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Automating Procure to Pay to Improve Liquidity

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Today’s competitive business environment requires that companies continually seek to cut costs and improve the bottom line. As a result, corporate executives are sharpening their focus on operational, back-office efficiencies as a source of savings and liquidity. One area that has been a major focus of this effort: the Accounts Payable process.

Studies indicate that the cost of managing low-value purchases in traditional paper-based, purchase order-driven formats is disproportionately high in relation to the cost of the goods purchased.

“Since the financial crisis, companies have been very focused on cash flow,” says David Bellinger, Payments Director for the Association for Financial Professionals. “Payables departments have been a point of focus, and certainly the Treasury area, as companies try to figure out ways to manage the supply chain and their processes. They’re trying to transition from the crisis mode of the last couple of years to investment mode, wherein companies are refocusing on the importance of managing and generating cash.”

Potential inefficiencies in Accounts Payable

As inefficiency-laden back-office processes go, a good place to begin improving performance is in Procure to Pay (P2P) — that is, the process that begins with ordering a product or service and ends with submitting payment for it. Studies indicate that the cost of managing low-value purchases in traditional paper based, purchase order-driven formats is disproportionately high in relation to the cost of the goods purchased.

In many cases, the cost to process a low-value transaction can actually exceed the cost of the good or service itself. In fact, in our experience at SunTrust, some companies’ age-old manual processes have put the cost of a simple purchase at $90 to $111 per transaction. That is not an outlier. SunTrust estimates that a full two-thirds of companies have not implemented an automated P2P process and are paying the consequences.

The good news is that many companies recognize the problem, and have taken steps to remedy their Accounts Payable (A/P) issues — and in turn, optimize working capital. To achieve that goal, these companies have focused on three key A/P activities, according to a recent Aberdeen survey (see Figure 1).


One area of A/P focus that has recently gained widespread attention is simply changing the payment method itself. By converting from manual to electronic P2P processes, companies can:

  • Reduce P2P time and costs by minimizing or eliminating fees and optimizing vendor discounts
  • Automate vendors’ invoice, payment and reconcilement processes to make more timely payments and streamline reporting
  • Leverage working capital by expanding the payment cycle and lengthening Days Payables Outstanding (DPO)

Dramatically reducing payment costs

Electronic payment methods can dramatically reduce the cost of payments when compared to traditional paper checks and wire transfers. As Figure 2 shows, commercial cards, in particular, can offer as much as a 50% cost-per-transaction savings over wire transfer.

Among the simplest and cheapest ways to achieve P2P cost savings: stop writing checks. According to the 2010 AFP Electronic Payments Survey, today’s companies make approximately 60% of their payments via paper check. This is an expense that can represent a substantial portion of invoice processing costs.


Public and private sectors on board

Facing such readily accessible benefits, businesses and government agencies alike are getting out of the check-processing business. One example: As of May 1, 2011, federal government retirees no longer receive their pensions via paper check. Payments are now direct deposited into retirees’ bank accounts. It’s part of a sweeping initiative by the federal government to eliminate 120 million paper checks by 2013 — projected to save the government over $100 million.1 Of course, if the federal government has discovered a cost-saving process, it’s a good bet that the private sector is on board as well. This is certainly the case for automating payment processes.

Start by quantifying your costs

Considering the above results, it is certainly understandable that finance professionals are making studied inquiries as to how to streamline their P2P processes.

The first step is one of assessment. As a precursor to automating process and instituting a P2P program, analyze your current process and its costs. Among the questions to raise: Can cycle time be reduced? Can some or all of the processes be automated? Which ones? Examine each step, evaluate your process holistically, and determine the point or points at which you might be able to plug in cost-saving automation solutions.

Opinions differ on how best to quantify current P2P costs. There are at least two schools of thought: top-down and bottom-up.

  • Top-down, the easier of the two, involves a simple formula:
    • Total A/P costs/number of invoices = cost per invoice

This information is more readily available, and its impact is easier to measure, because as systemic changes such as new policies or technologies are made, it is relatively easy to capture costs, add them to the total, and have a means of measuring effectiveness. If the top-down method has a downside, it is that it doesn’t allow easy identification, explanation or detailed insight into specific bottlenecks in the P2P cycle.

  • Bottom-up delivers the detailed view of the P2P process that the top down method cannot. Similar to — and in fact, inspired by — engineering processes, it focuses on process efficiencies and time-based cost savings. The bottom-up method essentially breaks down each step of the P2P process to pinpoint potential time and process improvements in each. While far more precise than the top-down method, conducting a study of component steps in the P2P process can be time and resource consuming.

