WHITE PAPER HOW TO REDUCE RISK, ERROR, COMPLEXITY AND DRIVE COSTS IN THE ACCOUNTS PAYABLE PROCESS

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1 WHITE PAPER HOW TO REDUCE RISK, ERROR, COMPLEXITY AND DRIVE COSTS IN THE ACCOUNTS PAYABLE PROCESS Based on a benchmark study of 250 companies with a total of more than 900 billion euro in Accounts Payable data worldwide, this white paper provides insight into the most commonly seen errors and risks in the Accounts Payable process

2 How to reduce risk, error, complexity and drive costs in the Accounts Payable process Based on a benchmark study of 250 companies with a total of more than 900 billion euro in Accounts Payable data worldwide, this white paper provides insight into the most commonly seen errors and risks in the Accounts Payable process. Introduction In today s volatile business environment, Finance strives to have a flexible and responsive finance function in order to support the business in making the smartest and fastest decision. Recent research by Free University Amsterdam shows that organizations which strive to have a flexible and proactive finance function: Exercise control over several leading indicators instead of many KPIs, Implement rolling forecasting, Use trend information and relative performance indicators, Value knowledge sharing, learning and collaboration within the finance organization From this perspective finance professionals want, among other things, to review and improve their performance based on hard, objective data. According to research by the Aberdeen Group (2009), CFOs challenges in improving financial performance are reducing costs (73%), optimizing working capital (70%), forecasting financial performance (53%) and, reducing errors (43%). Financials therefore have, among other things, an inherent interest in management information in the following areas:

3 Historical and current payment performance Types of payment errors that occur Cost control, profitability Contract Compliance Payment terms, DPO Extent of contamination of the vendor master file Supplier behaviour and risks associated with the supply base Based on hard, objective data this white paper offers insight into the causes and effects of the most common errors and risks in the Accounts Payable process. The study is based on the results of a benchmark of 250 companies with a total of more than 900 billion euro in Accounts Payable data in various industries and countries worldwide. Brief overview of this white paper: Supplier behaviour and risks associated with the supply Industries with the largest number of suppliers with small invoices Industries that have the most suppliers with the same bank account number Industries with the highest percentage of inactive suppliers among the total number of suppliers. Risks associated with the suppliers location Extent of contamination of the vendor master file Insight into the most common errors that occur in the vendor master file Top five industries with highest error rates in Accounts Payable Insight into the most common errors per top five industry Short- term and long- term solutions to resolve and prevent the most common errors

4 About the author: Founded in 2000, Transparent is an international financial- services provider specializing in data mining of Accounts Payable. The company has rapidly grown into a global operation, with operations in the Netherlands, Germany, Belgium, India, France, the United Kingdom, Italy and the United States of America. Our services include the analysis of outgoing payments and associated processes with the aim to convert payment data into detailed management information. Alongside the analysis, we identify, verify and collect undue payments on a no- recovery no- fee basis. The results are presented in an easy- to- read dashboard and used by Transparent to provide clients with management information and advice regarding their Accounts Payable processes. CFOs of blue- chip and medium- sized companies around the globe rely on Transparent to provide them with enterprise- level transparency of their payment processes and with sensible improvement recommendations. Moreover, many of our clients have seen an immediate profit increase upon engaging our contingency- based recovery services. Our analysis is robust, fast, risk- free, and doesn t consume our clients resources, due to our excellent technology deployment and fully- industrialized process. For more information about the benchmark, including a customized benchmark, our services and/or other inquiries, please feel free to contact: benchmark@transparent.eu Or contact us directly via: Mr. Joep van den Brink, MSc. Marketing Manager Joep.van.den.brink@transparent.nl (0)

5 Even if you believe that your Accounts Payable process is fully in order, a scan of your outgoing payments can give surprising results. This could be because contamination of the supplier database has increased historically. On the one hand there is a real risk of errors occurring in the payment process, while on the other hand there is also the extra workload due to payment corrections to consider. In today s volatile business environment, managers responsible for the Accounts Payable process want the following questions answered: How efficient is my Accounts Payable process? How does my Accounts Payable process compare with those of my competitors or other parts of my organization? What are the risks attached to my suppliers? How can I improve my Accounts Payable process? Several issues that can be taken into consideration: Supplier behaviour and risks associated with supply Accounts payable is all about managing your relationships with your suppliers. If you understand your suppliers behaviour, issues such as rare errors and workload can be reduced or even prevented. Small invoices During our benchmark study we noticed that a substantial number of suppliers sent small- amount invoices. The number of suppliers with small- amount invoices is the largest in the industries shown in Figure 1. With an average of 121 suppliers with small- amount invoices, the Transport, Distribution and Logistics industry (31%) ranks number one.

