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For many companies, invoice settlement processes are, well, unsettling. For one thing, the processes are paper- and people-intensive, which is why the full invoice-to-pay cycle takes between 30 and 120 days. In fact, up to 50 percent of paper invoices are past due when they arrive in accounts payable, so discount opportunities such as 2% 10 net 30 (2 percent discounts for payments made within 10 days) are often out of reach. In addition, between 10 and 40 percent of invoices involve an exception process, which can triple the transactions timeline and cost.
Electronic invoicing and settlement (EIS) solutions can cut the time needed to process invoices to between five and 30 days. EIS also can help eliminate paperbased and manual processes, reduce errors, improve decision-making by capturing more information, and limit the need for back-office staffers to manage paper flows. Altogether, automated accountspayable processes can cut transaction costs by up to 50 percent.
The benefits of Electronic Invoicing Solutionsdynamic discounts for buyers and compressed invoice-to-pay cycles and lower working capital costs for sellers make the change worth considering.
But that is neither all nor enough because, for buyers, EIS greatest benefits typically come from earlypayment discountscapturing reductions of up to 2 percent that many sellers offer in exchange for accelerated payment. Accenture research confirms that, for a typical company, electronic invoicing provides annual discount realizations of between 0.3 percent and 1.0 percent of spend per year ($3 million to $10 million per $1 billion in spend). Consider typical terms of 2% 10 net 30, which means that prompt payment gains the buyer a 2 percent discount for paying 20 days sooneran annualized return of more than 36 percent. Even after accounting for the return lost by paying early, the buyer can still expect to generate high, risk-free returns of 18 percent or more on short-term cash. This makes the buyer-focused value generated by EIS-enabled earlypayment discounts at least five times more than the value EIS brings to process improvements. The likely result is annual discount and efficiency savings of $16 million and $3 million, respectively, for an average communications, electronics and high tech or media and entertainment company (Figure 1). Sellers also come out ahead. Many, for example, typically obtain financing in expensive ways, such as factoring or asset-based lending. But EIS-enabled discounting lets sellers obtain financing by leveraging the buyers creditworthiness. Additional, faster and more reliable access to cash also allows the seller to have funds that can be placed on deposit, or invested at or above the organizations hurdle rate. Lastly, sellers benefit by reducing their days sales outstanding (DSO) and collection costs. On average, every 10 percent increase in the use of electronic invoices produces a three-day reduction in DSO. Collection costs often fall by 40 percent or more.
Communications
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Figure 1: Average discount and efficiencyimprovement opportunities for companies in communications, electronics and high tech, media and entertainment, and the three combined.
A New Paradigm
Before electronic invoicing, the prevailing working capital strategy was to stretch payables and earn interest off the float. These practices vary widely across industries and vendors, but two consequences are common: financial stress on sellers and, with todays interest rates, low return for buyers. Capturing prompt-payment discounts portends a radical shift in mindset for communications, electronics and high tech, and media and entertainment companies. However, the benefits dynamic discounts for buyers and compressed invoice-to-pay cycles and lower working capital costs for sellers make the change worth considering. Take the case of a leading wireless services provider, which combined invoice-to-pay automation with an aggressive seller-activation program. In addition to reducing per-transaction accounts-payable costs by more than 40 percent, the company streamlined its vendor master file and drastically reduced erroneous payments and payment-status problems. Its vendors now receive faster payments and have greater visibility into payment progress. Vendors also receive detailed remittance data, which was not possible with the ERP-based solution they were using previously. And the companys vendors now have 24/7 visibility into invoice and payments status, which allows them to optimize cash flow and make better decisions around cash management commitment and sourcing negotiations. Accenture has done extensive research into high performance: the traits and behaviors of the roughly 15 percent of companies that consistently outperform their industry peers. One notable finding is that measurably superior finance organizations are present at seven out of 10 businesses associated with high performance. On the buyer side, Accenture researchers noted the importance of creatively managing the accounts payable cycle. On the seller side, they highlighted tight management of days sales outstanding and return on invested funds. Both sides speak directly to the value of electronic invoicing and settlementa proven resource in the quest for high performance.
1. Standard payment terms are 30 days net (i.e., full payment of invoice value within 30 days).
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2. To manage DSO, suppliers offer discounts in exchange for early payment (e.g., 2% 10 Net 30). Buyers capture discounts by compressing invoice-to-payment cycle to less than 10 days. 3. The effective discount rate may be increased through ASAP discount terms.
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About the authors Troy Barton is a Partner in Accenture's Finance and Performance Management Service Line and is the global lead of this practice for the Communications and High Tech industry group. In addition, he manages the Revenue Assurance, Credit and Collections Practice for Accenture. Robert Hintz is a Manager in Accenture's Finance and Performance Management Service Line and supports the development of Accentures Electronic Invoice and Settlement offering in the Communications and High Tech industry group. He specializes in financial planning and analysis, systems and business integration, and finance and accounting operations.
Copyright 2006 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
About Accenture Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 129,000 people in 48 countries, the company generated net revenues of US$15.55 billion for the fiscal year ended Aug. 31, 2005. Its home page is www.accenture.com.