Blog Series:  Lavante Guide to Optimizing Supplier Statement Auditing

by Josh Morrison

In this four part blog series, Josh Morrison of Lavante lends his insights from over twenty years of experience working as: a global head in the P2P suite for a multi-billion dollar enterprise; a highly regarded industry consultant; and a Senior Solution Expert for an industry leading technology provider.  Throughout his upcoming posts, Josh will explore multiple facets of the supplier statement audit process.  Although they are often misunderstood or overlooked, statement audits hold the key to unlock better supplier relationships, a cleaner vendor file, and millions of dollars in profit recovery… but only if they are approached in the proper manner.  In this first installation of the series, Josh shares his perspective on the financial implications of optimizing a supplier statement audit.

Part#1 – Financial Impacts

Accounts Payable Recovery Audit has been around for a long time, but in the last few years, many forward-thinking organizations have sought to drive greater results through new strategies and innovations. Some leading service providers have risen to the occasion and have met the challenge with exponentially better ways to support their clients. This galvanization has been catalyzed by several critical pains that many companies either are not aware of, or realize is a problem but are not sure what to do about it. This four-part series lays out these critical pains and identifies many of their associated root causes. The intent is to educate organizational leaders about these common pitfalls and provide recommendations and decision support for improved audit recovery strategies.

The Problem:

We as organizational leaders are always being asked to do more with less.  We are challenged to cut costs or grow our business without adding costs, to improve and better control business processes, and to govern critical organizational information and business relationships.  How can these lofty objectives be met through something seemingly benign like reviewing supplier statements?  The answer may be simpler than you think; it’s all in the foundational data and processes that support the data.  Today we will look at how this impacts organizational dollars, specifically lost profits and ineffective use of working capital.

The Cause:

There are myriad reasons an organization could see profit leakage relative to ineffective utilization and management of supplier statements.  Some of this is attributable to the process, and some to the data underlying it.  Through bringing these hazard areas to the forefront, we can start to form strategies to combat them.

For starters, not all companies perform regular or thorough statement reviews.  Some organizations collect and audit statements only once or twice per year, and some not at all.   At the same time, not all suppliers’ statements are being reviewed.  All too often, statement auditors will only engage the suppliers with the highest spend, operating under the false assumption that there is very little value in auditing suppliers with lower spend dollars.  It is not uncommon for companies to only review statements from suppliers that make up the top 10-20% of spend.  This group often consists of a concentrated number of large, high spend suppliers.  So for example, if you run a $5 billion company with 20,000 active suppliers, your top several hundred suppliers may account for 60-80% of your spend. In this case, are you really comfortable leaving tens of thousands of other supplier accounts unchecked?  Of course not, but doing something about it can be easier said than done!

The fact is, if you are not performing a comprehensive and ongoing statement review, you are surely missing money. Suppliers of all sizes could have available credits on account, not only large ones.  And if they are not taken quickly, they have a tendency to disappear.  Some suppliers will send in statements without being asked.  This can be great, but to they always come to the same place?  If they do not, do they always get appropriately routed for review and processing of open credits?  Of course not.  You may be making duplicate or erroneous payments, missing allowances or rebates, or forfeiting discounts and not even know it.  To add insult to injury, your suppliers are reporting these monies to you.  All you have to do is be able to review all of these statements, verify the credits, and take them.  And yet again, this is often easier said than done.

But why is it so hard to accomplish these seemingly simple tasks?  The truth of the matter is that most organizations do not have the dedicated resources or available excess capacity needed to drive improvements and optimizations to these areas.  Statement review is very often performed manually; all of it.  But let’s not underestimate what this means.  Consider the time and effort it would take to manually:

  • Solicit your suppliers for statements
  • Re-solicit and report on those who have not complied
  • Receive statements and route to the appropriate internal reviewer
  • Perform statement reviews and analysis
  • Engage suppliers to verify open credits
  • Secure supplier approvals and backup documentation
  • Create electronic credit memo record
  • Load credits to organizational ERP(s)
  • Digitally image all documentation
  • Store/destroy physical backup

Not so simple anymore is it?  Compound this with the thousands of additional suppliers you want to engage, and it becomes abundantly clearer why organizations have such a challenge in scaling and optimizing their supplier statement review process.  When these laborious tasks are performed manually, and when you are lacking the ability to systematically engage, capture, and process documents and data, it is just not feasible to allocate the resources that would be needed to perform this work.

Missing credits on some supplier accounts is not the only result of having a broken or manual process however; the financial impact reaches well beyond only that.  We have established that when you have manual processes, you cannot audit all of your suppliers’ statements, or do so on an ongoing basis.  But what if you do have a system or some degree of automation in place?  Or what if you are paying a third party auditor to review statements for you?  How can you be certain you are capturing the full value you should expect?

Impacts & Recommendations:

If you are not reviewing all of your suppliers, you are missing open credits.  If your statements are only being reviewed on a periodic basis, you are also likely missing open credits.  And credits that are found as a result of a periodic review are found later than they should be.  This means that you are not capturing cash when it is available to your organization, which in turn directly and negatively impacts your working capital position.  Relative to the Balance Sheet, capturing open AP credits is no different than managing Accounts Receivable; it is collecting money owed to you.  When you collect late, you have to borrow more against your credit line, and have reduced cash on hand to support operations, investments and business development.  Moreover, delayed credit capture lengthens the audit cycle.  Why would you wait twelve months to collect monies owed to you when you could get it in 90 days?  I would challenge any good Controller to argue against this.

When we collect late, it also delays your ability to drive process and data improvements.  If we have open credits with a supplier because we were failing to take an allowance, we want to know this right away so we can correct the problem and stop the proverbial bleeding.  And yes, the money in this case was recovered, eventually (and likely for a 3rd party fee or associated internal cost), but your pricing in the system was wrong all along. This likely caused processing and payment delays, lost discounts, and negative impacts on credit reporting.  In addition, if this price was used for any Sourcing analysis or price negotiations, it has provided misleading and incorrect data.  Potentially even worse, if this allowance was the result of Sourcing or negotiations, you have failed to operationalize the financial benefits.

Capturing supplier statements can be leveraged in an entirely different way too.  When statements are captured regularly, your organization can monitor to assure you do not have past due invoices listed that could cost you discounts or credit rating, or are not over credit limits which could result in held orders or increased borrowing.  Further, over time, you can begin to discover patterns for suppliers. For example, if a given supplier usually sends a 20-page statement, and all of a sudden it drops to five, it is an indication of something that your company should probably want to know about.

So what needs to be done?  To maneuver around these pitfalls, organizations need to perform regular statement reviews.  These reviews need to be across the entire supplier base, not just for the top 10-20% or in certain categories.  The procedures to collect, review, and process supplier statements must be streamlined and centralized to assure there is no leakage or redundancy.  Communications and documentation needs to be tracked and managed. The magic wand needed to make all of this possible, to no surprise, is technology.  Finding the right technology, combined with the right strategy and the right partners, are the keys to success to assure that you are not losing money and ineffectively leveraging working capital through your statement audit.  Managing supplier statements is simple in concept but, within large organizations particularly, is much harder in execution.  Do you have the tools and strategies in place to assure you are optimizing how your organization manages statements?

J.Mo