The Challenges of Unauthorized Deductions in Accounts Receivable: Causes and Solutions

Effective management of accounts receivable is crucial for maintaining a healthy cash flow and sustaining a successful business. However, one of the persistent challenges faced by companies is unauthorized deductions from clients' payments. Unauthorized deductions occur when clients make deductions from the invoices they receive without proper justification. These unauthorized deductions can significantly impact a company's bottom line and create disputes that harm the client-vendor relationship. In this blog post, we will explore the reasons typically cited for unauthorized deductions and provide mitigation strategies to reduce them.

Common Reasons for Unauthorized Deductions

1. Discrepancies in goods or services received:

Clients often make unauthorized deductions when they believe that the goods or services they received do not meet their expectations or the agreed-upon terms. To mitigate this, it's essential to maintain clear communication and document all agreements with clients to ensure that both parties are on the same page regarding product or service quality.

2. Pricing disputes:

Discrepancies in pricing are another leading cause of unauthorized deductions. Clients may challenge invoiced amounts, citing disagreements over pricing agreements. To reduce this issue, ensure that your pricing agreements are well-documented and shared with the client, and any changes are communicated clearly and in writing.

3. Quality issues:

Clients may make unauthorized deductions if they experience issues with the quality of goods or services delivered. To mitigate this, focus on quality control and conduct regular assessments to ensure that your products or services meet the required standards.

4. Delivery and timing disputes:

Clients may claim unauthorized deductions due to delays or timing issues in the delivery of products or services. Effective project management and timely communication can help avoid such disputes.

5. Damaged or missing items:

If clients receive damaged or incomplete shipments, they may deduct the costs for the damaged or missing items from their payments. Implement stringent quality control measures to minimize these issues and document shipments thoroughly to prove their condition upon delivery.

Mitigation Strategies for Reducing Unauthorized Deductions

1. Clear and detailed invoicing:

To reduce the risk of unauthorized deductions, provide clear and detailed invoices that outline the products or services delivered, their pricing, and any agreed-upon terms. Include contact information and payment terms to facilitate communication.

2. Effective communication:

Maintain open lines of communication with your clients. Encourage them to report any issues promptly and work together to find solutions that satisfy both parties. Addressing concerns proactively can prevent unauthorized deductions.

3. Dispute resolution process:

Establish a dispute resolution process that defines how discrepancies will be resolved. This should include clear guidelines for addressing quality, pricing, and delivery issues. Be sure to document all discussions and agreements during the resolution process.

4. Regular quality assessments:

Implement regular quality assessments for products or services to ensure they meet agreed-upon standards. Maintaining quality control helps prevent disputes related to the quality of delivered items.

5. Consistent documentation:

Thoroughly document all agreements, communications, and transactions with clients. Having a paper trail can be instrumental in resolving disputes and justifying your invoiced amounts.

6. Customer feedback:

Encourage client feedback and use it to continuously improve your processes and offerings. By actively seeking input, you can address issues before they lead to unauthorized deductions. Provide a customer self-service portal where issues can be reported.

7. Periodic client audits:

Conduct periodic audits of client accounts to identify any unauthorized deductions or discrepancies. This allows you to rectify issues and enhance the accuracy of your accounts receivable.

Conclusion

Unauthorized deductions in accounts receivable can pose significant challenges for businesses, impacting cash flow and client relationships. By understanding the common reasons for unauthorized deductions and implementing effective mitigation strategies, companies can reduce these issues and ensure a more harmonious client-vendor relationship. Clear communication, thorough documentation, and a commitment to quality and transparency are key to successfully managing this challenge in accounts receivable.

Develop an Accounts Payable Scorecard to Drive Process Improvements

As part of any transformation project, and certainly as part of ongoing monitoring and improvement, identifying and tracking relevant metrics is critical to managing processes. In a previous post, we covered metrics around direct procurement. In this post, we’ll cover common metrics for the Accounts Payable process.

