Procure-to-Pay and Commercial Card Programs: Driving Profits Through Next Generation Procurement Programs

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Procure-to-Pay and Commercial Card Programs

Could your company improve profits by adopting commercial card programs and automated procure-to-pay solutions? More than 1,200 participants tuned in to a Webcast presentation on November 12, 2008 to learn more. Jennifer Steinmann, principal, Deloitte Consulting LLP, and Leader of Deloitte's Financial Services service line in the West Region of the U.S., and Laima Kardokas, senior business leader with Visa, U.S.A. in the Commercial Solutions Product Management Group, discussed effective strategies, the benefits of automation, and the results of Visa's 2008 Global Procure-to-Pay and Commercial Card Best Practices study. The following are the presenters' responses to select questions submitted by participants during the Webcast.

Participant Questions

We capture with our card program most of our typical spend, such as office supplies. What are some additional types of spend we should be targeting?
More and more companies are finding creative ways to use their purchasing card programs. We've seen companies use cards to pay for meetings and conferences that they sponsor for their clients, to cover certain service categories like temporary and janitorial services, even to pay for sporting events for client entertainment, such as boxes at basketball and hockey games. We are also seeing cards used for promotional items in the retail space, such as golf items and auction items.

Forward-thinking organizations often take a dual-pronged approach to expanding their card spend: soliciting feedback from cardholders regarding additional purchases that can be placed on commercial cards, and working closely with their issuers to identify specific suppliers or spend categories that represent the best opportunities for card payment. 

What are some of the key trends in the commercial card space? 
The growth in the market is happening within the procurement/purchasing card space, as organizations look to reduce check, invoice and purchase order processing costs. Purchasing card programs are being integrated into payment processes not only as plastic cards carried by employees, but also as ghost accounts, accounts payable cards and virtual accounts embedded within electronic accounts payable reconciliation technologies.

What do you mean by e-Procurement?
e-Procurement solutions are used by forward-thinking companies to streamline and automate their order placement activities. e-Procurement software applications are employee self-service solutions that support requisition, approval routing and order placement. These applications can eliminate manual purchasing activities, minimize process variance, enable process integration, reduce the need for multiple procurement systems and help minimize invoice and payment errors. 

How do different companies document their purchases with a procurement card if they don't use paper?
Using procurement cards gives you access to a vast amount of data delivered through the issuing bank's reporting technology. Companies typically have electronic feeds established between their bank and their various procure-to-pay processes so that detailed data can be uploaded and provide a trail as to what employees are buying, when, how much they paid — even details such as sales tax. The data can be monitored and analyzed electronically and funneled to business and cost-center managers for review and approval. So you can streamline and improve that knowledge base and approval process by eliminating the paper and having the data available electronically.

What metrics do others use to share with their management? We only share total card volume and program savings right now.
Regarding card program performance, useful metrics include: Monthly card spend, monthly spend per cardholder or employee, monthly transactions per card, average transaction size, cardholder to employee ratio, percent of active cards in a typical month, transaction cost savings due to payment by card, percent of transactions under $2,500 paid by card, and percent of transactions between $2,500 and $10,000 paid by card. More and more companies are interested in benchmarking their performance against their peers in terms of revenue size and industry.

You could also report metrics such as lost savings, which occurs when employees are making purchases not approved by the organization. Often organizations categorize information by department or spend category to target their analyses.

Instead of using the corporate purchasing card, employees often use their personal cards and get reimbursed through check requisition so that they can receive points and flyer miles. How is this best addressed?
We know that it is very tempting for employees to use their own personal cards for rewards programs, but in order for a corporate card program to be successful, there needs to be a business mandate to use that card program. You can integrate the mandate policy into your new employee training, so that those who are assigned a travel card are instructed as to how to use it and what the approval process is.

Another powerful incentive is the lost savings report. By sharing statistics on the savings lost as result of employees’ use of personal cards, department heads are more likely to enforce company policy.

What is the typical dollar limit used by companies for their card programs? Ours is currently capped at $10,000.
In order to determine the optimal limit for your organization, it is beneficial to do a spend analysis. By analyzing spend with preferred suppliers and specific categories such as office suppliers, computers, MRO, etc., companies are able to determine the types of spend to put on the card, and then place the limit at the point where you can capture most of the transactions for your organization. We've seen some companies go much higher than $10,000, because they are using the card within their business continuity plans – to prepare for emergency need. Others may have special purpose cards for major conferences/meetings with limits that could be over $100,000. The limit depends on the nature of an organization’s procurement activities, the type of assigned cardholders, and its control strategy.

