NAPCP Featured in 'Managing Accounts Payable' Article
Monday, August 17, 2015
Purchasing Cards (P-cards): Options, Benefits, and Tips for Success
Reproduced with permission from Managing Accounts Payable, published and copyrighted by the Institute of Financial Management (IOFM), a division of Diversified Communications, Portland, ME.
An increasingly popular trend in the payments arena is Purchasing Cards (P-cards). The use of P-cards enables AP to cut down on administrative costs, eliminate paper,
and capture lucrative discounts offered by vendors for early invoice payment.
NAPCP, a membership-based professional association committed to advancing Commercial Card and Payment professionals and industry practices, defines a Purchasing Card/P-card as “a type of commercial card that allows organizations to take advantage of the existing credit card infrastructure to make business-to-business (B2B) electronic payments for a variety of business expenses (goods and services).”
P-cards Take Many Different Forms
NAPCP further explains that P-cards can be non-plastic account numbers issued to employees (i.e., cardholders) who are responsible for making purchases or payments on behalf of their employer. For example, a cardholder can order, and pay for, office supplies on a supplier’s website. As the supplier uses the existing credit card infrastructure for payment processing, transaction data is captured by the supplier’s point-of-sale (POS) system and transmitted through the card network.
“We are clearly seeing a trend of organizations moving from the traditional procure-to-pay (P2P) process to P-cards as they look for efficiencies and cost effectiveness in their AP areas,” reports Terri Brustad, CPCP, Manager of Content Services at NAPCP. “The P2P process of issuing a purchase order, receiving and approving an invoice, and writing a check can be costly and inefficient. In contrast, the payment (at point of purchase) with a P-card is minimal, especially for small-dollar transactions.”
Benefits of P-Cards
According to the 2014 Purchasing Card Benchmark Survey by Richard Palmer and Mahendra Gupta of RPMG Research Corporation, P-card spending is expected to grow nearly 11 percent annually through 2019. In 2016 spending is forecast to reach $318 billion. The study also found that P-cards offer the following benefits:
- Generate administrative cost savings of about $70 per transaction (including sourcing, purchasing, and payment activities) when compared to traditional
purchase order (PO) payment methods. This translates into a transactional cost savings of approximately $38 billion annually in North America.
- Yield higher discounts; 66 percent of organizations that use P-card spending data to obtain higher discounts report success.
- Improve cash flow by extending the time to payment, reported as a benefit by the majority of respondents.
- Reduce petty cash and cash advances, and help avoid late fees and lost discounts, reported by a significant portion of respondents.
- Decrease procurement cycle time by approximately 8 days in comparison with a traditional PO process.
- Result in a reduction or redeployment of staff in AP and Procurement functions.
“The study Cost Savings: Purchasing Cards vs. Traditional Purchase Orders in the Government Sector by the NAPCP, noted that four governmental organizations found that the cost of a purchase made through a PO/invoice process with a check payment can be as high as $225.26,” Brustad points out. “By switching to P-cards, their cost avoidance savings per transaction ranged from $18.06 to $206.94.”
Best Practices for P-card Implementation
Brustad offers the following tips for successful implementation of a P-card program:
Re-engineer the P2P process. “Organizations with successful P-Card programs have re-engineered their P2P processes by thoroughly reviewing steps that do not
add value, ultimately creating a much more streamlined P2P process that involves fewer people, fewer steps, and less paperwork,” Brustad says.
“Benefits that emerge from a re-engineering effort and P-Card program implementation include staff reallocation and/or reduction, reduction in procurement cycle time, spend data availability, supplier consolidating/reduction, petty cash reduction or elimination, opportunity for improved cash flow and revenue-sharing potential,” she adds.
Set up a team. “Establish a P-card team representing each of the stakeholder groups in the organization who will be involved in the implementation as well as operation of the card payment program,” Brustad advises. “These groups include Purchasing, Accounts Payable, internal audit, tax, treasury, and information technology. This team should understand the value proposition of a program by conducting both external and internal research, reviewing industry benchmark data, and evaluating the specific impact of a P-card program on the organization.”
Lay the foundation for the program. “The P-card team should create a business case, establish goals and objectives for the program, draft policies and procedures, design the control environment, determine a tax strategy, and outline technology requirements and desired automation,” says Brustad.
Perform a payment cost analysis. “Doing a payment cost analysis will help determine an organization’s ROI,” Brustad points out. “Comparing the cost of writing a check to the processing of a P-card payment will clearly indicate an organization’s cost avoidance savings per transaction, and can be figured on an annual basis as well.”
Conduct a request for proposal (RFP). “Conducting a Request for Proposal (RFP) is necessary to select a card issuer,” Brustad notes. “Determine the weight of each key factor for selecting a card issuer. Look at what the card issuer will provide in terms of implementation support, ongoing customer support and service, technology and reporting capabilities, and fees and incentives. Specify the selection criteria in the RFP so it conveys all the organization’s requirements for the card program.”
➢➢ Tip for success: Allow plenty of time for the RFP process. “It could take several months to write and launch the RFP, respond to questions, and receive issuers’ proposals,” Brustad cautions.
Establish a strong partnership with the card issuer. “Once a card issuer is chosen, and prior to implementation, the organization should partner with the card issuer to further refine and finalize the program model initiated pre-RFP,” Brustad explains. Steps that need to be followed here are complete policies and procedures; creating a training program; developing the P-card interface for the finance system; and preparing communication to announce the program throughout the organization and to targeted suppliers.
From the program’s onset to post-implementation, organizations should regard their card issuers as a significant resource. “The partnership should continue to evolve along with the program,” Brustad says. “The card issuer’s knowledge of industry trends and program enhancement opportunities and technology help keep an organization’s P-card program running smoothly and on the cutting edge. Regularly scheduled communication and periodic meetings will facilitate the achievement of program goals.”
Create a P-card Administrator role. “Determining how to organize the program management staff is a key decision in conjunction with program implementation
and beyond,” Brustad points out. “Surveys have found that the P-card Administrator position typically ends up in procurement or AP. In the latter case, the AP manager
and staff ensure the policy and procedures are followed, provide effective program communication, maintain strong internal relationships, utilize metrics, and continue
marketing and educating.”
Enlist vendor buy-in. Getting vendors to come on board with a P-card program is the key to success of the program. “Partner with the card issuer by enlisting
their help in explaining the P-card payment process and outlining benefits to the vendors,” Brustad advises. “When resistant vendors learn that the P-card will provide them guaranteed payments and reduce internal costs such as check deposits and collection activities, the vendors may find the benefits will far outweigh the fees related to P-card use.”
To keep a P-card program working well, Lynn Larson, CPCP, founder of Recharged Education, advises the following steps:
Perform regular risk assessments. “Conducting a P-card risk assessment (also called a risk analysis) helps an organization spot control gaps, uncover program inefficiencies, and increase program buy-in among management and auditors,” Larson explains. “A risk assessment also provides the basis for process audits.”
While there are many ways an AP manager could approach a risk assessment, Larson recommends using the “ORCA” framework:
- Identify the organization’s program objectives.
- Determine the potential risks.
- Document existing controls.
- Specify the necessary actions to address areas that are lacking controls.
Segment spend so P-cards are used for low-dollar transactions. “Using an Excel file, compile a profile of where your organization is today and review a year’s worth of payments, sorted by dollar amount from lowest to highest,” Larson advises. “Look for ways to reduce check payments by implementing P-cards to pay for such items as office supplies, computer parts, advertising, printing, subscriptions, membership dues, and event registrations.”
Editor’s Note: For more information on P-cards and other payment options go to www.napcp.org and www.recharged-education.com.