Page 36 - Accounting Best Practices

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3–4 Use Procurement Cards
3–4 USE PROCUREMENT CARDS 25
Consider the number of work steps required to process a payment to a supplier:
receiving paperwork, sorting and matching it, entering data into a computer, rout-
ing invoices through the organization for approvals, expediting those invoices
that have early-payment discounts, creating month-end accruals, setting up files
on new suppliers in the computer and the filing system, processing checks,
obtaining check signatures, mailing payments, and filing away check copies.
Now consider how many purchases are so small that the cost of all these activities
exceeds the cost of the purchase. In many instances, one-quarter or more of all
payment transactions fall into this category.
The answer to this problem is not to find a more efficient way to process the
supplier invoices, but to change the way in which these items or services are pur-
chased. Instead of using a purchase order or check to purchase something, one
should instead use a procurement card. A procurement card, also known as a pur-
chasing card, is simply a credit card that has a few extra features. The card is
issued to those people who make frequent purchases, with instructions to keep on
making the same purchases, but to do so with the card. This eliminates the multi-
tude of supplier invoices by consolidating them all into a single monthly credit
card statement.
As there is always a risk of having a user purchase extraneous items with a
credit card, including cash advances or excessively expensive purchases, the pro-
curement card adds a few features to control precisely what is purchased. For exam-
ple, it can have a limitation on the total daily amount purchased, the total amount
purchased per transaction, or the total purchased per month. It may also limit pur-
chases to a specific store or to only those stores that fall into a specific Std Industry
Code (SIC code) category, such as a plumbing supply store and nothing else. These
built-in controls effectively reduce the risk that procurement cards will be misused.
Once the credit card statement arrives, it may be too jumbled, with hundreds
of purchases, to determine the expense accounts to which all the items are to be
charged. To help matters, a company can specify how the credit card statement is
to be sorted by the credit card processing company; it can list expenses by the
location of each purchase, by SIC code, or by dollar amount, as well as by date. It
is even possible to receive an electronic transmission of the credit card statement
so that a company can do its own sorting of expenses. The purchasing limitations
and expense statement changes are the key differences between a regular credit
card and a procurement card.
Another feature provided by those entities that offer procurement cards is
“Level II” data; this includes a supplier’s minority supplier status, incorporated
status, and its tax identification number. Another option to look into when
reviewing the procurement card option is the existence of “Level III” reporting,
which includes such line-item details as quantities, product codes, product
descriptions, and freight and duty costs—in short, the bulk of the information
needed to maintain a detailed knowledge of exactly what is being bought with a