Please describe controls for preventing abuse by cardholders.
Abuse usually falls into one of two categories: misuse and spend-out-of-policy. Misuse occurs when an employee charges a personal expense to a card then misrepresents it as a business expense. Spend-out-of-policy occurs when a card is used in a way that doesn't conform to the spending policies of the organization.

A company's control strategy should fit into the framework of overall enterprise controls. This would include having a strong hierarchy of reviews and approvals of purchases, having good technology that allows data tracking with reports, and having an audit program to periodically review and track whether employees are following guidelines. Your control strategy should also include good communication of the rules through training and one-on-one communication. In addition, card programs allow you to block certain activity by MCC or Merchant Category Code and to establish spending limits by transaction and per cardholder by month.

Furthermore, corporate card programs allow organizations to select the corporate card liability structure that best meet the organization’s control needs. The corporate card liability structure determines who is ultimately liable for the balance on the card – the organization or the individual cardholder.

How are 1099 reporting requirements handled with commercial card payments?
If your organization pays a non-corporate payee a total of $600 or more during a calendar year, you must report the payment to the Internal Revenue Service (IRS) on a Form 1099-Miscellaneous (MISC) or Form 1099-Interest Income (INT), and send a duplicate Form 1099 to the payee. Generally, payments to corporations are not reportable.

Generally, most commercial card issuing financial institutions provide a reporting service to their customers that details information necessary to prepare the appropriate IRS forms.   

How is sales tax reporting handled with commercial card payments?
The sales tax issue that arises on a procurement card transaction is generally identifying the transactions where sales tax was not charged on a taxable transaction. For these transactions, the purchaser has an obligation to accrue the use tax. This situation occurs most frequently when a cardholder makes a purchase from an out-of-state vendor and the vendor is not registered to collect sales tax in the state where the goods are being shipped. Card programs employ a variety of approaches to accruing and remitting the use tax. Some programs develop a factor using statistical sampling and calculate the use tax by multiplying the total amount of purchases by the factor. Other programs may apply tax modeling techniques using either a spreadsheet application or commercially available software designed specifically for the purpose of managing the use tax accrual.

What is a ghost account?
Ghost cards are virtual purchasing accounts (i.e., no physical card) associated with a single department, supplier or spend type regardless of the individual making the purchase. For example, a ghost card may be used to pay for corporate events such as sales meetings, training or client conferences. Irrespective of the purpose, purchases are always charged to an individual account, which can only be accessed by the designated purchaser. Organizations typically receive and pay ghost card bills centrally and establish controls to validate purchases and reconcile card statements through department and employee expense verification.  

Is there a process for approving purchases by commercial cards prior to the purchase?
Some commercial card issuing financial institutions provide card management systems to allow an organization to pre-authorize specific purchase amounts. This technology allows the approving manager to authorize either a specific one-time purchase or to limit transactions by cardholder to a specific amount. In addition, declining balance type cards allow organizations to pre-authorize a specific overall project budget to be paid by a specific card account. Once the pre-authorized balance amount has been accessed, the card account is de-activated.

What is a Commercial One card program?
Companies frequently use multiple card programs to pay for different expense categories – for example, procurement, travel and entertainment (T&E), and fleet expenses. Some organizations, however, are implementing the one card concept – a flexible, integrated commercial card solution that can potentially reduce administrative costs, streamline accounting, improve spending control and improve efficiencies. Procurement, Travel and Fleet expenses are all paid by one commercial card program.

Organizations should evaluate the advantages and potential challenges of a one card program against their card program objectives and Procure-to-Pay strategy in order to determine whether or not a one card program is the best solution to meet their needs.  

What are some of the benefits to suppliers for accepting payment by commercial card?
Acceptance of commercial card payments allows suppliers to run their payment collection processes more efficiently by streamlining functions, reducing paperwork and administrative expenses, increasing productivity, and achieving an array of additional benefits that include:

  • Potential increased sales volume by allowing new and existing customers to use the payment method that works best for them
  • Increased cash flow by receiving payment in time frames as short as two to three days
  • Saving time and money by eliminating costly credit approvals and late payments collections activity
  • Opening new sales channels such as B2B e-commerce
  • Enhancing their competitive position by offering customers greater payment choices
  • Improving customer service

It sounds like you are speaking to large companies. Does a commercial card make sense for every company?
All revenue size and industry group organizations can benefit from commercial cards that can eliminate invoice and check processing costs as well as provide enhanced purchase information through card program reporting.

