Strategic procurement

Using a purchasing card can do more than simplify processes — it can offer you an edge

By Emilio Boulianne

Senior managers are responsible for designing effective control systems and for taking proactive approaches to improve business performance, such as evaluating available information technology to streamline accounting processes. The procurement card (P-card) is one such technology. The P-card (also called a purchasing card) resembles a credit card, is issued by major vendors such as Visa and MasterCard, and is typically used for small-dollar, non-inventory, non-capital items. The card allows purchases without going through the usual paper-intensive authorization procedure. It’s a low-risk, low-cost instrument that streamlines the purchasing process with the benefit of cost reductions.

A P-card is issued to the cardholder, and the card mapped to a general ledger account of the firm’s accounting information system. The cardholder places an order to purchase goods/services, and the supplier obtains the bank’s authorization; when authorized, the supplier provides goods/services, and receives payment from the bank. The cardholder receives a P-card statement from the card issuer, and reviews and approves the statement but doesn’t submit payment. A single electronic statement, including the charges for all the company’s P-cards, with pertinent data related to the transactions, is sent from the bank to the firm, and processed for accounting entries. Lastly, the firm makes payment to the bank.

Integration of a P-card’s data with accounting systems through electronic posting makes it easier to obtain information for data analysis and reports, allowing firms to negotiate better prices and discounts, and determine preferred suppliers.

The payable process

The P-card is a useful instrument for reducing small-dollar invoice processing. Issuing a purchase order, receiving, verifying and processing an invoice, writing a check and getting signatures isn’t an efficient process for dealing with these purchases. In firms where much of the paperwork is for transactions below $1,000, the P-card can be a useful tool. As a general rule, highly repetitive purchases may represent 80% of transaction volume, but just 20% of the dollar value. A cost/benefit analysis suggests the procedures and people involved in processing a $100,000 invoice shouldn’t be the same as for an invoice of $500. The benefits of a control procedure must exceed its cost.

The P-card reduces the number of documents needed to support payments to vendors. Normally, when a firm receives invoices, each is supported by a purchase order, a receiving report, and a packing slip, so writing a cheque requires three supporting documents. With the P-card, when the monthly statement, including transactions, is verified by each cardholder, payment is made via an electronic funds transfer; it eliminates non-value adding activities. Computer-based information systems and reliable data transmission networks enhance the ways in which the data can be collected, processed, stored and disseminated.

Estimates suggest it may cost an average of $90 to process and pay for a product/service with the traditional method, while the average cost per P-card transaction is assessed at $25 — a 70% savings. The use of P-cards frees employees from the tedium of re-keying invoice data, allowing firms to reallocate staff to more productive and challenging activities. The reduction in the documentation required is estimated at three to five day’s time saved per month.

Management control

With a traditional credit card, the cardholder may buy any product or service, provided costs are within the credit limit. With the P-card, each card has controls such as:

• dollar amount limit per transaction;
• limit on the number of transactions per day and per month;
• dollar amount limit for specific periods; and
• limit on the use of the card to specific industrial code vendors (SIC) (for example, for travellers, the card may be accepted at restaurants, gas stations, and hotels, but blocks at jewellery businesses and other luxury items).

Perhaps more importantly, the P-card enhances the information available for decision making. It makes available three levels of information: basic information we find on typical credit card statements (Level 1), such as the date of purchase, the supplier and the dollar amount; Level 2 information including Level 1 plus sales tax and transaction data, providing pertinent information on a transaction such as an order number, an employee name, or project code; and Level 3 information including Level 2 plus other useful information such as item product codes, item descriptions, quantities, prices, and so on. This depth of reporting provides as much, or more, of the information usually found on an invoice.

Adoption

Some experts estimate that P-cards have captured only 25% of their potential market. There are several reasons for this. First, evaluating existing business models and searching for improvements is challenging, and some managers prefer to maintain the status quo. Second, despite the system’s ability to encode each card with control features, some managers are still concerned with the misuse of cards by users. Third, some managers have concerns about keeping spending within budget and fear employees will pay too much for goods, or make duplicate purchases.

Anecdotal stories of misuse are isolated and may be exaggerated. P-card misuses are estimated at only $270 for each $1 million in purchases, and some firms label misuse as suitable acquisition but from non-preferred suppliers. Thus, the real loss may be even lower.

The information pertinent to an organization’s P-card transactions can be provided on-line. Changes to a user’s spending profiles — limiting dollar amounts allowed per transaction, the use of specific code vendors, or including cash-advance permission — can be modified and put into effect in seconds. This easy access to transactions helps managers understand and manage an organization’s spending patterns, sorting the information by type of transaction, employee, department, supplier, or any other way the manager wants to view it. This makes it easy to see that X amount of dollars is purchased from supplier Y. This can help in the negotiation of better prices.

P-card technology has great potential and an examination of its benefits should be considered. But before you proceed, carefully analyze the business solutions offered by banks and card issuers — they may propose options that aren’t in your firm’s best interest. And avoid writing cheques regardless of the solution you choose, if possible. This is the most costly step in the payable process (around $40). Employees from the payable unit must be aware of existing electronic business solutions. 

Emilio Boulianne, Ph.D, is an assistant professor in the Department of Accountancy at the John Molson School of Business, Concordia University.

New rules from the CRA on P-cards

This past summer, the Canada Revenue Agency released Notice 199, Procurement cards — Documentary requirements for claiming input tax credits, which outlines changes to the CRA’s policy concerning the documents necessary for claiming input tax credits (ITCs) for the GST incurred on purchases made using P-cards. The new rules may allow registrants with inadequate documentation the chance to recover GST on P-card purchases — a problem for companies working with P-card issuers whose reports don’t provide sufficient information to satisfy ITC document support requirements.

The new policy does have stringent compliance requirements — the recovery of ITCs will be based on an estimated amount of tax paid, established using ratios that must be reviewed regularly. Only GST registrants whose activities are all or substantially all (90% or more) commercial activities (except provincial gaming authorities) are eligible to use the policy. — Ed.

For more information visit www.cra-arc.gc.ca.

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