Blink
I just finished reading “Blink” by Malcolm Gladwell on the plane last week. It was really an enjoyable read. He talks about “thin-slicing” in the book. It is basically the process of taking a small amount of information, that is immediately available to you, and using that information to make a decision or form an opinion. He further explains that the opinion or decision made using the “thin-slice” will usually be correct.
I found the concept and stories in the book to be fascinating. I use the approach often in my life. I would call it “first impressions from experience”, but “thin-slicing” works too. I can often determine, with relative accuracy, what improvements a client can make by asking a few questions and spending just a few minutes with their data. I think it becomes second-nature after working with clients large and small in numerous industries for ten years.
Documentation of AP policies and procedures are essential to proper training, communication, goal setting, evaluations, and execution in the payment functions. A complete manual should address all aspects of payment processing from invoices to credits, returns, discounts, allowances, rebates, back-orders, escheatment, sales and use tax, prepayments, and many others.
It is important to be as detailed as possible and attempt to cover typical and atypical situations that arise while processing invoices and credits. As your company grows and changes, it is also important to keep up by documenting them in the policy manual.
If you need help starting your manual, ask your AP consultant or make use of the many resources available online.
Data Mining: Don’t throw out the trash…recycle it.
I’m sure you’ve heard of the acronym GIGO (garbage in garbage out). You’ve also heard the saying “one man’s trash is another man’s treasure.” These adages are especially true when mining and analyzing data. Data that is exported for analysis is often incomplete due to errors or omissions in data entry or exporting procedures. Unfortunately, many recovery audit analysts will throw out the trash by either disregarding or not recognizing unmatched or incomplete records.
If a database contains 100 million records and 2% of the line items are trash, the ability to analyze two million records may be lost. Those two million records may be the exceptions we are looking for. Our ability to turn trash into treasure depends on our resourcefulness in completing or correcting (recycling) the data.
In depth data analysis, cleansing, and normalization procedures are key to providing a thorough, accurate, and complete recovery audit.
Rebate Calculations and Reconciliations
Large wholesale and retail organizations have between several hundred and several thousand suppliers and service providers. Many of their suppliers will offer sales or purchase based rebates as incentives for purchasing their products or services. The monies received from supplier rebates can make up a significant portion of net profits in many industries. Rebates may be fixed amounts, variable amounts, or contingency based programs. Each program is unique. It may include all products purchased, individual products, or families of products. It may be based on sales, purchases, receipts, bill-backs or other data sets. The supplier could cut off their calculations according to their ship date, invoice date, or bill-back credit date. With all of these scenarios spread across hundreds or thousands of suppliers, how can an organization accurately calculate, collect and reconcile all of the rebates available to them?
Some organization will not calculate the rebates they’ve earned, but will simply track credits and checks received from suppliers to ensure they have received credit on a consistent basis. Obviously, this leaves them vulnerable to mistakes made in the issuance of credits from suppliers as well as leakage in their collection process. Fortunately for them, most suppliers are typically very accurate and responsible in providing them with the credits they deserve. Unfortunately, one or two missing or under-reported credits can cause significant profit loss.
Most wholesale and retail organizations will calculate the rebates they’ve earned based on a single consistent data set and apply that logic to all of the rebate programs. For example, a wholesale client uses their sales data to calculate the rebate funds they have earned by contract across all suppliers. The figures calculated internally are compared to credits received from suppliers and large variances are reconciled annually. The problem with their process is they are not comparing apples to apples for contracts not based on sales; therefore, they are not able to accurately calculate monies earned or reconcile discrepancies for those contracts. Timing issues are also a consideration when trying to accurately calculate and reconcile rebate programs.
Customized software applications are a great tool to ensure that programs are calculated, received and reconciled according to the terms of the agreement. When set up correctly, it is a cost-effective, efficient, and accurate tool to calculate and reconcile rebate programs. The processes surrounding the program are dependent on the amount of manual input that is necessary or requested by the users, as well as the availability of electronic data. When more electronic data is available, the application can be enhanced to include customized data mining and analytical capabilities.
When analyzing and revising rebate procedures, be sure to thoroughly review the calculation, tracking, collection, data entry, and reconciliation processes. Requesting and reviewing statements of accounts from suppliers is an additional check to ensure that all credits are received and deducted.
Legacy Processes for Legacy Systems
Companies with legacy systems often use “legacy processes” to reconcile debit memos created internally to credits received for items such as: rebates, shortages, damaged goods, pricing discrepancies, charge-backs/bill-backs, returns, promotions, and others. Legacy processes are often manually intense and leave considerable room for error. Legacy systems are often supported by internal information systems professionals because the company who created the system is now defunct or no longer offers support for the system.
While it’s true that newer ERP systems offer greater flexibility, customization, and data management possibilities, legacy systems still offer significant value for many companies. The value provided by the legacy system could often be more significant when a few small process changes are made and software applications are added.
For example, several of our clients were not using their legacy mainframe systems to their potential. They were using the PO/Notes field in their accounts payable data entry module for paid invoices only. A process was initiated to include the debit memo number that corresponded to the supplier credit the associate was entering in the module. A separate application was designed to reconcile the debits created with deductions taken. The application provided reporting for various processes based on the electronic reconciliation. The manual involvement in the processes was lessened and the resulting errors were significantly reduced.
