Published In:
CFO, Australia Date Published:
5th March 2005 Author:
Simon Segal
The use of corporate credit cards is growing, but their cost-saving benefits are largely under-used
Chief financial officers have a primal fear of corporate credit cards. They dread the possibility that employees will overspend, leaving the company liable for the charges.
According to the leading credit card companies, however, such fears are exaggerated. Many financial managers tend to overlook the way cards and their attendant information systems allow them to limit purchase from a particular supplier, or within a certain area of expense.
Unlike the balances on consumer cards, those on corporate cards are not carried forward from one statement period to the next. Companies can place restrictions on spending, and transaction data can be integrated with company financial systems.
Corporate cards allow financial managers to set spending limits, and restrict card use to designated spending categories, such as air travel, hotel bookings or retail.
Beyond restricting the typical travel and entertainment (T&E) expenditure, corporate cards can create efficiencies by eliminating multiple invoices for numerous indirect expenses.
Cash advances are the most expensive payment method companies can use to fund T&E expenditure.
The head of commercial solutions, Visa Australia, Vipin Kalra, says: "Use of the corporate card is spreading beyond the more traditional T&E expenditure. Online ordering for a range of goods and services encourages the use of cards. This is a growing market that all the major card providers are pursuing aggressively."
Kalra notes that studies conducted by Visa over the past few years "demonstrate that almost 50% of firms surveyed use electronic expense management systems, although they also show that there is a fair way to go."
A report on mid-size companies, Leading Practices in Expense Management, prepared by CFO Research Services in collaboration with American Express Corporate Services says that 62% of middle-market companies have a corporate card programme. "However, companies may not be leveraging the benefits fully throughout their organisations," the report says. "Where companies do have corporate cards, they are usually distributed to a small number of executives or heavy travellers, and these cards are used predominantly for T&E expenses. By not using cards extensively, companies may be missing an opportunity for finance to improve its insight into, and control over, expenses."
The report adds that many employees use cash, cheques, and personal credit cards for paying expenses, rather than company-issued cards. "Without mandated policies, employees will continue to use disparate payment methods, denying managers the information they can get from a corporate card system. Detailed spending reports, online management tools and expense report integration are all benefits available with corporate cards, but not with other payment methods."
Such claims on the benefits of corporate cards should not be taken at face value. Jeremy Gimson, merchant card services specialist at consultancy Expense Reduction Analysts (ERA), stresses that financial managers should question the service they get from their merchant card service provider and determine whether the rate is competitive.
His starting premise is to analyse the company's merchant statements to assess how much is being spent on credit and debit transactions, how many credit and debit transactions are going through, the size of the average transaction, the proportion of card-present (swiped through) and card-not-present (by telephone or internet) transactions and the rates being charged.
"Then one can understand service-related issues and find out how the transactions are being processed. The credit transaction rate will typically be a low percentage - say, from 1% for a very large client to 2.5% for a small client. For the debit transactions, the rate will be based on a small number of cents per transaction."
Once this information has been assessed a CFO is in a position to negotiate with the bank on the basis of the company's annual transaction value, average transaction size and number of transactions that are card-present and card-not-present which are charged at a higher rate because of the higher risk factor and the differential on the bank interchange rate).
The report, Maxismising Expense Management Savings, prepared for American Express by Accenture, finds the consequences of ignoring card data are lost savings opportunities, and lost expense-management efficiencies.
"Organisations employing best-in-class corporate card data usage, which includes the use of global, regional and enhanced data, realise average incremental savings of up to 7.2% on their T&E budget. This gain is from improved sourcing with suppliers to maximise discounts and rebates and from improved compliance. The bottom line is that a company with a $25-million annual T&E budget could gain up to $1.8million in incremental savings," the report said.
The report further finds that companies using expense processing best practices realise an average incremental saving of up to 1.8% on their T&E budget. "This gain is from the automating expense submission and approval processes, automating expense processing (including cash advances) and using online card program-management tools."
The report concludes that corporate cards used most efficiently reflect employees' actual spending, company-wide and across local, regional or global offices. Financial managers can "see the best possible picture of their T&E costs. With such data in hand, they are better able to make informed decisions when setting T&E policies and gain the best leverage possible when negotiating with preferred supplier partners. In addition, firms can cut T&E administrative costs by taking advantage of the new generation of web-based management tools."
Catherin Bennett, director (IT Management Programme) at IDC Australia notes that the direct benefits (whether using hardware or software) are great improvements to operational efficiencies and effective information use.
"Technology can reduce the number of human resources required to perform a certain task," she said. "This is seen most commonly in manufacturing with the use of robotics, but also in other sectors such as financial services, where online banking has reduced the number of branch offices."
The indirect benefits of technology that Bennett identifies include enabling management to make more informed decisions by having access to the heart of an enterprises's information.
Since 1996, IDC's annual Forecast for Management survey across Australia and New Zealand has found that chief information officers believe that executives view IT as primarily contributing to their operational capability, and secondly as a source of competitive advantage.
The 2004 IDC survey shows the return on investment (ROI) time frames to be shrinking, with 35% expecting an ROI on IT investments within 12-24 months.
"Businesses are not giving the CIO very much time to deliver. Therefore, CIOs continue to search for the most effective tools and methodologies to help them achieve these goals," the report says.