Accounts payable (AP) performance metrics are crucial for monitoring the efficiency and effectiveness of your organization's financial processes. These metrics help you assess how well your AP department is managing its responsibilities and identify areas for improvement. All to often, if an A/P department tracks metrics at all, they will typically be basic metrics, such as the percentage of invoices paid within terms. Nothing wrong with that, but a truly useful scorecard will incorporate the type of metrics discussed below.

Here are some common accounts payable performance metrics along with descriptions of each:

Accounts Payable Turnover Ratio:

Description: This ratio measures how quickly your company pays its suppliers. It is calculated by dividing the total purchases from suppliers by the average accounts payable balance during a specific period. A higher turnover ratio indicates that you are paying suppliers more quickly.

Importance: A high turnover ratio can suggest good cash management, while a low ratio may indicate inefficiencies or problems with supplier relationships.

Average Days Payable Outstanding (DPO):

Description: DPO measures the average number of days it takes your company to pay its suppliers. It is calculated by dividing the average accounts payable balance by the cost of goods sold (COGS) per day.

Importance: A lower DPO indicates that your company pays suppliers more quickly, which can be positive if you want to maintain good relationships. However, a longer DPO can free up working capital.

Invoice Processing Time:

Description: This metric tracks the time it takes to process an invoice from the moment it is received to when it is paid. It includes the time for approval, coding, and payment processing.

Importance: A shorter invoice processing time helps prevent late payments and may lead to better terms with suppliers.

Accuracy of Payments:

Description: This measures the percentage of payments made without errors or discrepancies. It includes checking for correct amounts, payment to the right supplier, and adherence to agreed-upon terms.

Importance: High accuracy reduces costly errors and disputes with suppliers.

Early Payment Discount Capture Rate:

Description: This metric calculates the percentage of early payment discounts offered by suppliers that your company actually captures by paying invoices ahead of their due dates.

Importance: Maximizing early payment discounts can save your company money, making this metric vital for cost management.

Supplier Satisfaction Score:

Description: This is a qualitative metric that assesses how satisfied your suppliers are with your accounts payable processes and interactions.

Importance: Happy suppliers may offer better terms, prioritize your orders, and provide more responsive support.

Aging Reports:

Description: Aging reports categorize outstanding payables by the length of time they have been unpaid (e.g., 30 days, 60 days, 90 days). This helps identify overdue invoices and potential issues.

Importance: Aging reports are essential for managing cash flow and identifying overdue payments that need attention.

Percentage of Electronic Payments:

Description: This metric tracks the proportion of payments made electronically (e.g., ACH transfers or wire transfers) versus paper checks.

Importance: Electronic payments are often faster, more secure, and cost-effective, making this metric relevant for efficiency and cost reduction.

Late Payment Rate:

Description: The late payment rate measures the percentage of invoices paid after their due dates.

Importance: A high late payment rate can damage supplier relationships and may result in penalties or strained business partnerships.

Accounts Payable Cost per Invoice:

Description: This metric calculates the average cost incurred by the AP department to process a single invoice, including labor, technology, and overhead expenses.

Importance: Reducing the cost per invoice helps improve overall AP efficiency and reduce operational expenses.

Conclusion

Monitoring and analyzing these accounts payable performance metrics regularly can help your organization identify areas for improvement, optimize cash flow, enhance supplier relationships, and streamline your financial processes. It’s critical that once a scorecard is finalized, it must be introduced the the Accounts Payable staff so that they understand the metrics that are being tracked. And for better or worse, the metrics should be published regularly, likely monthly, so that everyone understands the progress towards the goals, and that the process has transparency and trust.

Questions:

• Does your organization currently have a scorecard for A/P?

• If so, what are the key metrics you’re tracking?

• If you don’t have a scorecard, what is preventing your organization from developing and using a scorecard?

Unveiling Efficiency: Key Ideas in Corporate Process Design

In the dynamic and competitive landscape of modern business, corporate process design plays a pivotal role in driving operational efficiency, enhancing productivity, and ensuring sustainable growth. The art of crafting and optimizing processes within an organization involves a strategic approach that aligns tasks, resources, and technologies to achieve desired outcomes. In this blog post, we'll delve into the key ideas that underpin effective corporate process design, shedding light on how businesses can streamline their operations and achieve remarkable success.

