Automated early payment approvals
Let's make early payments truly early without changing the AP process!
Finance teams have standard ways to approve invoices for payment. These are nearly always on a post-delivery basis. That's after goods have been received and inspected.
Prima's technology delivers two outcomes:
An additional automated early payment approval is organised before delivery. Automation is based on digitised shipping documents provided by suppliers and purchase order matching.
This allows standard post-delivery invoice approvals to remain in place - so finance teams are happy as financial controls and posting processes continue as before.
We make early payment approvals truly early.
Our clients are generating savings of 1% or more on spend across the enterprise using this new approach. Read on to find out how!
3-way match: standard invoice approvals
Buyers approve invoices for payment when they are satisfied that the supplier has completed its work.
The standard process that finance teams use to approve invoices for payment is called the “3-way match”. Here is a good article about it: click here.
A 3-way match compares (a) purchase orders to (b) goods receipts to (c) invoices. If there is a sufficient match across all three, the invoice is approved for payment. And, if these components are digitised, the 3-way match can be automatic and finance approvals can run very smoothly. This is often called "AP Automation".
Finance teams love this process because it works, and it also allows them to raise debit notes or claims against suppliers before final payment if deliveries fall short of expectations.
But 3-way match / AP automation is not that early.
Getting suppliers a truly early payment needs a quicker approval process - ie: before delivery.
The 3-way match cannot do this because it relies on data that only arrives some time after the goods have left the supplier and the invoice has been issued.
And, we need to find a way to do this without compromising on existing financial controls or upsetting the existing and trusted invoice approval process.
The 4-way match at shipment
Before delivery, the supplier has three documents available:
Transport documents for the goods, such as a bill of lading, airway bill, CMR, or a consignment note
Packing lists – what has been put in the boxes
Commercial invoices typically itemising the bill
And, buyers have the purchase order(s) that the supplier has filled.
These are the components of the 4-way match.
The 4-way match compares data from the three documents with each other and then with the purchase orders awarded by the buyer. If there is a sufficient match then the invoice can be approved for payment.
Getting the shipping documents digitally
On Prima’s platform, suppliers upload and self-digitise the three required shipping documents:
the transport document(s),
packing list(s) and
commercial invoice(s).
Suppliers are fine to do this using efficient OCR systems on our platform. By itself, this can be enough to get a pilot up and running and prove the efficiency of the process to a buyer finance team.
There is no IT project required to go live.
PO match magic
The 4-way match is fully completed by checking the documents against the purchase order(s).
This is an optional step. We have a number of ways that buyers can send us their open purchase orders and they can come from multiple sources. Purchase orders are allocated to suppliers.
The PO match completes the 4-way match.
With the buyer's purchase orders in our platform, suppliers simply and easily match their shipments against their open purchase orders (price and quantity).
What do we check?
We do around 35 automated checks on the shipping documents and purchase orders. For example:
We check dates, names and ports across the documents and against our own data.
We compare the number of cartons on the packing list to the number of cartons on the transport document.
We compare the number of pieces on the packing list to the number of pieces on the invoice(s) and on the reconciled purchase orders.
We cross-check net and gross weights across all the documents.
The finance team controls which checks are done and what tolerances are set.
This is not a "black-box" process - it is simple and transparent. We usually run the platform for a month or so on a fully manual basis in order to build up data on the quality of the documents and the PO matching. This data then informs the calibration of the automated process, switched on under the full control of the finance team at the corporate.
This is not a new idea
Companies have, for centuries, been paying "cash against documents" in trade finance - making exactly the kind of checks described and wiring payments. Your bank likely has a documentary credit team that does this for clients.
What's new is to get suppliers to upload and self-digitise the documents, sharing the data in real-time with the buyer so that checks can be automated - and the platform connects suppliers and buyers together directly and in real-time for maximum efficiency - avoiding the administrative costs that banks historically would charge for a similar process.
Automated early payment approvals can be partial
Early approval is just for early payment.
The early payment can be given for less than 100% of the invoice amount (for example, 50%, 80% or 95%). The balance follows after the traditional 3-way match. Control over the approval percentage allows buyers to reward suppliers for their reliability and to reflect the maturity of the relationship.
This partial early payment is very valuable for the supplier, better than waiting until after delivery for even an initial decision and can trigger valuable discounts.
And the finance team can still keep the trusted 3-way match after delivery to approve the invoice (as a whole). This preserves existing financial controls, manages debit notes and journalling can continue unchanged.
In fact, the automated 4-way match can be implemented with minimal changes to the way that finance teams operate.
What is automated early payment approval worth?
Our clients are earning additional discounts on spend of more than 1% for approvals at shipment versus traditional approvals post-delivery.
Every invoice for $100 can be settled at $99 (or less).
This is a big saving.
What has made all this possible?
The capabilities described in this short note are live and operating at scale in Prima’s clients. They are achieving additional savings of more than 1% on spend versus traditional SCF and approvals after delivery.
And this is possible because suppliers self-digitise their documents as they ship - digitally providing the documents needed to drive the 4-way match.
Supplier data powers this process - and it works.