Posted by Steve Wilcox on Tue, Aug 18, 2009 @ 01:06 PM
Many years ago, I owned a 2-story condo in Silicon Valley. Unbeknownst to me, I had a leaky pipe in the upstairs bathroom. I guess it started as a very small leak that was undetectable. One weekend, I went skiing at Lake Tahoe. When I returned, I was horrified to find the entire condo flooded! That darn leaky pipe had burst, flooding the entire 2nd floor ... and ... the water leaked through the 2nd floor to flood the entire 1st floor ... and ... water leaked through the 1st floor to flood the neighbor's unit below! What a disaster!!!
The water damage was extensive ... and the repair costs prohibitive ... all because of a tiny leak.
Tiny leaks can turn into BIG leaks ... very swiftly. This is especially true when it comes to paying invoices.
If a company is struggling to meet its working capital requirements, a broken AP process is like a leaky pipe that can cripple cash needs. We all know that manual, paper-driven processes are ripe for "leaky" errors ... errors that can critically affect working capital. Keying errors, lost and/or misfiled documents and matching errors, as examples, can lead to duplicate payments & overpayments.
These payment errors directly affect available cash. And CASH IS KING right now.
In manual processes, most errors are human errors. As corporations continue to cut SG&A costs, human errors are going to rise. Count on it.
With the downsizing of finance departments, there is going to be a rise in careless accounting and transaction processing mistakes. Nowhere are the risks greater than in under-staffed finance departments - especially AP.
And here is where the real danger lies. In over-worked AP departments, small leaks (payment errors) run the risk of becoming a BIG leak that threatens precious operating cash reserves. Cutting staff in AP is invariably going to lead to more mistakes and errors in manual, paper-intensive operations.
Here's an eye opening statistic from Jon Casher, a well-respected procure-to-pay expert:
For $1 billion in spend, $2-20 million (0.2% - 2%) is erroneously paid
Drifting to the 2% end of the range is very risky at a time when working capital optimization is a top priority.
The solution? Automate your AP processes. And get rid of the paper as early in that process as possible. There is a direct correlation between automated processes and lower error rates (more on this in a future blog post).
-Rakesh Shukla
@rakesh170
Related Blog Posts:
Posted by Steve Wilcox on Wed, Jun 24, 2009 @ 08:43 AM
I had a very enjoyable Father's Day ... unlike 2 years ago. You see, in 2007, instead of enjoying a relaxing brunch with my family like most normal fathers do, I wanted more thrills and excitement, so I entered a bike race!
On the very final sprint in the last 200 meters, I crashed ... very badly.
The unspoken truth in the cycling community is that racing is very dangerous. Riding at very high speeds in a tight shoulder-to-shoulder pack gives you very little reaction time if something goes wrong. You must be alert as possible to the sudden movements of other riders, road conditions, upcoming turns, etc. You have to constantly manage and assess the risks ... and especially be aware of riders who might do something stupid and then play it safe and avoid them ... even if it means losing the race.
To make a long story short, I did not manage risk very well on Father's Day 2007 and ended up paying dearly. During the final sprint, a reckless 20-something kid swerved up beside me outside the yellow line (you are not supposed to cross the yellow divider line on the road for obvious safety reasons). I knew this kid was dangerous because he had been riding erratically the whole race. The prudent thing to do would have been to hit the brakes, give up any chance of winning and let him go past me. But noooo, I stubbornly held my position because I felt strong enough to win the sprint.
That is the last thing I remember.
I woke up in the ambulance with a concussion, some very serious lung contusions, a broken shoulder blade and some very nasty road rash all over my body. To this day, I still have absolutely zero memory of what happened but witnesses said that as my front wheel was clipped (i.e. I was cut off), I did a spectacular flip in the air and landed on my head and shoulder ... at close to 40mph. Apparently, it was a bad pile up -- another guy in the ambulance had lost all four front teeth!!!
Lying in the hospital bed, my 7 year-old daughter's reaction to my injuries struck a deep chord -- I realized how lucky I was to still be alive and not be paralyzed ... things could have been a lot worse.
My Father's Day bike crash is a story about poorly managing risks and paying the costs. The economic crash is also a story about poorly managing risks (see blog entry here). After most crashes, regardless of the type of crash, risk management becomes a priority. So, in today's tough economic climate, it's no surprise that managing risk has become a top priority; especially for CFOs:
My
In the business world, risk is managed with strong internal controls. In fact, strong internal controls optimize business performance. Here's another way to think about it -- controls are like brakes. Brakes allow you to go faster. If a bike didn't have brakes, how fast could it really go? Of course, you also have to be willing to use the brakes! Strong internal controls, like brakes, allows a business to put the foot on the accelerator and aggressively reduce costs without increasing risk.
With the unemployment rate at its highest level in over three decades, it is clear that companies are simply trying to survive by cutting expenses and laying off workers. Individuals whose homes are declining in value and whose retirement assets have been wiped out are also trying to survive. Many are becoming desperate. It is not surprising that occupational fraud is increasing. It's a vicious cycle where losing valuable assets to fraud may push a struggling company perilously close to insolvency which, in turn, increases the risk of fraud.
And fraud is on the uptick.
In a recent Special report on Occupational Fraud by the Association of Certified Fraud Examiners (ACFE), more than half of the Certified Fraud Examiners (CFE) surveyed said the frequency and dollar amount of fraud is increasing:
"The message to Corporate America is simple: Desperate people do desperate things," said ACFE President James D. Ratley, CFE. "Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now, organizations must be vigilant during these turbulent times by ensuring proper fraud prevention procedures are in place."
