Published In:
CFO Date Published:
15th June 2002 Author:
Simon Segal
For finance managers, choice and flexibility in deciding when, where, and how to pay for goods and services is becoming increasingly important as a competitive tool. To meet this increasingly diverse set of payment needs, the major credit card companies are developing products and using information technology systems aimed at helping companies purchase a wide range of goods and services more efficiently and track expenses more accurately.
Cards have become more than just a payment tool, as the supporting IT system can be customised to meet the needs of finance managers by allowing them to set defined spending parameters and other strategic goals.
On the product side, most credit card companies offer a corporate card program aimed primarily at travel and entertainment (T&E) expenditure. More recent is the development of purchasing cards.
Diners Club estimates two-thirds of companies now rely on a corporate card program to fund travel and entertainment expenses, but few take full advantage of the benefits the program offers - only half of companies with a corporate card program issue a card to all employees who incur travel and entertainment expenses.
So Visa's Corporate Card pitches itself as "improving expense reporting and analysis, thus helping companies negotiate better discounts from vendors and monitor employee spending more effectively".
Unlike consumer credit cards, corporate card balances are not carried forward from one statement period to the next. Companies can place restrictions on spending limits, and transaction data can be integrated with company financial systems.
Corporate cards are typically marketed to large and mid-sized companies with large transaction volumes and a need to actively manage travel budgets.
Most card companies also offer a card aimed at businesses with under 100 employees. This card enables small companies to separate their business and personal expenses, while simplifying monthly bookkeeping tasks and providing detailed spending reports that can be valuable for tax preparation. Small business owners can also set purchase limits for each authorised employee.
Diners Club general manager of sales and marketing, James Atkins, argues that the two main benefits of corporate cards are administrative efficiency and the ability to receive detailed management information on travel and entertainment spending. Data gathered on travel and entertainment spending, travel volume, travel patterns and policy compliance can be used to control and improve the travel management program.
"Cash advances and direct invoices are cumbersome and costly payment methods," Atkins says. Cash advances are the most expensive payment method companies can use to fund T&E expenditure.
Research by Ernst & Young, commissioned by American Express in the United States, finds that the best result in cash advance processes identified a saving of 88 per cent at $US4.38 each process, when compared with the average cost per cash advance at $US36.86. The highest amount paid for a cash advance was $US167.76. An average company issuing 500 cash advances per year could save as much as $US16,000 annually by moving into best-practice performance.
Additionally, the average time taken to manage each cash advance was 102 minutes, which can be valuable time spent on more important business activities.
The study found the best central billing process achieved costs 89 per cent better than the average cost per central bill ($US23.28 compared with $US218.76). So a company that processes 100 central bills per year could save $US19,500 annually.
For the past few years card companies have been offering "purchasing cards" aimed to help corporations improve control of their purchasing and reduce their costs. The purchasing card expands the company's product offerings from the corporate card's traditional travel and entertainment base into a new category of corporate spending.
Howard Allen, vice-president, American Express CorporateServices, explains that "the purchasing card was developed for all non-strategic purchasing done by companies, which includes everything from computers to pencils, from flowers to recruitment". Allen reckons the total business purchasing market in Asia is around $US400 billion.
"It is self-evident to say that the efficient procurement of goods and services is critical to any company's efforts to reduce administrative cost and waste. Eliminating excess costs can be the difference between black ink and red ink on the bottom of a balance sheet."
The types of transactions that the purchasing card aims at are those repetitive low-value purchases that typically make up around 80 per cent of the total transaction volume for a corporation and are extremely costly to process. By way of an example, Allen notes the cost to an average company of buying and paying for a $10 computer disk is roughly $85. "The goal of the purchasing card is to remove the majority of effort and cost from this process while retaining financial control."
Rosemary Dunn, American Express director of corporate services, Australia, highlights two ways in which the purchasing card can reduce a company's costs - cutting the time and effort of employees in simply making a purchase and by providing an additional opportunity to develop agreements with preferred suppliers.
Ernst & Young's research for American Express finds that companies which use purchasing cards spent about 80 per cent less on the procurement of goods than firms using purchase orders. They also complete buying tasks about 75 per cent faster. Verifying bills and generating payment cost 95 per cent less and was 94 per cent faster.
Expense Reduction Analysts Consulting (ERA Consulting) merchant card services specialist Jeremy Gimson reckons the credit transaction rate typically varies from 1 per cent for a very large client to 2.5 per cent for a smaller client.
"For the debit transactions, the rate is based on a small number of cents per transaction," says Gimson. He reports success in achieving savings and improved service in merchant card services.
"One first has to assess how much is being spent on credit and debit transactions, how many credit and debit transactions are going through, what the average transaction size is, the proportion of card present and card not present transactions, and the rate being charged."
