From paper to plastic: how to design and implement a purchasing card program.

• Author: Sofley, John A., Jr.

Governments 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...