How can card programs provide the detailed information I need to see in my general ledger system?
Organizations benefit from being able to view the details of their spend – what they purchased, who purchased it, how much they paid, etc.  Commercial card programs can provide this information through issuing bank reporting systems – online inquiry, electronic and paper reporting, and data uploads to your company’s general ledger or other accounting system.  Suppliers provide Level 1, 2 or 3 detail with Level 3 providing the most detail.

What department tends to handle the procurement card program – Procurement or Accounts Payable? 
In our experience, we have seen the day-to-day management of procurement card programs run successfully by either the Procurement or Accounts Payable department. However, organizations with the most effective programs typically involve both groups when developing and implementing the card program strategy. This joint approach allows organizations to standardize and streamline non-strategic activities, increasing the quality of service provided to the company. Additionally, this enables Procurement and Accounts Payables’ joint participation on cross functional teams for initiatives involving the purchasing card such as the initial implementation, or integration with an e-Procurement or expense management solutions.

Do you see P2P pieces (procurement/AP) being in one organization or split between procurement and finance. If in one, which one do you see it in the most?
Determining the degree of centralization of Procure-to-Pay functions (Procurement, Accounts Payable) is a critical organizational design and management decision. A company’s strategy, culture, and organizational structure will strongly influence this decision.

The most effective companies typically drive the integration of Procure-to-Pay functions (Procurement, Accounts Payable, Card Program Management) through the development of a shared services organization.  They encourage a close working relationship with the business units they support through a variety of approaches including cross functional business management teams, internal stakeholder councils, and business unit liaisons.  This approach allows these organizations to standardize and streamline non-strategic activities, increasing the quality of service provided to the company. In addition, a shared services model can enable significant cost savings by eliminating any duplication of effort across business units or regions.

Do you have any suggestions for improving controls and maintaining an audit trail within the P2P lifecycle? In addition, do you have suggestions for monitoring fraud and misuse of procurement cards?
Implementing a well-controlled Procure-to-Pay process and commercial card program is critical to mitigating organizational risk. The most effective organizations define control objectives that align with the Procure-to-Pay strategy, including compliance with procurement and payment policies, reduction of maverick spend and mitigation of fraud.

These organizations typically achieve Procure-to-Pay control goals by implementing effective practices within the following five areas: Procure-to-Pay Ownership, Policies, Procedures, Technology and Audit:

  • Ownership - Establish an organizational structure with well-defined roles and responsibilities to monitor the Procure-to-Pay process
  • Policies – Develop policies that support various aspects of Procure-to-Pay control, including sourcing, order placement, payment and settlement, reconciliation and reporting
  • Procedures - Establish procedures that define execution of the established Procure-to-Pay policies
  • Technology – Implement technology to enforce procedures and guard against human error
  • Audit – Implement regular audits to monitor Procure-to-Pay policies and procedures compliance as well as identify any needed policy and procedure updates

In addition, commercial card program parameters, such as user profiles, spending limits and Merchant Category Code (MCC) blocking, can be implemented to minimize the risk of misuse. User profiles are commonly used as the basis for establishing card parameters because common employee profiles tend to be associated with common spending requirements. Effective organizations use a combination of individual transaction and monthly limits to control spend on purchasing cards, and establish guidelines for reviewing and adjusting these limits on a regular basis. In addition to a list of blocked MCC codes, many organizations maintain an MCC “watch list” which contains un-blocked MCCs that the company should monitor and consider blocking in the future depending on cardholder activity. Effectively using MCC blocks can prevent misuse at the point of sale.

Commercial cards are capable of recording and transmitting enhanced levels of data that satisfy auditors’ information requirements. Cards are capable of recording data ranging from basic information such as merchant name and transaction amount to extremely detailed information, such as purchase description, quantity, unit of measurement, product code and much more. 