Once this information has been assessed, the company is in a position to approach and negotiate with the incumbent bank before, if necessary, putting the job out to market. Suppliers are asked to re-assess their rates and services based on the client's total annual transaction value, average transaction size and the number of transactions that are card present (swiped through or Eftpos) and card not present (over the phone or internet).
"The latter are charged at a higher rate because of the higher risk factor and the differential on the bank interchange rate," Gimson says.
With product differentiation among the major card companies narrowing, the rush is to use information technology more smartly.
Atkins expects Diner Club corporate clients will achieve cost and time savings of up to 80 per cent by moving their business card management and expense reconciliation from manual process to its online solution.
He notes that the Australian National Audit Office now recommends public sector bodies and departments move from entitlement-based travel and accommodation allowances to a charge card system.
Peter Gordon, vice-president, commercial payment solutions, Asia/Pacific, MasterCard International, claims MasterCard's commercial card product solution provides the corporate buyer with a fully functional delegatory B2B purchasing/payment tool, enabling the cardholder to initiate the purchase and pay for the transaction without the involvement of any non-value added approval process.
"This differs significantly from the traditional paper-based purchase requisition purchase order/invoice matching/payment approval and payment remittance process, which is recognised as being costly and inefficient for low- to medium-value procurement," he explains.
Gordon highlights the benefits of this process as being the elimination of the creation and data entry of paper purchase requisitions/purchase orders; the removal of supplier/vendor creation and/or maintenance; the elimination of the "matching principle" for supplier/vendor payment initiation; the elimination of payment run set-ups/payment run authority; the elimination of mail costs/bank fees associated with payments, plus the option for reduced costs on bank drafts for overseas payments; simplified bank reconciliation process with the removal of a large percentage of cheque activity; reductions in replacement cheque costs; and reduced supplier/vendor accounts payable enquiries as the supplier/vendor is paid within two to three working days by the bank.
He identifies the benefits to corporations using such systems as: they provide their cardholders with functionality, such as daily validation of transactions with full cost allocation functionality; the capacity to account for GST and also add line item detail; online endorsement of cardholder transactions by line management; print screen capability for attached tax invoice/receipt documentation; electronic posting of confirmed transactional card data; capacity to maintain a comprehensive vendor/supplier profile of all commercial card expenditure, providing extensive management and exception reporting; and capacity to view and account for encumbered commercial card transaction data not yet ledgered, but requiring financial accounting treatment for end-of-period reporting.
He adds that such functionality provides for major resource and enterprise resource planning (ERP)/accounting system efficiencies that include electronic posting of transactional data direct to the general ledger, without any intervention from accounts payable; removal or inactivation of approximately 65 per cent (industry benchmark) of vendor master file records on the ERP/accounting system; reduced production of ERP reporting and report writing needs; reduced end-user ERP training costs and system accessibility costs; and simplified ERP bank reconciliation process.
Purchasing cards
Employees order goods or services from approved suppliers, using their purchasing card as payment. The supplier authorises the transaction (most notably by checking the cardholder is within agreed spending limits) and then delivers the goods to the cardholder. The supplier then sends full details of the transactions to the card company electronically and is paid in an average of five working days - compared with an average of 54 days with paper invoicing. The transaction information is delivered electronically to the client monthly. This information can be automatically loaded into the client's ledger, removing thousands of hours of manual keying. The client then makes one monthly payment.
Purchasing costs are reduced by:
Decentralised processes that eliminate the delay and cost of traditional purchase order processing. These savings can be achieved through decentralised ordering, receiving and reconciliation processes, as well as reduced invoice processing by the accounts payable department. In addition to lower purchasing costs, this streamlined approach also helps companies improve control over purchasing, simplify data management and regulatory compliance processes and increase employee productivity.
Improved billing and payment processes. Research by Ernst & Young, commissioned by American Express in the US, finds under traditional procurement methods, around 36 per cent of the total cost of order processing is associated with billing and payment. Purchasing cards simplify this process by enabling a company to consolidate expenses and make one payment, reducing the costs associated with billing and payment by up to 96 per cent.
Effective controls to track and manage spending, prevent misuses and enforce policy. To control expenditures, maximum spending limits per transaction and per month can be set. Also, industry restrictions enable managers to target industries from which they purchase goods and services for the maintenance, repair and operation (MRO) of the business, as well as capital and business services.
Consolidating suppliers to simplify the ordering process and gain volume discounts from suppliers. American Express estimates supplier cost reductions can reach 15 per cent.
End-to-end process automation and data integration to streamline purchasing. Accessing detailed spending data helps monitor and control spending, view trends and minimise manual data capture. American Express claims that when this is combined with an e-purchasing system, savings of up to 95 per cent can be created. Corporations can streamline the back-end process, thus shifting low-medium value/high-volume procurement activity to an alternative electronic platform, without loss of data integrity or accountability.
