management system, company executives couldn’t get real-time, accurate data on their cash flow, current assets, and expense accounts.

Since implementing Order.co, [solidcore] streamlined a process that once took at least two days and tons of back-and-forth emails for its 25 locations. Today, the process takes about four hours across all 50 locations. Now [solidcore] can see their spending at the product, location, and aggregate levels. With standardized processes steadily implemented in a more reliable manner, the company has much more transparency in its working capital and bank account balance than ever before.

Since implementing Order.co, [solidcore] streamlined a process that once took at least two days and tons of back-and-forth on emails for 25 locations. Today, the process only takes about four hours across all 50 locations.

Use Order.co to streamline accounts payable

Whether refining the fundamentals or digging deep to find innovative ways to streamline your accounts payable process, expertise requires your eyes to stay on the prize—but on potential hindrances, too. The figures on your company’s financial statements tell only a small part of the story even though they reflect the bigger picture.

Using the Order.co platform, many basic tasks such as reporting and visualization, invoice reconciliation, and spend analysis happen automatically within the platform. It takes the guesswork out of managing spending across locations and gives accounting professionals granular insight into every dollar flowing into and out of the organization.

Order.co offers growing businesses the most comprehensive and user-friendly accounts payable management & automation available. We invite you to request a free demo to learn more.

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The lean operating model was conceptualized sometime around the fifteenth century, at the Arsenal of Venice. Venetian shipbuilders created an assembly line to standardize production and, in doing so, were able to build naval vessels faster and cheaper. As the centuries passed, the Venetians continuously sought to improve their operations and experimented with new ways of working. The quality of their vessels improved with each adaptation, and the shipbuilders made it into the history books.

Fast forward 500 years. Every business wants to emulate the core principles of a lean operating model: high customer value, with minimal or no waste. And they can, if they’re able to plug cash leaks and free up resources for continuous innovation.

A procurement plan can help you build a lean operating model so you can prevent cash leaks that come from wasteful spend.

At the organizational level, a procurement plan outlines what an organization plans to spend in a given time frame. It identifies specific needs, a budget for obtaining supplies, and approved vendors from whom to procure those supplies. A procurement plan requires you to think strategically about spend, but it shouldn’t be difficult to create. A spreadsheet works well enough.

Businesses that formulate a procurement plan can optimize their spend and empower employees to proactively look for cost efficiencies. Following are four ways these benefits can help curb wasteful spend.

1. Gives a holistic view of business needs so you can optimize spend

A procurement plan that outlines spend at the organizational level allows you to identify patterns and redundancies in your purchasing needs.

Budgets are often created and executed at the department or team level, which can lead to redundancies. Let’s say two employees from separate departments subscribe to the same software solution. A procurement plan would expose this redundancy and enable the organization to invest in a single team plan, reducing the overall subscription cost.

Or let’s say two departments know they will require a few hours of work from a freelance designer each week. A procurement plan makes it easy to see this overlapping need. Then, the two teams can coordinate to hire the freelancer by day instead of paying a higher hourly rate independently.

Planning a year’s spend in advance also creates opportunities to receive discounts. Many vendors will give discounts if you buy in bulk or commit to an ongoing order. Businesses should identify any recurring orders during their procurement planning and ask about these discounts.

2. Reinforces your purchasing policy to prevent maverick spend

Procurement plans guard against spend that is over budget, unnecessary, or fraudulent by reminding employees of the company’s purchasing policy.

Two out of three employees haven’t read their company’s expense policy, according to AllStarCard. A procurement plan gives organizations a prime opportunity to tell employees, “This is how we intend to spend this year, and all of your purchases must map back to this plan. Purchases that don’t map back to this plan stand in the way of achieving our goals of X, Y, Z. And, by the way, if you don’t adhere to our policy, we won’t approve your expense report.”

Most employees want their business to achieve its goals. Employers need to articulate what those goals are and explain how maverick spend stands in the way of achieving them. Anyone who still fails to follow the purchasing policy should face repercussions.

3. Allows you to get a head start on ordering to prevent costly delays

Spending on an as-needed basis leaves too much room for error. A procurement plan helps you build a structure for employees, so they can submit orders early—or at least on time—as a matter of routine.

Late orders can be costly. If the supplies you need don’t arrive on time, someone from the team has to run out to the store to buy them. Let’s count the waste: employee time, duplicate purchase, purchase at a markup price. If you’re a coffee shop in need of milk, that amounts to about $20, if we figure an hour of an employee’s time, and $5 for the dairy. Quite the markup for something that should have cost $3.

But what if you’re a coffee shop, and your signature espresso doesn’t arrive on time? Now you have to tell customers you can’t sell them their favorite beverage, putting your sales in jeopardy until the espresso arrives.

You know if you place an order at the last minute, it’s going to take ages to ship. Establish a procurement plan so your team can either get ahead on purchasing or set up automatic reorders.

4. Gives employees visibility into spending goals

Like we said before, employees want their employer to succeed. Share your procurement plan with employees to give them transparency into spend across the organization. This way, employees can help the organization save cash when unexpected expenses arise.

Take the example above, where two employees from different teams were using the same software. Had the two employees known they were subscribing to the same software, they might have coordinated to purchase a team plan.

Additionally, a procurement plan allows team managers to set their budgets against the broader organizational goals and plan for spend when it is most convenient for the organization. This doesn’t necessarily cut costs in the long term, but it helps ensure that the business has enough capital at all times to achieve its value-add goals.

In essence, this type of budget planning keeps the company’s working capital, or the difference between a company’s current assets and liabilities, high. The significance of this feat shouldn’t be overlooked. According to a report from PwC, global firms could have freed up as much as €177 billion ($214 billion) in cash in 2017 to support growth and innovation if they had improved their working capital.

Plug cash leaks in 2021 with a clear procurement plan

“2020 went exactly as planned,” said no one ever. But don’t let the past year discourage you from planning.

We have a pretty good idea of what 2021 will look like (knock on wood). Offices will be closed, at least temporarily. The majority of employees will work from home. Spend will come from as many locations as you have employees.

You can prevent spending from becoming haphazard while your employees are dispersed. You just need to think a little bit more like a Venetian and create a clear procurement plan to ensure that all spending improves your bottom line.

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2. Reinforces your purchasing policy to prevent maverick spend

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