Survey Shows How Purchase Cards Can Save Time, Money

BY RICHARD J. PALMER

Since the early 1990s, banks have promoted the corporate purchasing card (p-card) as a convenient and cost-effective way for businesses to pay for low-cost goods and services. On paper, the strategy seems simple: Save time by letting employees use p-cards to buy necessities without running the purchasing department gauntlet. And, along the way, save money by eliminating paper requisitions, purchase orders and invoices for thousands of minor transactions. How much of this bounty can p-card users expect to realize? A new survey provides some answers and brings the current state of p-card affairs into sharp focus.

In fact, companies in a wide range of industries have incorporated p-card use into their financial operations and reaped the benefits. But while initial projections indicated p-card spending could top $300 billion per year, banks now acknowledge that only $15 billion to $25 billion of the projected market has materialized. And recently, some organizations said their p-card programs delivered only a fraction of the savings card issuers promised. The solution to this problem, according to recent research, lies in changing a company’s culture and in its management’s willingness to loosen controls for the sake of improved efficiency and reduced expenses.

In order to assess the impact of p-card use on business efficiency, the AICPA Center for Excellence in Financial Management funded a survey of companies who use the cards. The survey examined their experience and identified best practices for p-card use.

The survey’s key findings were as follows:

  • Most companies realized only some of the benefits of p-card use.

  • Underachieving programs often were burdened by stringent controls applied to inexpensive items.

  • P-cards significantly reduced costs and improved turnaround time in “progressive” companies.

  • Almost all companies could significantly improve their p-card programs with a few important modifications.

When They Work, They Work Well

Survey results offered proof p-card programs can be effective. According to the companies that responded, the average cost per p-card transaction was only $15, while it cost $91 to pay for an item using traditional methods. Also, p-cards cut order fulfillment time, ordinarily 9.1 days, down to zero.

To gain insight into why some companies shifted millions of dollars in spending to the p-card and others only thousands, the survey compared large companies with similar sales revenues that had p-card programs in place for the same length of time. The large corporations were divided into two groups: (1) a high-spending group consisting of 26 companies with monthly p-card spending of $1 million or more and (2) a low-spending group consisting of 30 companies with spending of less than $1 million per month.

On average, high-spending companies had almost 80% more employees than low-spending companies. So, the greater number of p-card transactions by high-spending companies appears to be partly due to larger workforces. However, the 1.8-fold difference in the number of employees is eclipsed by the fact that high-spending companies reported 5.6 times as many cardholders, 6.6 times as many cards, nearly 3 times the percentage of employees in possession of a p-card and 9.2 times as much in p-card charges per month as their low-spending counterparts.

Further, employees in high-spending companies used the card more often than their low-spending counterparts (5.3 vs. 3.8 transactions per month) and had a significantly smaller percentage of inactive cards (28% vs. 44%). High-spending companies, therefore, were able to reduce staff by an average of 18.2 employees, or one clerk for every 10,312 invoices shifted to the p-card. Low-spending companies, by contrast, had smaller staff reductions—averaging only 2.7 employees per company.

Yet, as an indication of how much more extensively p-cards could penetrate the corporate market, the survey found that even high-spending companies used them to pay for only 25% of their purchases under $2,000.

Getting Past Obstacles to Success

Asked why their programs weren’t growing, companies with low p-card spending cited senior managers’ concern that the programs would weaken essential cost controls. But Ren Urbina, an accounts payable manager at Lucent Technology, had perhaps the best advice for companies whose p-card programs have not met expectations: “You have to fight the impulse to over-control,” she said. “The first step is to ensure appropriate monitoring and control activities, but avoid introducing onerous procedures that defeat the program’s purpose.”

The survey found companies can improve their programs by

  • Loosening the requirements an employee must satisfy to obtain a p-card.

  • Encouraging managers to provide strong support.

  • Providing information and training to help employees use the cards.

  • Making it easier to use p-cards by raising spending limits, broadening spending categories, reducing restrictions that block the use of certain standard industrial classifications when submitting expenses, limiting card activity audits and eliminating logs.

  • Committing resources to promote p-card use.

  • Holding the program administrator responsible for performance targets consistent with p-card spending potential.

  • Establishing company policies mandating use of p-cards for certain transactions.

  • Adopting a “one-card” solution under which p-cards could be used to pay for travel and entertainment.

  • Enhancing back-office technology (for example, automated posting of allocations to general ledger accounts).

Ruth Bradshaw, who administers Nationwide Insurance’s p-card program, attributed its success to advocacy from the corner office, plus adequate staffing. “We have senior management’s support and a full-time person dedicated to making the process work,” she said. “At a lot of other companies, it’s only part of someone’s job.”

Lucent’s Urbina told of a similar strategy, including sponsorship by the company’s CFO. “We also appointed a project lead, partnered with the purchasing department and set aggressive targets. Then, we let the fun begin,” she said.

Looking to the Future

Jeff Tubbs, vice-president in charge of p-card programs at Wells Fargo, one of the card issuers whose customers were surveyed, is so confident p-cards will fulfill their potential that he’s predicting similar programs will be instituted in other paper-intensive areas of corporate accounting and purchasing. “The same process that attracted companies to p-cards is now being used to analyze the travel and expense reporting process, causing growing interest in a ‘one-card’ solution,” he said.

The Survey and Its Respondents

The Corporate Purchasing Card User Benchmark Survey was mailed to 1,034 p-card users of seven major card issuers. The response rate was 18.3%. Of the respondents, 111 were public corporations, of which 63 were large corporations (sales of at least $2 billion), 46 were midsize corporations (sales of less than $2 billion but more than $250 million) and 36 were small corporations (sales of up to $250 million).

Richard J. Palmer, CPA, PhD, CMA, a professor in the Department of Accounting, Management and Information Systems at the University of Tennessee at Martin, created the survey. He can be reached at rpalmer@utm.edu .

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