From the 2008 Fraud Report to the Nation, we already know that over half of all fraud incidents are AP related. This leads to some serious implications for AP:
- Layoffs are affecting AP's internal control systems... Most in-house fraud examiners reported that because of layoffs, some internal controls procedures were eliminated.
- Fraud levels will keep rising... Almost 90% of fraud examiners expect fraud to continue to increase during the next 12 months.
But the recession is affecting more than just increased fraud risk. AP staff cuts that are not coupled with process improvements will inevitably lead to more mistakes and errors.
How is risk being mitigated in your AP processes? Is a fraud or accounting crash lurking around the next corner?
AP Automation can reduce risk because it simplifies and centralizes processes and most good solutions have preventative controls that are automated.
Here are some of the specific ways in which AP Automation strengthens controls to manage risk and prevent fraud and errors:
- Robust Approval Framework
- Segregation of Duties
- Automatically enforced at the transaction level
- Automated Enforcement of Policies and Procedures
- Properly Maintained Transaction Backup
- Internal and External Audit Support
-Rakesh Shukla
@rakesh170
Related White Papers
Related Blog Posts
Posted by Steve Wilcox on Wed, Mar 25, 2009 @ 08:43 AM
This is a picture of the cast of my daughter's 3rd grade play. If you squint, you can see her near the middle of the back row in a white tank top dressed as a crow.
The play, "Why Mosquitoes Buzz in People's Ears" is based on a very amusing West African folktale. And when 3rd graders perform the play, it is even more enjoyable.
Here's the storyline -
... a mosquito tells a tall tale to an iguana ...
... the iguana refuses to listen to such nonsense and puts sticks in his ears...
... unable to hear, the iguana offends a friendly python trying to say good morning ...
... the python is so upset, he shoots down a rabbit hole and terrifies the rabbit ...
... seeing the rabbit scares the crows overhead ...
... the crows spread an alarm that danger is near ...
... a monkey gets spooked and accidently knocks down an owl's nest ...
... mother owl is so upset that she refuses to hoot to wake the sun ...
The night grows longer and longer until King Lion calls a meeting to figure out what the heck happened. The chain of events is traced back to the source of all the trouble - the pesky mosquito. Mother owl is satisfied and hoots the sun to rise ... and the mosquito is forever plagued with guilt, compelling him to be a pest and buzz in people's ears, asking for forgiveness.
Sometimes, a seemingly isolated event, can cause a chain reaction with unintended consequences. This is especially true with AP errors. Let me explain.
Let's take the example of a supplier short-pay error. What is the cost of such an error???
The costly chain reaction is revealed when such an AP error is broken down into the steps required to address it.
Each step is time-consuming and the cost of one error can be significant. It's worth noting that paper-based processes, understandably, are known to have higher error rates - keying errors, matching errors, lost and/or misfiled documents, etc. Quality of service is also affected since errors result in irritated vendors and frustrated internal clients.
So, how do you prevent AP Errors?
The best way is to start tracking key metrics and performance indicators through Quality Programs.
-Rakesh Shukla
@rakesh170
Related Blog Posts:
Posted by Steve Wilcox on Thu, Mar 12, 2009 @ 11:27 AM
"A hasty man drinks his tea with a fork."
- Ancient Chinese Proverb
This amusing Chinese proverb on the futility of hurrying is similar to the more familiar "haste makes waste" truism.
... and how true it is!
You see, this past weekend, I got lost driving my son to his basketball game - a big playoff game against a worthy rival. We were hopelessly late. The coaches were calling me all in a frenzy as my son is one of the better players on the team.
So I'm lost and I'm late and my cell phone won't stop ringing with the "Where are you?!?" calls when I notice that I am very low on gas. Just great. Starting to panic a little bit, I pull into the local mom-and-pop gas station, fill up the tank as fast as I can, get directions to the gym and we are off.
Not so fast.
My car starts to sputter ... the engine stalls and there are awful fumes coming from under the car! Is the fuel pump malfunctioning? Has some BMW engine part that I can't pronounce busted? Did I pump in some watered-down shoddy gas?
Somehow, after about a dozen more stalls and restarts, we lurch and stammer into the parking lot just as the engine finally dies. The car is towed to the dealer and and I am scratching my head as to what the heck happened.
A long tow trip later, I found out why my car died. Are you ready for this? In my hasty rush, I had put diesel in my car! What a knucklehead thing to do! Haste truly made waste which resulted in a very expensive repair bill. To top it off, we also lost the game.
So what does this have to do with finance and AP? Here's my prediction: with the downsizing of finance departments, there is going to be a rise in knucklehead accounting and transaction processing mistakes.
As corporations continue to cut SG&A costs, nowhere are the risks greater than in over-worked, under-staffed finance departments - especially AP. Below is a graph of the rise in restatements. The graph only goes to 2006 -- the number of restatements in 2007 and 2008 are lower but still high around 1200.
Now here is the "haste makes waste" point: studies of corporate restatements suggest that well over half of the errors ... more than 50% ... were human errors -- ordinary books and records deficiencies.
Cutting staff in AP is invariably going to lead to more mistakes and errors -- especially so in manual, paper-intensive operations.
And AP errors are expensive to fix!
I'll elaborate more in my next blog entry.
-Rakesh Shukla
@rakesh170
P.S. I thought diesel pumps were supposed to be tucked away in the back away from the regular gas pumps ... (sigh) live and learn.
Related Blog Posts: