05 Sep 2011 In defense of accounts payable
I have sometimes described purchase to pay as sitting at the least glamorous end of the business spectrum. At one end is the sex, drug and rock ‘n’ roll world of PR, marketing and sales – life at the coal face where business really happens – and then at the other end there’s the back office functions like purchasing, finance, internal audit. And if we take a closer look at the back office, sitting quietly right at the wrong end of the glamour spectrum is accounts payable. A colleague once described accounts payable as “the spinsters department”.
Jason Busch doesn’t spare his vitriol in his criticism of AP suggesting that “most companies would likely be better off blowing up their AP function“. To be fair he does suggest a more constructive fate for AP by describing how they might transform into a high value add supply chain finance operation – something I would strongly endorse. But for the time being, I want to defend AP. Why? Because much of the criticism is unfair and especially when it comes from purchasing.
Accounts payable is the guardian of a company’s cash. It is there to ensure that as far as possible, no money goes out unless it is properly authorized. If they didn’t do this, fraud would be rife. You are on very thin ice indeed if you argue that AP should not police payments very tightly. But this does not mean of course that they should prevent or delay legitimate payments and it is in this respect that AP comes under fire most often from purchasing and from suppliers.
Now, please don’t misinterpret me in my defense of AP. I abhor late payments, wrong payments as much as I hate the officious attitudes from AP people that act like its their money. Late payments create supply chain bottle necks that can bring a business to it’s knees but let’s just examine for a moment why late payments happen.
In a recent review of late payments by a company that shall remain nameless, the following root causes were identified:
- Invoice errors (incorrect P.O. number quoted or mismatch in price for example) 40%
- Receipting errors (receipt of goods not confirmed properly) 40%
- AP error 20%
The figures are approximate but representative and they are very revealing. What they say is that while AP are not perfect and are directly responsible for 20% of the problem, 80% of the issues are not within their control. What’s more important is that 80% of the issues absolutely are within the control, responsibility or influence of purchasing. When purchasing bleat about the incompetence of AP because a supplier has put them on hold, more often than not, its because the receipting process is broken or the supplier AR department has a hair trigger on the hold button and doesn’t respond to AP invoice queries.
This is one isolated case but I’ve seen similar situations in many companies and actually, late payments is not the fault of purchasing – neither is it the fault of AP – it goes higher than that. Late payments is symptomatic of poor purchase to pay processes. If P2P sits within purchasing there is generally a lack of appreciation of the accounting needs of the business and late payments are common – or it sits within AP and poor purchasing practice becomes the norm – and late payments become common. The only way to tackle this is to recognize P2P as an important strategic function that has the teeth to be able police process properly. If it does it can have a dramatic effect improving not only compliance to process and contract, but better supplier relationship and cash management. And it only when this is in place that Jason Busch’s supply chain finance wish list is possible.