Page 32 - Accounting Best Practices

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3–1 Pay Based on Receiving Approval Only
the additional approvals. The only best practice that truly addresses the underly-
ing problems of the accounts payable process is paying based on receipt.
To pay based on receipt, one must first do away with the concept of having an
accounts payable staff that performs the traditional matching process. Instead, the
receiving staff checks to see if there is a purchase order at the time of receipt. If
there is, the computer system automatically pays the supplier. Sounds simple? It is
not. A company must have several features installed before the concept will func-
tion properly. The main issue is having a computer terminal at the receiving dock.
When a supplier shipment arrives, a receiving person takes the purchase order
number and quantity received from the shipping documentation and punches it
into the computer. The computer system will check against an on-line database of
open purchase orders to see if the shipment was authorized. If so, the system will
automatically schedule a payment to the supplier based on the purchase order
price, which can be sent by wire transfer. If the purchase order number is not in the
database, or if there is no purchase order number at all, the shipment is rejected at
the receiving dock. Note that the accounts payable staff takes no part whatsoever
in this process—everything has been shifted to a simple step at the receiving loca-
tion. The process is shown graphically in Exhibit 3.2.
Before laying off the entire accounts payable staff and acquiring such a sys-
tem, there are several problems to overcome. They are as follows:

• Train suppliers. Every supplier who sends anything to a company must be
trained to include the purchase order number, the company’s part number,
and the quantity shipped on the shipping documentation, so this information
can be punched into the computer at the receiving location. The information
can be encoded as bar codes to make the data-entry task easier for the receiv-
ing employees. Training a supplier may be difficult, especially if the com-
pany only purchases a small quantity of goods from the supplier. To make it
worthwhile for the supplier to go to this extra effort, it may be necessary to
concentrate purchases with a smaller number of suppliers to give each one a
significant volume of orders.
• Alter the accounting system. The traditional accounting software is not
designed to allow approvals at the receiving dock. Accordingly, a company
will have to reprogram the system to allow the reengineered process to be
performed. This can be an exceptionally major undertaking, especially if the
software is constantly being upgraded by the supplier—every upgrade will
wipe out any custom programming that the company may have created.
• Prepare for miscellaneous payments. The accounts payable department will
not really go away because there will always be stray supplier invoices of
various kinds arriving for payment that cannot possibly go through the receiving
dock, such as subscription payments, utility bills, and repair invoices. Accord-
ingly, the old payments system must still be maintained, though at a greatly
reduced level, to handle these items.