Are you finding that companies are moving toward imaging or electronic receipt management? In addition, with card programs, is there sufficient documentation available through the issuing bank to preclude the need for maintaining individual receipts, which is burdensome and inefficient, particularly for T&E (Time and Expense)?
Increasingly, forward thinking organizations are choosing to use electronic imaging to store receipts electronically in order to reduce storage costs and make it easier to locate archived receipts.  Electronic receipt imaging can save a company US$4 or more per expense report (Concur Technologies Inc., 2007). Upon imaging, electronic receipts can be made available online through integration with expense reporting solutions to allow cardholders, Accounts Payable staff and card program management to view, approve, and attach the electronic receipts to expense reports.

In a further effort to reduce receipt retention costs, many companies are no longer requiring employees to submit receipts for purchases paid by the commercial card. The U.S. Internal Revenue Service (IRS) will accept electronic receipts in lieu of paper, provided there is detail for each individual purchase. If a company is unsure if the level of detail their expense management system maintains is sufficient, they can request a ruling from the IRS. All IRS rulings are made public and companies can base their system and retention guidelines on previous rulings. 

What are the different components of AP automation (e.g., EIPP)?
A key component to an Accounts Payable automation strategy is the reduction of paper in the invoice receipt-to-pay cycle. The most effective organizations adopt technology solutions that enable the receipt of electronic invoices, convert paper invoices into digital images, store electronic invoices in a web-based repository, and extract key data from the invoices to enhance reporting and approval and payment processing. These organizations typically evaluate the following aspects of the Accounts:

  • Payable function when identifying opportunities for automation:
  • Invoice Receipt – Organizations automate the receipt of invoices through EDI or solutions supporting Electronic Invoice Payment and Presentment (EIPP), which are electronic solutions a company can use to automate key Accounts Payable processes such as invoice receipt, data entry, disputes, approvals, payments and payment reconciliation
  • Document and Data Capture – Organizations consider imaging or automating the conversion and capture of paper documents into an electronic format.
  • Content Storage and Management – Companies also automate the storage, management, and retrieval of electronic documents and data
  • Workflow Management – Workflow management solutions allow invoices to be automatically routed for appropriate approval
  • Payment – Organizations can automate the payment of invoices through ACH (Automated Clearing House) or a commercial card solution. For commercial card solutions, there are generally two types of payment methods, Accounts Payable Cards and Ghost Cards/Virtual Accounts
  • Reporting and Analytics – Automated Accounts Payable solutions enable the analysis of payment process performance data such as the number of invoices pending approval, unpaid invoices past due, and average invoice processing time as well as the analysis of spend data for strategic sourcing purposes

Could a Procurement Card program negatively impact an organization's efforts to better leverage/consolidate its indirect spend? i.e., foregoing preferred supplier negotiated pricing, spend off revenue volume tiers, and/or payment terms discounts.
Procurement card programs typically improve an organization’s ability to leverage indirect spend. Procurement cards allow an organization to gain greater visibility into spend, enabling more accurate and comprehensive spend analytics. Spend data analysis can help companies better understand their purchases with top suppliers by spend type, enabling them to negotiate supplier terms and pricing.

The most effective organizations use enhanced transaction data from the procurement card (also known as Level II and Level III data or “line-item detail”) to further improve reporting and analytic capabilities, monitor spend policy compliance, and facilitate reconciliation processes. Enhanced data includes transaction details, such as purchase amount, sales tax, customer code and potentially, full line item detail, such as item description, quantity, unit of measure, unit cost, and product code.

Capturing the enhanced data enables companies to track spend across multiple categories such as supplier, Merchant Category Code (MCC) and line item description. In addition, companies can use enhanced data to support supplier negotiations; companies can analyze the spend elements that negotiations are based upon such as pricing by item/product code in order to improve service and access to discounts. Companies can also track supplier spend by line item to ensure compliance with spend policies and use of preferred suppliers.

Related Content:
Archived Webcast:  Procure-to-Pay and Commercial Card Programs: Driving Profits Through Next Generation Procurement Programs 
Overview:  Strategy & Operations 

Note: Visa does not make any warranty or representation as to this information, nor assume any liability or responsibility that may result from reliance on such information. The information contained herein is not intended as legal or tax advice, and readers are Note: Visa does not make any warranty or representation as to this information, nor assume any liability or responsibility that may result from reliance on such information. The information contained herein is not intended as legal or tax advice, and readers are encouraged to seek the advice of a competent tax professional where such advice is required. encouraged to seek the advice of a competent tax professional where such advice is required.

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