Process Mapping and Visualization

The foundation of effective process design lies in understanding the current workflows and visualizing them in a clear and comprehensive manner. Process mapping involves creating visual representations of how tasks and activities flow within an organization. This helps identify bottlenecks, redundancies, and inefficiencies that might hinder productivity. Mapping also aids in the identification of key decision points, interactions between departments, and areas for improvement.

Lean Thinking and Continuous Improvement

Lean thinking is a principle rooted in minimizing waste and maximizing value. In corporate process design, this means eliminating activities that do not contribute to the end goal. By embracing lean principles, organizations can optimize resource utilization, reduce costs, and enhance overall efficiency. Continuous improvement, another integral aspect of lean thinking, ensures that processes are constantly evaluated and refined, allowing businesses to stay adaptive and agile in the face of changing market dynamics.

Cross-Functional Collaboration

Processes often cut across various departments and teams within an organization. Effective corporate process design encourages cross-functional collaboration, breaking down silos and fostering seamless communication. When teams collaborate, they can collectively identify pain points, share insights, and collectively design processes that cater to the needs of multiple stakeholders. This not only enhances efficiency but also nurtures a culture of cooperation.

Standardization and Automation

Standardizing processes involves defining best practices and consistent methods for performing tasks. Standardization simplifies training, reduces errors, and ensures that everyone is on the same page. Additionally, automation can significantly amplify efficiency by automating routine and repetitive tasks. This not only accelerates the pace of work but also reduces the risk of human error and frees up employees to focus on more strategic endeavors.

Customer-Centric Design

A customer-centric approach to process design emphasizes aligning processes with the needs and expectations of customers. By analyzing customer journeys and feedback, organizations can tailor processes to deliver exceptional experiences. This might involve streamlining order processing, improving response times, or personalizing interactions. A satisfied customer base is often the key to long-term success.

Data-Driven Decision Making

Data is a goldmine of insights that can guide process design. By collecting and analyzing relevant data, organizations can identify trends, pinpoint areas of concern, and make informed decisions. Data-driven process design enables organizations to focus resources where they matter most, enabling efficient allocation and constant refinement.

Change Management

Introducing new processes or modifying existing ones can be met with resistance from employees accustomed to the old ways. Change management is crucial to ensure a smooth transition. Transparent communication, proper training, and involving employees in the design process can alleviate concerns and promote a sense of ownership in the new processes.

Conclusion

Corporate process design is the backbone of operational excellence and competitive advantage. By embracing concepts like process mapping, lean thinking, cross-functional collaboration, standardization, automation, customer-centric design, and data-driven decision-making, organizations can foster a culture of continuous improvement and drive innovation. As businesses evolve in response to market shifts, mastering the art of process design will remain essential to achieving efficiency, growth, and success.

Lean Finance conference in Auckland, New Zealand

I will be hosting a series of workshops at the inaugural Lean Finance conference in Auckland, New Zealand on 17 - 18 October, 2011.  Hosted by Conferencz and BrightStar Conferences & Training, the Master Class series I'll be facilitating covers four sessions:

1. The Value-Adding Finance Function
2. Lean Assessment of Your Organization
3. Re-engineering Finance Processes
4. Transforming the Finance Professional

You can read more about the Conference at Conferencz's Lean Finance website and register for the event.  I hope to see you there.

After the Go-Live: Ten focus areas for effective Shared Service delivery - Part 10 - Foster a Culture of Continuous Improvement

It's been a long journey though this series of posts.  If you've stuck with me this long I appreciate it and hopefully you've gathered some additional insight that you can apply to your organization.  I'm wrapping up this series with a post about continuous improvement and organizational development.

High-performing companies make a commitment to continuous improvement in every area of their operations.  This improvement focus is centered on both the effectiveness of service delivery as well as the relentless pursuit of ever increasing efficiency.  There are a number of opportunities to focus on improvement.  Much of this improvement will be incremental and take place inside the walls of the broader transformation effort.  While true transformation makes bold leaps from one point to another, an organization's continuous improvement efforts supplement and refine that transformation effort.

