Despite widespread agreement that effective expense
management is critical to business success, there's still one aspect of expense
management that tends to be handled badly. And it's costing many businesses
millions each year! Ironically, it's a cost that can be drastically reduced
(all but eliminated) overnight.
I'm talking about the processing costs associated with
purchases. They're called "transactional processing costs"; they're
not the cost of the purchase itself, but the cost of the transaction.
The Dollar-Value of Transactional Processing Costs
The end-to-end cost of processing high volume, low-value
purchases (such as travel, entertainment, contract labour hire, training,
employee claims, stationery, publications, books, kitchen supplies, etc.) can
be exorbitant. In fact, in many cases, it's higher than the purchase cost
itself (even with the efficiencies delivered by an ERP application). The reason
for this is that the total cost-to-transact includes many associated activities
such as processing, administration, and bank fees, to name just three. In a
typical business, 90% of purchases are low value; they represent less than 10%
of total company purchase spend. But because the cost of each transaction is
normally much the same regardless of the purchase price, in reality, these low-value purchases cost far more than the big purchases. Consequently, the
majority of available company resources (e.g. employee time, effort, and money)
may be dedicated to managing the low-value, high-volume transactions that
constitute a relatively small percentage of overall company expenditure.
How to Reduce Transactional Processing Costs
An increasing number of businesses have taken steps to
address this issue, and have enjoyed substantial operational savings and direct
bottom-line improvements. They've significantly improved their operational
efficiency and, in many cases, reduced their transactional processing costs by
more than 90% per transaction. This represents substantial cost savings when
considering the volume of transactions most companies process each year.
So how did they do it? What is the opportunity for those
companies that still employ traditional methods?
Today, many businesses have found a straightforward,
effective and efficient answer to this question. They employ a simple solution
that combines the use of a traditional credit card with expense management
software.
How does this work in practice?
The Process: Your employees use a corporate credit card to
procure goods and services. The electronic transaction is sent to their
individual PDA or PC (via any network or internet connection). The employee
confirms the transaction and charges with the click of a button, and a fully
coded transaction is then posted to your chart of accounts. You then make a
single payment to the credit card provider for all purchases made using the
card during the month. Everything is managed automatically in real time,
including all of the controls, business rules, and management notifications
that ensure purchases are approved and comply with corporate policy.
The Result: You're able to consolidate thousands of payments
into a single transaction. With the supporting systems, you can analyse
expenses and implement controls on a real-time basis.
Case Study
A company processes around 50,000 payment transactions per
year, of which 80% (40,000) are low-value/high-volume non-strategic expenses.
By implementing an expense management system, they are able to save $56 per
transaction, delivering a total cost saving of $2.24m per year (40,000 x $56.00
= $2.24m). Admittedly, this includes both 'hard' and ‘soft’ savings, but the
business case is real and is proven to deliver results in all industry sectors
including ROI within six months.
Conclusion
For years now, companies have been using credit cards as a
corporate payment tool for travel and entertainment costs. The extension of the
concept into general business procurement has been made possible more recently
by the release of new products from card issuers and the development of
sophisticated expense management software systems that provide immediacy of
control. Today the concept is a key addition to a corporate improvement project
portfolios, covering all non-strategic low value spends and potentially far
more.
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