CFOs strapped for working capital by the coronavirus business slowdown might find relief by accelerating forensic audits to recover misspent money, Ron Stewart, CEO of PRGX, told CFO Dive.
Between 1% and 3% of the money companies spend annually on services or for supplies is duplicative or incorrectly calculated, making it low-hanging fruit for CFOs looking to shore up their company’s cash position, Stewart says.
"In these times, what we’re seeing is everybody’s scrambling for working capital and there’s a lot of working capital that’s right in front of you that’s lost in the complexity of your processes or systems," he said.
PRGX analyzes the data tied to companies' source-to-pay processes to isolate the mismatch between what they were supposed to pay and what they actually paid. For companies doing billions of dollars of business, it’s not unusual to have millions of dollars incorrectly paid to suppliers or vendors.
"You’d be surprised how many large duplicate payments we find," said Stewart, a 30-year veteran of Accenture before joining PRGX in 2013. "Companies literally are spending millions of dollars in duplicate payments to a supplier or a service for a particular type of product."
Operations using multiple enterprise resource planning (ERP) systems tend to be susceptible to duplicative payments because vendors or suppliers listed more than once can get paid out of more than one system.
"We have clients with hundreds of ERP systems," he said. "The same supplier could be set up on multiples of these ERPs. And so, the invoice gets sent, gets paid out of one system. There’s a follow-up [in which] they look at a different system. They don’t find it, so they pay it there. It’s typically where you have large companies with a lot of complex data and the left hand doesn’t know what the right hand is doing. Or maybe a payment’s been made and it hasn’t gone through yet, and the supplier asks for an emergency payment because they need the money. So, it gets paid again."
New suppliers raise risks
Incorrectly applied payments are a particular risk today because many companies have turned to suppliers they haven’t worked with before to get around supply-chain disruptions that have increased since the start of the outbreak.
These unfamiliar suppliers are often "charging incorrect freight, or charging an amount that’s incorrect against the contract,” he said. "Or, there are delays in their returns, or some of the rebates are affected."
If you’re working with a new supplier, you want to look for timeliness of documentation, what they're billing for, and whether they’re giving you credits, among other things, because these can indicate whether their billing is accurate.
"There are going to be a number of supplier performance indicators that would tell you whether these guys are performing well or not," he said. "Are you getting a lot of returns? Are you seeing particularly high volume of credits? These are things that would come out of this. It can mean there are some problems going on in their supply chain and how their internal processes are working."
Many groceries, big-box retailers and drug stores are unlikely to have cash problems, because they’re among the companies seeing increases in volume as people stock up on essentials to ride out stay-at-home orders. Once things calm down, though, these companies can expect to find a lot of the money that went out the door to suppliers was incorrectly calculated.
"Some of these companies are seeing 50% to 70%, even 100%, increases in sales compared to a year ago," he said. "With that kind of massive increase in volume, that’s going to create and churn a lot of activity, a lot of transactions that could lead to errors."
Companies on the other side of the spectrum, whose business has fallen off a cliff, like many specialty retail and department stores, don’t have the luxury of time to find where they misspent money.
"They’re the ones that really need to find some extra working capital," he said. "You want to go back and look: Do you have some access to some of these recovery claims? That could put working capital on the bottom line for you."
In ordinary times, CFOs who have forensic audits conducted of their source-to-pay process typically have it done eight months or a year after the spending occurred, but it can make sense to have the audits done in real-time if they want to get money back sooner or keep money going out incorrectly in the first place.
"As soon as the transaction hits, [an auditor] can start looking at it," he said. "Obviously, there are internal processes you want to do, like matching and verification. But once you get to a verified transaction, an auditor can start looking at it."
By looking at your transactions on a prepaid basis, he said, you can keep it from becoming a recovery in the first place.
"The best time to recover is before you pay it," he said.