6 Figure 1 Industries with the largest amount of suppliers with small invoices 17% 16% 31% Transport, Distribu5on, Logis5cs (31%) Insurance & Banking (19%) Industry & Manufacturing (17%) 17% 19% Travel, Leisure & Food Services (17%) ICT (16%) A large number of small invoices increases the risk of a larger workload and may lead to unnecessary costs. To reduce the workload, organizations should analyze their suppliers behaviour by means of random checks. The purchasing department can make arrangements with suppliers that send small- amount invoices. These arrangements, for example receiving a monthly invoice instead of an invoice per order, will lead to a reduction of the workload. Same bank account number Using the bank account number when searching for a supplier in the vendor master file can lead to the selection of a wrong supplier. This is because the benchmark study shows that 85% of the respondents have different suppliers with the same bank account number. We have broken these respondents down by industry, and Figure 2 shows an overview of the top 5 industries with the highest number of suppliers with the same bank account number.

7 If an invoice is paid to the wrong supplier, the payment must be reversed by issuing a credit note. To prevent employees from selecting the wrong supplier, incurring unnecessary costs and to reduce errors, we recommend the use of a unique code like a client number. Figure 2 Suppliers with the same bank account number 19% 22% Energy (22%) 19% 21% Wholesale & Retail (21%) Transport, Distribu5on, Logis5cs (19%) 19% Government (19%) Industry & Manufacturing (19%) Inactive suppliers versus total suppliers Besides the presence of suppliers with the same bank account number, inactive suppliers also contaminate the vendor master file. Based on the benchmark study, a top 5 of industries (see Figure 3) with the highest percentage of inactive suppliers of the total suppliers is composed. The benchmark study considers a supplier inactive if it has not effected a payment in 20 months. All of the respondents have inactive suppliers in their vendor master files. So this is a common irregularity that can occur in both your processes and those of your supplier. Inactive suppliers also increase the risk of fraud. For example, when a supplier is inactive it is possible to change this supplier s details. These types of changes, such as changing the bank account number, can be done unnoticed and can drain money from the company. That is why we recommend updating your master file once a year.

8 Figure 3 Percentage of inac@ve suppliers among total number of suppliers 48% 46% 44% 34% 40% ICT Transport, Distribu5on, Logis5cs Educa5on, Health, Social Services IT & Telecoms Media Risks When working with suppliers from other countries, you should take into account the risks associated with the location where the supplier is based. A large number of the respondents of the benchmark study operate in various countries around the globe and make use of suppliers based in that specific location. The presence of a large number of suppliers in a specific geographical region increases the risk of fallout when that geographical region is comprised in any way. Issues such as political and economic risks have a large impact in the business world. Industries in countries with these issues tend to be vulnerable to outage. These countries have been identified by AON, a provider of risk management services. The risk map created by AON can be used both for determining the reliability of your suppliers and the stability of your Shared Service Centre (SSC). We noticed that most of

9 the respondents operate SSCs abroad: in the United Kingdom, Poland, Brazil, Portugal, Hungary, India and other Asian countries. Based on AON s risk map, we conclude that the United Kingdom, Poland, Portugal, Hungary and Brazil have a low probability of political and economic risks. In contrast, countries in Africa and Asia, including India, have a high probability of political and economic risks. In sum, when setting up an SSC or searching for suppliers, the above- mentioned risks associated with the location should be taken into serious consideration. Extent of contamination of the vendor master file In an effort to make the company more flexible and responsive, organizations are restructuring and professionalizing the organization. This could lead to, among other things: The automation of the back office and Accounts Payable process Companies migrate their ERP systems to improve companywide communication Mergers and acquisitions SSC are set up and/or companies are outsourcing back- office processes These changes can have a major impact on your data in the vendor master file and may cause a decline in the quality of your supplier database. The impact of a contaminated vendor master file must not be underestimated. Pollution and incomplete data in the vendor master file could lead to serious errors and undue payments. It is therefore important to check if your master vendor file is polluted. The benchmark study shows that the following causes are quite common and could lead to errors in the vendor master file. The use of different ERP systems VAT input task not claimed Typing errors or manual errors: same supplier spelled incorrectly, or inaccurate contact details Large number of errors occur involving a parent company and subsidiary Recent merger and acquisition have taken place