Senior management must be visible in their commitment to the process, not only in word but in deed.  Funds must be allocated to the effort and the Shared Service Organization’s management team must be held accountable for delivering on promised and potential benefits.  Here are some ideas to contemplate as you improve your organization:

• Develop an integrated scorecard for the Finance organization that focuses on Financial, Customer (internal and external), Internal business processes and Learning and Growth.  It's hard to know how your journey is going if you don't have a way to keep score.  Develop a series of balanced metrics that provide a feedback loop for not just your current performance, but also to track the investments you're making to continuously improve.  You can track the number of customer invoices without an error, but you should also track the investment in training hours that you're people complete.
• Hold regular "lessons learned" meetings to identify areas for improvement.  I used to be a Controller in private industry, so I know as well as anyone that time is short in Finance and Accounting.  Yet it's important to set time aside to evaluate the current performance of the organization against established metrics.  What, you don't have metrics?  See point #1.  Really, why do Finance organizations continue to make the same mistakes and live with the same inefficient and ineffective processes month-after-month and year-after-year?  Don't let money be an excuse.  If the value is there and it's well documented in a business case, you stand a chance of improving your future.  At least you're trying.
• Rotate Finance personnel through Finance and Operations to give them a broader perspective on how Finance creates value in the organization.  I wish I had a dollar for every time a senior Operations manager told me they wished the Finance organization really understood their business.  Finance is about more than debits and credits.  Leading organizations have a formal rotation program that moves select personnel through both Finance and Operations so that they have a deeper appreciation for challenges of the business and better understand the ways in which they can create value.
• Clarify organizational responsibilities.  The world changes and so do a company's priorities.  Make sure that people's performance plans are up-to-date and reflect the alignment of operations with the company's strategy.  Implement at least two formal review periods during the fiscal year - at the end of the year and at it's mid-point.  Don't wait 12 months to give personnel formal feedback on how they haven't been living up to expectations for the last year.  Does a sailor only check his compass once a year?
• Implement a formal development plan for both individuals and departments.  What are the goals of each for the coming year?  What training, both formal and on-the-job, will these individuals and departments get to support their efforts to develop?  How do these plans align with the overall strategy of the organization.  If you don't have alignment you don't have an effective plan for organizational development.
• Implement a formal quality program.  Many companies have made the commitment to a formal program to track and improve quality.  And this is not just about manufactured products, but about all the support services used to support the company's strategy, including Finance & Accounting.  Instilling a culture of quality is as important as the reduction in error rates achieved.

These are just some ideas that companies use to continuously improve.  What have you tried in your organization?  What would you like to try and what's stopping you?  I encourage you to use the comment section below to leave your ideas and be part of the conversation.

After the Go-live: Ten focus areas for effective Shared Service delivery - Part 3 - Standardize and Optimize Processes

Note: This is the third post in a series focusing on the continuous improvement of Shared Services. You can read Parts 1 and 2 here.

3.  Standardize and Optimize Processes

Processes should be standardized as they are transferred from the Business Units to the Shared Service Organization.  However, even under the best of circumstances there will still be more work to do.   Once the processes are actually being serviced from the SSO, additional opportunities to standardize the processes will be identified.  Additionally, opportunities to optimize the processes to enhance service delivery and reduce costs through the elimination of non-value added activities should also be identified.  If processes were not transformed as part of the shift to a Shared Service Organization but were part of a "Lift and Shift" strategy, then the SSO really has work to standardize the disparate processes transferred from the Business Units.

