With the economy already in a downturn, many predict a recession by the end of the year. In this scenario, an organisation’s Finance team are expected to prepare their organisation for the possibility of a recession with strong controls around their working capital – providing the flexibility and agility needed to navigate the uncertainties of changing economic conditions and emerge in a strong financial position.
For public sector organisations, during an economic downturn, the aim is to continue providing high-quality services and emerge able to operate effectively in the prevailing conditions. In the private sector, survival may be the focus for smaller organisations, or where there is more stability, emerging relatively unscathed and able to take market share from less well-prepared competitors is the goal.
The Role AP Plays
What can Accounts Payable do to support the Finance plan for a recession? Keeping control over liabilities and disbursements is what AP teams do well, and when the financial going gets tough, controls need to be maintained as the business imposes modifications to standard operating practices.
For example, the CFO is likely to request an increase in working capital, to support the organisation through the unusual and unpredictable financial demands of a recession. Early payment to suppliers may be suspended, and later payments may be required. The AP team will play a vital role in adjusting supplier payment schedules, managing the delicate balance of increasing liabilities, increasing cash in the bank, and maintaining good supplier relationships and an uninterrupted supply chain.
As expenditure comes under greater scrutiny, the importance of visibility, controls and reporting of the Procure-to-Pay cycle increases – continuous monitoring and effective controls around supplier spend are essential during a recession.
Increasing Risk of Overpayments
We have seen many times that when revenue is in short supply, suppliers will often invoice repeatedly, typically requesting early payment with another copy of their invoice. Duplicate invoices, similar invoices, new invoices (not even similar) for the same PO, and invoices without a PO number are common causes of overpayment to suppliers; they can be extremely hard to spot.
There may even be an increased desire to defraud organisations out of money during a recession, either by a cash-strapped supplier, or an individual in either the buying or supplying organisation who has increased motivation. (Ref: the fraud triangle)
Time to Collect
One sure-fire way to boost working capital is to run a forensic recovery audit – looking back 3-4 years and checking every invoice approved for payment. What many organisations may not realise is that forensic recovery audits can be performed on a contingency basis – there’s no initial cost, only a percentage of recovered funds is paid – meaning this can take place right away, using a 3rd party, and can only contribute positively to your bottom line.
Most audits check only a sample of invoices or those above a certain threshold, but a forensic recovery audit checks every single invoice and generally finds a lot of overpayments made in low-value invoices that have not been reviewed before, and a smattering of higher-value invoices that were paid as nobody had spotted they were duplicates, were for a higher value than the PO, or cannot be connected to a purchase order.
An extension to a forensic recovery audit is a statement reconciliation exercise. Run after the forensic audit, bringing supplier statements into the verification of the AP ledger generally yields a healthy return of cash and overlooked credit notes and rebates from suppliers. When the belt needs to be tightened, proactively checking for any past overpayments to recover cash from suppliers is a smart, proactive move for AP.
Ongoing Prevention
With a one-off cleanse completed it is time to move to daily prevention of exceptions. Start checking and monitoring your suppliers and their transactions to identify any risks as soon as they enter your ERP or accounting systems. This will help optimise your working capital by preventing unnecessary leakage – cash is of no use to you if it gets paid to suppliers, even if it is clawed back later – you need your cash in your bank account during times of economic challenge and uncertainty.
FISCAL Technologies would be very happy to talk to you in more depth about the topics mentioned in this blog, please contact us using the details below.