10 According to the benchmark study, the most common errors in the vendor master file which could lead to the following payment errors are: Payments Original & Copy (accounts for 57%) A supplier has sent both the original invoice and a copy, and payment has been received for both invoices without being refunded. Financial Statements (accounts for 32%) An overview returned by the supplier listing the outstanding items containing an unknown credit amount. This credit amount is still to be reclaimed. payment Multiple Supplier Records (accounts for 11%) A supplier is listed twice in the payment system; as a result, a payment has been received twice by a supplier without the supplier returning the second payment. Most common errors in the Accounts Payable process 57% 32% 11% payment: Original & Copy Financial Statements payment: Mu@ple supplier records

11 Other errors that are less common but still produce a substantial error rate: payment - Payment to wrong vendor (accounts for 4%) A payment has been collected twice by different suppliers without this amount being returned by one of both suppliers. payment - Different invoices (accounts for 4%) A supplier has charged twice for the same delivery or service with different invoices. Unposted credit memo/chargeback (accounts for 2%) An unknown credit amount to be paid by the supplier which is not entered in the system. This credit amount will be checked and reclaimed. Erroneous Pay Overpayment (accounts for 2%) The supplier has received an amount that is higher than that originally invoiced. Less frequent errors in the Accounts Payable process 4% 4% 2% 2% payment: Payment to wrong vendor payment: Different invoices Unposted credit memo/chargeback Erroneous Pay Overpayment

12 Based on the benchmark study, the following industries have the highest average error rates: The top five industries with highest amount on error rates worldwide 88% 84% 79% 35% 28% Travel, Leisure, Food Services Banking & Insurance IT & Telecom providers Wholesale & Retail

13 If we analyze the most common errors in each industry listed, we find: Travel, Leisure, Food Services 23% 22% 5% 4% Payments: Original & Copy Financial Statements Payments: Payment to wrong vendor Payments: supplier records Banking & Insurance 38% 17% 14% 13% Payments: Original & Copy Financial Statements error Payments: supplier records

14 35% 13% 9% 4% payments: Original & Copy Financial Statements payment: supplier records Erroneous pay Overpayment IT & Telecoms 47% 36% 8% Financial Statements payments: Original & Copy payment: Different invoices

15 Wholesale & Retail 32% 19% 6% 4% payments Original & Copy Financial Statements payment: supplier records payment: Different invoices Short- term and long- term solutions Short term: Vendor master file cleansing and enrichment A short- term solution to reduce the number of errors is to update your data by analyzing your supplier database for duplicate, incorrect, outdated and incomplete data. This involves supplementing your files using relevant data, such as activity codes, industry classification codes, registration numbers and other relevant and useful fields. A corrupt supplier file results in undue payments and unknown due payments. A supplier file would partially prevent this. It is therefore advisable that you check your Vendor Master file for errors every few years. The maintenance of a supplier file is extremely error- sensitive. Since the consequences of a corrupt supplier file can be significant, the creation of a new creditor or the

16 modification of existing Accounts Payable data must remain the responsibility of a restricted number of persons. The responsibilities of these individuals may not include invoice input, purchase orders or the authorization of invoices. Additions to the supplier file must be reported to management for verification and approval. Short term: Suppliers with small- amount invoices Making arrangements with suppliers that send small- amount invoices can also prevent anomalies. If these suppliers send one invoice which consists of multiple small invoices, instead of one invoice per order, the workload will be reduced. Short term: Payment terms check Another way to make the Accounts Payable process more efficient is to have a clear overview of the payment terms of your suppliers. When an organisation has many suppliers with different payment terms it is easily possible to overlook interest and discounts. For example when the payment term of a supplier is 60 days and the invoice is paid within 28 days, you miss interest on (60-28) 32 days. To provide insight in the different payment terms of suppliers we recommend you to do a payment term check. By means of Days Payable Outstanding (DPO) Transparent measures the average number of days an organisation takes to pay its suppliers. It is also possible that the supplier offers a discount if the invoice is paid earlier than the given timeframe. If this is the case, paying the invoice earlier than the given payment term can save you money. Long term: Analysis and process optimization Of course, companies strive for a long- term solution in optimizing their Accounts Payable process. Some companies choose to automate their Accounts Payable process or centralize financial and other processes in shared service centres and/or start using E- invoicing. These solutions do professionalize the payment process but unfortunately human errors still occur. Because of the inevitable human factor we have recommendations which could be easier to implement and will optimize the Accounts Payable process. Long term: Continuous monitoring Continuous monitoring or as we call it Real- Time audit. Transparent uses a state- of- the- art online dashboard, to provide clients with data in a clear manner. The difference between a dashboard which is generally used and this kind of dashboard is that clients can monitor the Accounts Payable process live at any moment in time.

