Electronic Invoicing

Electronic Invoicing - spend or invest?

I was reflecting on the use of language and how government no longer spends our money raised as tax revenue they invest it.

Electronic Invoicing; do you spend or invest?

There is a cost to implementing eInvoicing and someone has to meet that cost. Will it be the buyer or the supplier? This debate about who pays is unresolved with no consensus on who pays and why. I suspect it will remain so for the foreseeable future.

What is the outcome of implementing eInvoicing?

AP costs are reduced - easy win and the financial justification provide you can cash the savings
Discounted goods and services - if you have capital available to take early payment discounts
Warm and fuzzy compliance improvement - but some pay attention others don't
Lower prices - how is that?

I was thinking the other day about how to, once again, help a customer justify their investment in electronic invoicing. They need their suppliers to participate and I used the words "you need to sponsor your suppliers.".

Now I want to use the words 'invest' and 'sponsor' when discussing eInvoicing.

Previously I would have talked about "who will pay" and "getting suppliers to commit".

Is this just a massage of words or more?

Justification for invest and sponsor approach

Let's say you spent £15M on purchased goods and services per annum with 425 suppliers. Your investment in electronic invoicing to include the sponsorship of your suppliers' participation amounts to £15,000 per annum (0.1% of your spend).

You now are looking at what ROI you can achieve on £15,000 per annum.

Let's go for the simple case:

If you accept that eInvoicing is not a fad and is on course to be the way that buyers and suppliers will facilitate AP and AR functions then we need a solution that is equitable for all. Supply chains have many tiers and the cost in the supply chain is ultimately reflected in the price that the end customer pays. eInvoicing is a method to reduce the cost of processing a supplier invoice that saves the payer and payee time and money and when you put that saving into each tier of the supply chain there is a benefit to all supply chain participants. Perhaps the milkman is not a big player in this scheme but you probably pay them out of petty cash.

This is why supply chains prosper as they seek to drive cost out of the supply chain as lower overheads result in lower prices.

For eInvoicing to deliver the best ROI you need all suppliers to participate as then you can have one AP process (all electronic rather than electronic for some and paper for others). Therefore all suppliers should be sponsored.

How do your recover your investment?

You spend £15M per annum
You have 425 suppliers
You invest £15,000 per annum
You save £30,000 with no risk

You sponsor your suppliers and recover your investment by taking a discount of 0.2% (1/5%) on all invoices (£15M x 0.2% = £30,000) Will your suppliers quibble at a 1/5% discount?

Your ROI is only based on savings against money that you were going to spend anyway and does not include other cash savings that you might achieve. It a no risk return.

Even if you reduce the number of suppliers, as many are doing, then you spend the same but with fewer suppliers but this does not affect your ROI. Actually, with the trend to have a smaller number of suppliers who in turn sub-contract with suppliers who used used to be direct suppliers to you, then the argument to drive cost out of the supply chain is even more valid.

Let suppliers know the deal

Your suppliers benefit as they should no longer need to service requests for copy invoices and your capability to process supplier payments on time is greatly improved. Of course if you never intend to pay your suppliers on time then that is another matter. You may also send a message to your suppliers that you only deal with suppliers that agree to submit electronic invoices so they know they are on a level playing field with other suppliers.

Your supplier has invoices totalling £200,000 per annum under the formula above their invoices would be discounted by £400 (£200,000 x 0.2%) that is £8 per week to have the capability to receive and process electronic orders and send electronic invoices - the price of twenty five first class stamps.

Your supplier has invoices totalling £10,000 per annum under the formula above their invoices would be discounted by £20 (£10,000 x 0.2%) that is 40 pence per week to have the capability to receive and process electronic orders and send electronic invoices - little more than the price of one first class stamp.

A better way

I suggest this approach is much more favourable way to approach the introduction of eInvoicing than to confront suppliers with an upfront cost and is perhaps showing them the way to go downstream in their supply chain to introduce eInvoicing so there are savings in n tiers of the supply chain.

Food for thought?

Labels: einvoicing, lower costs, roi, suppliers

posted by FrankB @ 9:25 AM