A roadmap of the process

If one chooses the bottom-up method of quantifying P2P costs, Figure 3 on page 5 can serve as a helpful roadmap. It shows a typical organization’s P2P process, with an emphasis on the costs related to each step in that process.

Step 1. Need to buy. Most companies have a Purchase Order (PO) process that starts with identifying a product need — e.g. a chair, a computer, a ream of paper.

Case in point: Converting checks to ACH

One company recently asked SunTrust to help them convert from checks to Automated Clearinghouse (ACH). Like most organizations, they had not yet adopted a robust electronic payment initiative, and were primarily using checks and wire payments. They were seeking a streamlined, automated solution that would achieve cost savings, enhance cash forecasting, and improve fraud control.

Since a radical, wholesale change would be tantamount to changing the tires on a speeding racecar, it was dismissed as an option. Rather, SunTrust took a stepped approach to conversion. Initially, we maintained the company’s manual, paperbased procurement process. But whenever possible and practical, we switched A/P vendor payments to ACH. By taking this small step to identify and address low hanging fruit, the company cut its payment costs by roughly 50%.

In addition, because ACH accelerated the payment cycle, the company was able to make better use of idle balances. The result: an estimated 40% improvement in cash forecasting accuracy.


Step 2: Purchase request. The employee prepares and submits a request for purchase, in the form of an email, memo, request for PO, or online in an existing system or application.

Step 3. Request approval. The employee’s purchase request is submitted for approval by his/her manager. (This is not necessarily a quick step; the manager may be on vacation, out of the office, or simply may not reply for several days.)

Steps 4–7. Prepare PO, purchase product or service, receive goods, receive invoice. The P2P process can typically become quite costly here, depending on the level of (or lack of) automation within the organization.

Step 8. Approval and matching. After the employee receives goods, there is still time consuming paperwork to attend to — matching up various documentation such as a PO, packing slip or bill of lading, contract, statement of work, etc.

Step 9. Pay invoice. The supplier’s invoice arrives via mail, email or Web, from which it is funneled into the Procurement system to make payment.

Next step: Automate to reduce process costs

After identifying and quantifying the costs of each step in your P2P process, the next step is reducing those costs by automating at least part of the process. Many businesses begin with a quick-and-easy-to-implement solution: Integrating a purchasing card program into their payment mix. The result is typically an immediate increase in DPO for the buyer — and associated decrease in Days Sales Outstanding (DSO) for the supplier — by, for example, purchasing an item on the first day of month and gaining 45 days to submit payment.

As an interim measure toward implementation of a fully automated P2P solution, a single purchasing card can be utilized to pay multiple vendors (who are usually selected by the A/P Manager). The company’s buyers work directly with these vendors, with the buyer using the card instead of paying by check.

The most obvious benefit of implementing this solution is cost. As Figure 2 showed, paying with a purchasing card is the least expensive form of payment one can make — more cost-effective than wire transfer, paper check, and even ACH.

A purchasing card is a win-win: The vendor is paid sooner, while the buyer gets to pay later.

Using a purchasing card brings additional value as well. When an invoice arrives, the buyer simply notifies the vendor and provides information to process the electronic payment. The result is a win-win: The vendor is paid sooner, while the buyer gets to pay later. The benefits: Elimination of check processing time and costs, avoidance of petty cash issues, and leveraging of working capital for longer periods of time.

These benefits of purchasing cards are not hypothetical; they are real and growing. One company, for instance, recently had an annual A/P spend of about $90 million. By shifting their payment to a card, they eliminated 20,000 checks and saved over $200,000. In addition, by moving their $90 million spend to purchasing cards, the company received a rebate check from their bank, for an additional savings of nearly $1 million. As a result, A/P personnel began referring to their department as a profit center, since they were contributing directly to the company’s bottom line.

Check vs. card under the Microscope

For a closer look into the DSO/ DPO win-win, see Figure 4. The top arrow (“Check”) represents the typical paper check payment process, from the time an invoice is approved to when the supplier receives a check. In general, this timeline is 30 to 40 days — suboptimal not only from an order-to-cash cycle perspective, but also for cash forecasting, because one doesn’t know when the vendor will receive the check and when it will clear the buyer’s bank account.

