Simplifying your accounts payable: self-billing

Introduction

The accounts payable process includes the various stages in making the payment of an invoice received from a vendor: it starts with the receipt of the invoice from the vendor, and ends when the payment is made.
In recent times, many companies have developed initiatives for cost savings in this area. There are two major directions:

  • Business Process Outsourcing: the activity of processing vendor invoices is executed by a third-party service provider. Often this is combined with offshoring, where the actual posting of the invoice in the accounting system is executed in a low-cost country like India or Malaysia.
  • E-invoicing: in this case the vendor issues an invoice in a structured format that can be entered in the buyers accounting system without any additional data input or effort. This also includes portals where the vendor can manually enter the details of their invoices.

Although both options lead to lower average cost for processing a vendor invoice, they will not necessarily reduce the number or errors in the process: invoices are not posted in the accounting system, or invoices are posted but blocked due to a failing three-way-match. The number of errors could even increase, and the effort to resolve these errors might be higher than before.
Even worse, as you do not pay your supplier, your supplier will eventually refuse to deliver anymore (ship hold). Especially ship holds can result in high failure cost, as it could cause delays in the production process.


The simple alternative: Self-billing

But there is an alternative that still will meet, or even increase, the cost savings, while at the same time significantly reducing the number of errors in the process: evaluated receipt settlement (ERS) or self-billing.
In this procedure it is not the vendor that will submit an invoice; instead, the customer will generate a self-billing invoice (credit memo) based on the information in the purchase orders (like price, terms of payment, tax), and the quantities delivered. The self-billing invoice will never be blocked due to a failing three-way-match as price and quantity are taken from the customer’s system.

The figure below shows how self-billing works.

Also for the supplier self-billing has its advantages. Most important is that the supplier will have a positive cash-flow effect due to regular and timely payments; payments are no longer blocked due to differences in price or quantity, as there will always be a perfect three-way-match
Another advantage is that the supplier can save on administrative effort as invoices do not need to be printed or sent.
During the implementations we have supported, we learned that most suppliers prefer self-billing over e-invoicing solutions like the OB10/Tungsten network; not in the last place due to the annual membership fee and transactional fees the supplier has to pay.

Prerequisites for implementing self-billing

Legal and fiscal regulationsTo implement self-billing it should be allowed in both the country of the customer and the supplier. In addition, country-specific legal/fiscal requirements might apply.

Data accuracy
The master data and transactional data in the customers’ system (price, tax) should be of high quality. If not, there will be many queries and discussions regarding the self-billing invoices. And ultimately even additional postings.

Maturity of the supplier relationship
The relationship with your supplier should have reached a certain stage of maturity before you can effectively implement self-billing for that supplier. Self-billing can be part of a strategy for supplier collaboration in which self-billing and other elements of supplier collaboration can reinforce each other.
The confirmation of purchase orders will enforce the supplier to confirm the price and prevent discussions afterwards. Advanced Shipping Notifications (ASN) sent in by the supplier will reduce errors during goods receipt, but also will support better matching of the self-billing invoice at the supplier side.


McCoy & Partners

At McCoy & Partners we have an experienced team of consultants in logistics and procurement. We have supported various customers with the implementation of self-billing, and can help your company do the same. Both from a technical/IT perspective as well as a business perspective.

For a customer in the chemical industry our consultants have implemented self-billing especially for maintenance services executed by external parties. Another example is a customer in the high-tech industry where self-billing was implemented as an integral part of their supplier collaboration strategy; this also included the implementation of SAP Supplier Network Collaboration.

Want to know more? Please feel free to contact us.