CONVERTING INVOICES FROM A FOREIGN CURRENCY

Letters of credit are a form of insurance that the seller requires as a condition of the transaction. However, they have their disadvantages and they might not be used in all cases involving foreign trade. The financial institution's fees can be a large percentage of the overall profit and, from the standpoint of the seller, gathering the documentation required to collect the amount of credit, can be a burden on the organization. These disadvantages do not exist in situations in which the foreign vendor directly invoices the buyer.
When this occurs and the foreign vendor performs the currency conversion in his accounts receivable system, the problem of currency conversion is invisible to the accounts payable system. However, when a foreign vendor does not bear this burden and conducts business only in his native currency, the purchasing and accounts payable systems must perform this conversion. Because accounts payable vouchers can be processed only in their own native currency, this creates a situation requiring the accounts payable system to convert foreign currency invoices into its own native currency.
Figure 6-25 shows the typical flow for paying a foreign vendor in his native currency. Note that this indicates payment being made to the bank that subsequently converts the currency. Hedging is another strategy to avoid the conversion of these funds at the time of the transaction. With this approach, the buyer purchases foreign currency, such as yen, at a fixed rate before the transaction, and uses these funds to pay for the transaction when it occurs. Hedging tends to reduce the risk of foreign currency gains and losses, because the conversion is taking place at a known rate.

FILING ACCOUNTS PAYABLE DOCUMENTS

In a modern accounts payable system, on-line access to electronic records replaces the need for most paper-based filing. This relieves the need for constantly pulling paper documents from filing cabinets to answer routine questions.

Document Filing in a Modern Environment. Businesses that automate the record keeping of accounts payable information in this manner do not have the rigid requirements for filing paper accounts payable documents. This is contrary to the old approach of matching paper documents and filing a matched voucher packet.
In a modern environment the basic requirement is to have a trail of documents that can be used, if necessary, to locate an original piece of paperwork. Purchase orders are already stored in vendor sequence in the purchasing department. The packing slips are also retained by vendor in the receiving area. All that remains is for the accounting department to maintain a file of invoices and credit/debit memos. Usually sorted by vendor (name or number), this file is the only necessary permanent repository of paper documents that the accounting department needs to maintain. Most often, the accounting department places the newest invoices in the back of each vendor's folder, keeping the file in chronological order.

Document Filing in a Traditional Environment. In an accounts payable department that does not match voucher information on-line, this single file becomes expanded. Instead of filing just invoices, the file contains completed and partially completed vouchers. Each voucher is a packet of documents (usually a voucher, an invoice, a packing slip, and a purchase order). The accounts payable department may also maintain a second file of incomplete documents (usually packing slips and purchase orders) that are awaiting the receipt of an invoice.
Some organizations file checks in this vendor file along with the voucher packets. This is usually not necessary; writing a check number on each voucher is sufficient. The checks themselves do not need to be stored because the bank can reproduce a copy of any check, once they have the check number.
In a traditional environment, these paid voucher files usually play a critical role because they serve as a primary source of information for responding to questions about invoices, voucher accounting, and related information. Because of this, the accounts payable department must enforce strict filing procedures:

· Voucher packets pulled from the file, must be returned to the file promptly.
· All documents must be filed according to strict date (or voucher number) order to avoid misfiling.

These stringent procedures underscore the weaknesses of a traditional environment. These weaknesses do not exist in a modern accounts payable system that uses electronic records of completed, matched vouchers.

Document Image Storage and Retrieval. Two new technologies, optical disk storage and digital image scanning, have added an alternative approach for filing accounts payable documents. Using image storage and retrieval systems built around these technologies, some businesses have replaced paper accounts payable filing systems with systems that use digitally stored images of original paper documents. Although this technology is not yet widespread, cost reductions and developments with these new technologies are making this a viable document filing alternative. Originally businesses with the highest volumes first implemented this technology, but new low-volume systems are making this a cost-effective approach for use in medium-sized organizations.
Using optical disk storage and document scanning technology, the invoices can be stored as electronic images of the original paper document. This allows invoices to be retrieved as images—effectively eliminating any need for paper documents or manual filing. In addition to the invoice's image, the system can store data associated with each invoice, such as the vendor number, the date, the voucher number, or the invoice number. This information can not only be used to retrieve or sort the electronically stored documents, but it should also serve as the documents' linkage to the accounts payable master file.

VOICE RESPONSE TECHNOLOGY FOR ACCOUNTS

PAYABLE STATUS

Another application of new technology to the accounts payable processing procedures involves the use of a voice response system for answering vendors' questions about the status of particular vouchers. With a touch tone telephone, a voice response system may be set up to allow vendors to

1. Identify themselves as a legitimate caller by entering a passcode.
2. Enter their invoice number to obtain payment status information.

The voice response system can use this information to access the accounts payable system and obtain the voucher record in question. Following this, the caller listens to a recorded message about the status of his voucher. If it is paid, the voice response system can give him the check number and date.
This technique is generally appealing only to larger organizations that handle a significant number of requests from vendors about the status of their invoices. A voice response system for accounts payable receives its justification primarily from the clerical labor that it saves in responding to inquiries and requests by vendors.

Next Month's topic: Cash Disbursements

  

About this article and the author:

Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com. Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York