The bottom arrow (“Card”) represents a purchasing card process. Here, the vendor realizes a tangible reduction in DSO because payment is made within two to five days of payment approval. In addition, the buyer sees a positive impact to DPO, since it has extended its A/P to agreed-upon payment terms (generally seven to 30 days) with the bank that provided the card solution. The upshot: A/P is effectively extended to 60 or more days.


The benefits of automating P2P

Organizations may wish to maximize liquidity further by exploring options beyond a “plastic-in-hand” solution. To that end, many companies have considered a fully automated P2P solution. One limitation of the purchasing card-only solution is that the card is not integrated in a P2P solution, so paying suppliers is still a manual process. With a fully automated payables solution, however, payables files can be uploaded automatically to pay multiple suppliers simultaneously. In this expanded environment, each supplier has a unique purchasing account number, so buyers can identify whom they wish to pay by card.

Whether one begins by integrating purchasing card into the payment mix or implements a comprehensive, fully automated P2P solution from the start, the benefits of automating all or just part of the process are numerous.

Among them:

  • Speed. Once an electronic payment hits the network, the transaction is almost instant. Depending on your relationship with suppliers, they could receive funds in just 24 to 48 hours. In addition, if an unusual transaction pattern occurs, the cardholder or program administrator can be alerted immediately and the issue resolved promptly.
  • Fraud prevention. An automated P2P environment is more secure for processing payments. The bank can configure your purchasing cards to block certain types of transactions, and systems can monitor electronic transactions for unusual, suspect patterns. In addition, cardholders can charge back transactions and dispute questionable ones. Contrast this with a paper check environment; once the check is cashed, there is little recourse in terms of fraud remediation.
  • Reporting/reconciliation detail. A fully automated P2P solution offers enhanced data reporting, which provides deep, invoice-level transaction detail. After payment, this information can be electronically transmitted from supplier to buyer (eliminating the need for a paper invoice). Much of that information is resident right in your Enterprise Resource Planning (ERP) system; it simply needs to be extracted. And, if you wish to automate a part of the requisition process, software solutions can help you request approval for purchasing. Other software can automate the process of comparing and matching line item details between invoices and shipping documents.
  • Easy technology integration. An automated P2P solution can be easier than you think to integrate into your existing Information Technology (IT) platform and ERP system. You can use a basic, straightforward file with fewer than a dozen data elements. An authorization file can be submitted in one of two ways: uploading it directly to the P2P solution, or dropping it in a secure ERP environment (e.g. SAP), where it gets picked up and processed into the solution. Either way, the process is automatic, so there is no need to allocate costly development resources.

For one company, a $1.6 million gain

Here is an example of how the decision to automate P2P processes can play out: Recently, SunTrust met with a client to map out a plan. They were clear that in addition to converting paper checks to electronic payments, they would consider any suggestions on how to deliver key benefits to their A/P, Purchasing, Treasury and Sourcing functions. Among their overriding goals were reducing paper, increasing working capital, and taking advantage of up-to-date technology.

We met with key stakeholders and decision makers, and got to work strategizing and implementing a solid purchasing card program.

Among the steps we took were:

  • Analyzing A/P check payments to identify vendors who could potentially accept a purchasing card
  • Reviewing purchase requisition traffic to identify employees who might benefit from a purchasing card
  • Targeting specific products and services for a purchasing card (e.g. pharmaceuticals, office supplies, overnight shipping, petroleum)
  • Requiring the Purchasing Department to refuse to process a PO for purchases that could be made on a purchasing card — for example, purchases below $500
  • Training the company’s employees in using the solution
  • Recommending that the company’s program administrator attend bank- and industry-sponsored user conferences to keep up with best practices in P2P

The results were impressive. More than 22,000 purchase transactions totaling over $6 million were converted to purchasing cards, generating $1.6 million in newfound liquidity. In addition, multiple A/P check-issuing locations were consolidated, while maintaining local control over the approval process — one check to the vendor, and one check to the bank for payment of monthly purchasing card transactions.

A leader as a partner

As companies look for ways to minimize costs and improve efficiencies, electronic payments are now common practice in helping to streamline the payables process. When making routine payments, managing working capital effectively and efficiently can be a challenge. It pays to partner with a financial institution with deep experience in designing, building and implementing successful P2P programs.

SunTrust offers comprehensive payments solutions to help you integrate control and efficiencies into accounts payables processes and systems. No matter what kind of payment you’re making, SunTrust can help you strategically manage payments and reduce processing costs.


This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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