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Weekly UpdatesGovernments have struggled for years to find an efficient, cost-effective solution to the problem of small-dollar purchases. Studies have shown that on average, 80 percent of purchasing transactions account for only 20 percent of total dollars spent. Translation: most governments expend a significant amount of resources processing transactions that add very little value to the organization.
In the typical purchasing process, for example, departments or divisions initiate a purchase order, which is then processed by purchasing and forwarded to accounts payable where it is entered into the accounting system. A paper check is prepared and issued, which, once it clears the banking system, must be reconciled against the government's accounting records. This process involves multiple intermediaries and requires a tremendous amount of paperwork and manual effort, all of which consumes valuable staff time that could be better applied to any number of value-added activities. This article describes how the City of Salisbury, North Carolina, used purchasing cards to achieve operational efficiencies.
BACKGROUND
Upon reviewing the workload of our accounts payable clerk several years ago, we learned that this person was spending most of his time dealing with a mountain of invoices for purchases under $500. At the rate these purchases were growing, the finance department was facing the likelihood of having to hire an additional clerk to help process the payments. After struggling for several years to find a more efficient method of processing small-dollar transactions, the city began to look at what other governments were doing.
The finance department talked with several other governments about their attempts to improve their small-dollar purchases. While many of these jurisdictions had implemented procedures that reduced the volume of paperwork and eliminated the need for purchase orders, these efforts had done little to reduce the workload pressures in the accounts payable area.
At the 1994 Spring Conference of the North Carolina GFOA, the finance director and accounting manager listened as another city discussed its purchasing card program. We agreed that if implemented properly, purchasing cards could reduce the costs associated with small-dollar purchases and streamline purchasing and payment procedures. After learning about the benefits of purchasing cards from the finance director, the city manager directed the finance director to draft a purchasing card program for authorization.
As the finance director and accounting manager discussed purchasing cards, we identified a list of questions that the city would have to answer before it proceeded with any purchasing card program. How do we develop and implement a purchasing card program? Which banks offer municipal purchasing card services? How do we maintain control over city expenditures? How do we prevent abuses of the cards? How do we allocate expenses to the proper account codes? Would purchasing cards create additional work for the purchasing and accounting divisions? Could we establish an acceptable paper trail for our auditors? Would the city manager ultimately approve such a program? There were other questions and issues, but these were the major ones.
Unfortunately, when Salisbury began considering the use of purchasing cards, it did not have the benefit of a recommended practice to guide its efforts. GFOA has since approved a recommended practice on purchasing card programs that offers specific guidance on the controls needed to ensure a successful program (this recommended practice can be found online at http://www.gfoa.org/services/rp/cash/cashpurchasing-card.pdf). Interestingly, most of the controls that Salisbury ultimately implemented were later included in this recommended practice.
ANSWERING THE QUESTIONS
The questions raised in the preceding section are likely to be similar for any government considering a purchasing card program. This section describes how Salisbury answered each of these questions. Governments considering the use of purchasing cards, as well as those that are already using them, may be able to apply the lessons learned to their own circumstances.
How do we develop and implement a purchasing card program? Salisbury established a task force to develop a policy on the use of purchasing cards. This task force included the purchasing manager, an accounting clerk from the purchasing division, the accounting manager, the accounting manager's staff accountant, and a systems analyst from the technology services division. The purchasing manager, who happened to be the harshest critic of bringing purchasing cards to the city, was assigned to head this project. The rationale behind this decision was that the person who recognized the potential drawbacks of purchasing cards would make sure that these concerns were adequately addressed by the policy. Assigning the purchasing manager to lead the project also helped create ownership of the program.
The task force had four goals: (1) investigate the purchasing card programs offered by financial institutions in our area; (2) identify other municipalities and counties that were already using purchasing cards and discuss with them the challenges they had faced and how they had resolved them; (31) develop a policy that would provide fiscal control and purchasing accountability; and (4) implement purchasing cards citywide.
Which banks offer municipal purchasing card services? The task force was able to accomplish the first two goals rather quickly. The city learned early on that CoreStates Bank of Delaware was the only bank willing to work with a municipal government on purchasing cards. CoreStates had already established a purchasing card program for the State of North Carolina. The city decided that if and when it decided to proceed with a purchasing card program, it would go with CoreStates as its provider.
How do we maintain control over expenditures? The task force agreed with the purchasing manager that distributing purchasing cards to city employees could cause control problems if proper safeguards were not implemented. The task force discussed at length Salisbury's existing controls, concluding that the policies and procedures for small-dollar purchases provided very little oversight other than to ensure that they were properly coded.
The task force asked CoreStates how the city could maintain control over these expenditures if it were to transition to purchasing cards. CoreStates explained how spending limits and vendor types could be tailored to individual cardholders. For each cardholder, the city could set single purchase limits, weekly/monthly purchase limits, cash options, and merchant category-blocking. These limits are established during the initial sign-up process and can be modified any time thereafter. The city decided that purchasing cards would be used only for purchases under $500-the city's capitalization threshold for equipment. The purchasing manager was particularly interested in the merchant category-blocking feature, which allows the city to disallow purchases from unauthorized vendors. Ultimately, the task force concluded that the spending and transaction limits and the merchant category-blocking feature would allow the city to maintain significant control over expenditures.
How do we prevent abuses of the purchasing cards? Convinced that the city could maintain control over government spending with purchasing cards, the task force moved on to an equally important question: How do we prevent cardholders from using the cards for personal use? The solution to this problem was surprisingly simple. As part of the expenditure approval process, city employees would have to send to their supervisor a signed copy of their card statement. The supervisor would then have to sign the statement and forward it to purchasing. Next, the purchasing division would conduct a random audit of employee statements each month. As part of this audit, each statement would be reviewed item by item with the employee. If the audit uncovered any questionable items, these would then be discussed with the employee's supervisor. Finally, each employee would have to sign an agreement stating that they would only use the card for city purposes and that any misuse of the card would be grounds for immediate termination of employment (Exhibit 1).
How do we allocate expenses to the proper account codes? During the course of discussions with CoreStates, the task force learned that the vendor could provide Salisbury with software that would allow the city to properly account for the purchases made by each cardholder. After evaluating this software, the city's technology services division determined that it could develop an interface between the software and the city's financial system that would facilitate the updating of the general ledger. The purchasing card policy itself includes a section that delineates the specific procedures for reviewing and posting these transactions to the general ledger.
Would purchasing cards create additional work for the purchasing and accounting divisions? As work on the policy evolved, the accounting manager realized that the city had overlooked some other potential uses for purchasing cards. For example, the cards could be used to eliminate the use of travel advances in most situations. The elimination of travel advances would actually reduce the workload in the accounting area, since the advances would no longer have to be tracked and reconciled. Departments would also benefit, since they would not have to go through the process of requesting travel advances. Given these benefits, Salisbury added travel to the list of authorized purchasing card expenditures. Even the purchasing division was expected to be able to decrease its workload once the city transitioned to purchasing cards. The projected decrease in purchase order requisitions would more than offset the added responsibility associated with managing the purchasing card program.
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