17 They also receive up- to- date and accurate management information which they can use to make their Accounts Payable process more efficient. Long term: Analytics and process improvement It is recommended that you only use original invoices for a payment. If no original invoice has been received and the creditor is unable to supply one again, then it is of great importance to accurately check that a payment has not been previously effected. That way, you prevent making a payment on the basis of both an original invoice and an invoice copy. It is also important to periodically examine and discuss unclear, expired and unsettled purchase orders, invoices and other receipts. If companies work with different accounting systems and enter invoices in other divisions, then the probability of undue payments and unknown due payments is considerably greater. We therefore recommend using a single accounting system (if possible) and a single division for entering invoices. The already initiated digitization of the records archive can be of further help for the correct administration of your payment data. You can automatically pay the invoices to specific suppliers. You can exercise control over this by means of a random check. We recommend that the purchasing department make arrangements with suppliers that submit large numbers of invoices for small amounts to send a monthly consolidated invoice instead of daily or per delivery. It is possible to pay such suppliers a monthly advance against which they strike off their invoices. The supplier would then submit a statement each month as well as an annual settlement.

18 Founded in 2000, Transparent is an international financial- services provider specialised in data mining of accounts- payable (AP) data. The company has rapidly grown, serving clients globally, with operations in the Netherlands, Germany, Belgium, India, France, the United Kingdom, Italy and the United States of America. Based on hard, objective data we help our clients to reduce risks, errors, complexity and drive costs in AP processes. Alongside the analysis we recover lost working capital on a no- recovery no- fee principal. Transparent proposition Provide a quality and in- depth measurement of all AP data (free of charge) Benchmark the performance of AP processes against industry peers (free of charge) Provide in- depth analysis and tailored improvement recommendations (free of charge) Identify, verify and collect all undue payments (no- recovery no- fee) Have all this done without any up- front investments or any use of resources, within a matter of weeks to months The exercise is risk free, effortless and quick, there is nothing to lose and so much to gain! Transparent approach Benchmark - All data with a total of more than 950 billion euro in financial data worldwide is stored in a centralized database, which allows us to benchmark our clients performance against their industry peers on more than 30 different benchmarks. Software - Our data mining software incorporates 10 years of know- how and searches for suspect transactions based on 26 different criteria. 6- eye principle - We manually process the check list, applying triple control in order to guarantee full data insight. Secure process - Our people are screened (Trigion) and our database and application servers are hosted in a secured environment (RSA). All data analysed - Our process is fully industrialized, in the sense that we have split it up into various sub- steps. Per step we have assigned a dedicated team of specialists who only oversee their part of the process. A suite of software tools seamlessly integrates the various steps and enforces that each part of the process is completely covered without loose ends. We do not investigate a subset of the data (e.g., only high invoice amounts, or only a cross- section sampling), but all the data. Statement research - Our Statements department asks our clients suppliers for a statement of open credits. This usually involves, for each individual supplier, looking up updated address and telephone numbers, sending several mailings and making multiple phone calls. International scope - Our international scope requires that we have several language specialists in- house, able to write and speak the foreign languages that are needed when contacting vendors abroad. Online dashboard - All information is made available to our client in an online, interactive dashboard. No extra work or efforts - We do all the work, including the actual recovery; we make sure that our customers, apart from providing the ERP data, do not have to allocate any resources for the project. Data cleansing Matching: the systematic comparison of your own file with our up- to- date, reliable reference file; Removal of duplication: tracking down suppliers which occur more than once in your file; Correction: amending incorrect data. Data insight: We offer insight in your data, benchmark your data and discover trends in order to reduce errors, risks & complexity in your AP process.