Payment Process Diagnostic
Download a pdf version of Payment Process Diagnostic.
The payment process is strewn with “opportunities” for companies to lose money through inefficient if not downright shoddy practices that lead to duplicate payments. For the most part, the professionals who run accounts payable operations know these practices should be overhauled but often don’t have the political wherewithal to insist on the change. Sarbanes-Oxley has changed some of that but there is still room for improvement at many organizations. This quiz will target those areas that really need further investigation. The Diagnostics that follow the quiz will provide solutions to potential payment process problems.
The Questions
1) Does your accounts payable staff often pay invoices that are marked copy, duplicate or second request? ____Yes ____ No
Potential Issue: Paying from copies is one of the biggest causes of duplicate payments. Best-practice accounts payable departments make it a policy never to pay from copies unless extenuating circumstances are proved.
2) Do you issue more than five manual (Rush or ASAP) checks each month? ____Yes ____ No
Potential Issue: Rush checks indicate a breakdown in sound invoice processing procedures. While every firm has an occasional slip up or occasional need when a check must be issued outside the normal check production cycle, more than a few indicates serious problem. Paying with rush checks outside the normal cycle is one of most common causes of duplicate payments.
3) Does your staff spend tons of time tracking down delinquent payments for vendors looking to be paid? ____Yes ____ No
Potential Issue: Inefficient processes that lead to time wasted in the accounts payable department. What’s more, they may often miss a payment that has been made and issue a second one.
4) Do you fail to direct vendors to send all invoices to the accounts payable department? ____Yes ____ No
Potential Issue: Without clear instructions, invoices take longer than they should to get to accounts payable for payment. Not to sound like a broken record, but this often leads to a second invoice being issued —one that occasionally gets paid.
5) Has your company ever been put on credit hold by a key supplier because an invoice had not been paid (not because of financial difficulties)? ____Yes ____ No
Potential Issue: Yikes—this one is really bad. While key suppliers can sometimes behave like pampered princesses, to get one to the point that it puts you on credit hold because of non-payment signals an almost complete breakdown in effective processing procedures. The problem is just as likely to be outside of the accounts payable department as it is within the group. However, that will not matter when manufacturing starts screaming. And, late payments tend to generate second and third invoices—which we all know occasionally get paid.
6) Do you fail to earn (and take) more than 10% of the early payment discounts your firm is entitled to? ____Yes ____ No
Potential Issue: The primary issue obviously is the loss of the early payment discount, which in the current low-rate interest rate environment may represent the best investment opportunity your company has. Secondarily, failure to earn early payment discounts can be symptomatic of bigger operational issues—which lead to duplicate payments.
The Answers
Once again, all the questions have the same answers. Even one response of yes is not really acceptable as these are all serious issues. When it comes to payments not only do inefficient processes cost in terms of wasted time, they often, as demonstrated above, open the door for fraudsters and duplicate or erroneous payments.
The Diagnostics
Most of the problems discussed were symptomatic of bigger problems. To diagnose the source of your problems try the following:
1) Begin by flow charting the process as it should work, including estimated time frames for each step in the transaction.
2) Then flow chart the process as it actually works including your estimates of the time actually spent on each task. Include in that second chart estimates for time spent on the various additional steps. This might include the issuing of rush checks, time spent on calls from vendors either looking for their money or with an inquiry about a partial payment, etc.
3) Compare the two charts.
From your comparison you should be able to pinpoint two items.
1) By looking at those areas where the actual time spent was much longer than the ideal time you can identify those areas needing further investigation. Clearly something is going wrong and the process at that point needs to be reengineered or procedures need to be enforced.
2) Using the information gathered above estimate how much extra time is being spent on the payment process. Convert this into a dollar figure using the average salaries of the employees performing the tasks. Don’t forget to include the cost for the time spent on extra tasks that the poor processes generate. Add to that any lost income (of lost discounts etc.).
As noted above, the source of the problem is often outside of accounts payable. This can make fixing the issue tricky especially if the root cause is a department or individual who is at odds with AP. Depending on where the breakdown is, you may need support from management in both your department and elsewhere.
Often the professionals handling payments know where the problem is and they really don’t need to do the diagnostic suggested above. But there is a very good reason for doing it. The analysis will arm you with the data you need to enforce the necessary procedural changes to improve your payment processes. It will provide you with the metrics and ammunition to, at the very least, force a discussion if not the actual change itself.
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Download a pdf version of Payment Process Diagnostic.
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