One framework for evaluating and improving processes is Six Sigma.  Pioneered by GE and other organizations, Six Sigma uses the DMAIC methodology to either create standard processes or optimize existing processes.  DMAIC can be broken down as follows:

1. Define- This initial stage focuses on defining the customer of the process, their business requirements for the process, and the decomposing the actual process into individual activities along with the organizational titles responsible for each step (e.g. Accounts Payable processing).
2. Measure- This stage creates a measurement dashboard that incorporates both effectiveness and efficiency measures (e.g. processing error rates and invoices processed per FTE per annum).
3. Analyze -  This stage analyzes the processes in detail to understand the root causes of inefficiencies and bottlenecks.
4. Improve- This stage focuses on the development and execution of initiatives that are designed to address the inefficiencies identified in the previous stage.
5. Control - This stage maintains the controls necessary to maintain the process improvements over time.

Ideally this framework would be employed as part of the design process prior to transferring the processes to the Shared Service Organization.  However, even if there is standardization of processes as part of a "Transform and Shift" strategy, there will inevitably be opportunities for improvement once the processes are up and running in the Shared Service Organization. 

Five mistakes that damage the effectiveness of Shared Services and how to avoid them - Part 3

Note:  This is Part 3 of a 5-part series.  You can click here to read Part 1 and Part 2.

3.  Processes are consolidated into Shared Services without the required transformation

Companies sometimes take poorly performing processes from the business units and move them to the Shared Service Organization without engaging in the transformation necessary to standardize and optimize the processes.  This is often done with the best of intentions.  The thinking is that the company will consolidate the processes into a Shared Service Center to obtain the immediate benefit of labor cost reduction.  Many times this is done in conjunction with a shift in the delivery model from onshore to offshore.  Unfortunately, this often leads to the "my mess for less" syndrome, where there is some immediate cost benefit but the company is still left with a host of non-standardized processes that are no where near as effective as they should be.  This is fundamentally the "lift and shift" method of consolidation that does not focus on the simultaneous transformation of processes as they are moved to Shared Services.  Without this transformation, those poorly performing processes will continue to be a problem for the company by providing substandard service to the business units at a cost far above best-in-class.

In order to fulfill the vision of the Shared Service Organization, disparate processes from multiple business units and geographies must be reengineered to standardize those processes, incorporate best-in-class practices and technologies, and reduce the overall cost of delivering those services.  This is the "transform and shift" model and is most often used by companies seeking true finance transformation.  This approach takes a phased approach where the early phase is focused on understanding the existing processes and designing a series of standard future-state processes based on best-in-class practices and technologies.  Once there is a corporate standard for the in-scope processes, they can be migrated to a Shared Service Organization, either onshore or offshore, where the benefits of standardization will be delivered.  Leading companies often make this move in conjunction with an implementation or upgrade of a common technology such as SAP to facilitate the standard delivery of services.  This approach takes more time up front, but delivers far greater benefits for the long-term.

Why Shared Services is more than centralization of activities

When thinking about Shared Services, there is often confusion about what it really entails.  Of course, many companies are far down the road of creating and managing a Shared Service Organization (SSO) but others really haven't made the commitment to setting up a true SSO.  They may have gathered an activity such as accounts payable processing from the various business units and centralized them in a single location, typically at the corporate office.

One of the problems with this arrangement is that mere centralization of an activity is not a true Shared Service Center.  In centralization, the activity may be all under one roof, but it implies a bureaucratic mindset where the Business Units have to take what they get, there is no collaboration with the Business Units, there is no incentive for the group (in this case the accounts payable department) to continuously enhance service delivery while reducing cost, and costs are typically allocated back to the Business Units in a manner that has nothing to do with the volume and complexity of the services delivered.

In a true SSO, there is close collaboration between the Business Units and the SSO, the Center has the mindset of competing in the marketplace to deliver services at a competitive price, and there is a focus on continuous improvement to enhance delivery and reduce costs.

I believe it's wise to create a separate identity for the Shared Service Organization.  The most successful SSO's I've seen actually create a separate business unit for the group, so there is no doubt that they are in fact a business supplying services to the customers/partners.  They have their own budget and their own mission statement.  They are held accountable for delivering measurable savings  and delivery improvements year over year.  By creating a separate identity, there should be no confusion that this shift represents mere "centralization" but rather a separate business unit in the business of delivering value to its customers.