MRO Today - Found money

Found money
MRO Today audited the reports of seven manufacturing companies that have gone through the process of finding lost money in their books. Of the seven companies, they found more than $5.1 million. Here's what they lost.

by Clair D. Urbain

What if you opened your file drawer and found checks made out to your department that weren’t cashed. Or worse, you opened that same file drawer and found a bunch of I.O.U.s, each with an asterisk that taunts, “If you can find it!”

That’s exactly what happens in every company that has an accounts payable department that’s cutting checks. And the bigger the company and the more expensed items that come into the facility, the more likely you have lost some money, says Gary Angel of Cambridge Consulting Group, Cambridge, Mass.

Angel makes his living going into companies, rooting in accounts payable files and coming up with cold, hard cash.

MRO Today audited the reports of seven international manufacturing companies that have gone through the process of finding lost money in their books. Of the seven companies, a total of more than $5.1 million was found in lost money.

Although nearly all the companies experienced losses in the following categories, there was no one category that was consistently the greatest loss leader. “Areas where there are losses vary from company to company and depend upon the types and speed at which products come into and out of the plants,” he says.

Angel categorizes the losses into these four main categories: Human intervention, cost differences, sales or use tax overpayment and product returns to vendors.

“It’s the exceptions to the norm that cause the trouble. Whether you are the person originating the order or the person processing the paperwork, if all orders are not eventually tied to the purchase order, you’ll see losses,” he says.

Human intervention (or the lack thereof)
Computers don’t make mistakes, people do. If you want to get truly technical, every dollar that Angel finds in a company can be traced back to human error or oversight. That’s why accounting departments thrive on paper. It sets up a trail that traces an order or request so mistakes can be tracked back to the source of the error and corrected.

Here are the most common human errors:

Users don’t “use” forms.
We all hate paperwork, especially those who must handle it on top of getting their regular jobs done. But until the electronic age eliminates the need for paper, those triplicate carbonless forms everyone despises can create the critical threads between the fabric of the orderer, buyer and payer.

Angel suggests accounts payable should always get a copy of an action on any transaction. If you order items regularly, a mini-database on a Lotus 1-2-3 or Excel spreadsheet can help you track what has been bought, delivered, and even returned, he says.

Data entry mistakes.
Every time someone keys data into a system, there is an opportunity to make a mistake. “Electronic data interchange (EDI) is great because it lists everything, line-item by line-item, and there is no rekeying needed. It also makes it easier to gather data to audit payments. Otherwise, it’s back to the files of paperwork to sleuth out problems. That helps reduce errors considerably,” Angel says.

Part of accurate data entry is establishing a consistent keying protocol. It’s the best way to prevent invoice #0001234 from getting entered as #1234. No accounting program can easily pick up those differences, Angel says, so establish consistent rules for entering invoice data.

Another common data entry problem: one vendor’s invoice gets mixed in with others and accidentally gets paid to that vendor. When the vendor resubmits the invoice, it shows up as not paid, and gets paid again.

“Another big problem is when a vendor has several remit addresses. The payment goes to the wrong address even though it’s the same company. It’s best to scrub your vendor database of multiple remit addresses, if possible, to avoid this problem,” he suggests.

You can further reduce the chance of double payment by only paying from original invoices. If you are forced to pay from a photocopy or faxed invoice, closely scrutinize it to assure it hasn’t already been processed.

Musical chairs in accounts payable.
Employee turnover causes some of the greatest challenges for companies. New hires can’t understand some of the nuances of contracts, especially if there is no structure in place to compare invoices against agreed-upon terms.

Difference in selling price vs. price paid.
Purchase orders are designed to request X items at Y price. But when some invoices come in, it’s hard to believe it’s for the same purchase order. “We searched one database for any invoice paid over 7.5 percent of the purchase order. In the list, we found one invoice that was for 57 percent more than what the purchase order established. It turns out the vendor forgot to discount the 50 percent job start payment that was already paid. It’s not that vendors are dishonest, they lose track, too,” he says.

“Fuzzy” purchase orders.
Purchase orders should be very concise about part, quantity, shipping and delivery date. That way, when the invoice is processed, you can be sure where the responsibility belongs. “Freight often gets charged back, and it shouldn’t,” says Angel.

Vendors post unauthorized charges or deductions on invoices.
Pre-billing or restocking fees can show up on an invoice. To prevent you from having to pay these, Angel recommends adding the following to your purchase orders: “We shall pay no extra charges, including but not limited to charges for pre-packs, cartons, pallets, drop-shipments, insurance, cartage, setup, tooling, minimum orders, restocking fees or because of any taxes or excises levied on processors, manufacturers, wholesalers or otherwise unless specified on the purchase order.” This allows accounts payable to deduct all such unauthorized charges when paying invoices.

Discount deals made, but never received.
One of the greatest shortfalls in companies audited by Angel was the inability to capture rebates or volume discounts. “The rebates and volume discounts are negotiated by the buyer or the manufacturing team and never communicated to the people who pay the bills. If the vendor doesn’t inform his or her billing department about the deal, it never gets reconciled on your invoice. Then your accounts payable people continue to pay the regular price because they are not aware of the rebate,” he says.

Whenever a volume discount or rebate program is put in place, your bill-payers add it to their records so they can monitor it as to when the cost savings should kick in.

Sales and use tax overpayment.
This can be one of the most difficult areas to dig up money, even though you know it’s there.

In most states, if a product or service is used in the manufacture or creation of another product, sales tax isn’t applied. That’s why it’s important to check for sales and use tax on items you use in production and in some cases, development.

One biotechnical company found almost $700,000 in overpayments on raw materials and packaging. This company had no procedure in place to determine tax status of hundreds of raw materials used in the manufacturing process.

Once it was aware of the problem, it assembled a cross-functional team from purchasing, accounts payable, processes, research and development and the finance office to sort through all of the products they purchased that may be non-taxable.

The group made a matrix of all possible raw materials used, then categorized them by end-product in which they were used. The purchases were further delineated into products that were in development vs. production.

Once tax-exempt status was identified on part numbers, the group downloaded all transactions for those part numbers. It then sorted and flagged those invoices where tax was paid but not owed.

Angel worked closely with the manufacturer and its suppliers to coordinate work with the state auditor to get a refund. “This became a bit tense at first because several people wanted to lay blame.

“We went to all parties involved and coordinated with the state auditor to get a refund. The project started in late 1995, and a final refund was not released until January, 1998,” he says. “These cases can sometimes take a long time to get settled.”

Get your money back on returns.
It’s the exceptions that break the rules, and at times, the bank, in product acquisition. The biggest rule-breaker is product returns, says Angel. “Everyone seems willing to put up with the paperwork it takes to get something in the plant, but when it comes to returning it, they just want to slap a label on it and get it shipped back. This is where proper paperwork can save money.”

In fact, in the MRO Today audit, we found the seven companies had recaptured almost $576,000 from doing a better job of tracking returns.

Since returns are a way of life in the MRO world, it’s important to track them correctly. Otherwise, returned items can be easily paid for even though they were returned.

Set up a solid return policy that ties your P.O., invoice and bill of lading together.
Angel suggests this best practice:

First, develop a shipping authorization form that becomes a debit memo. It should be numbered and carry the following information:
• date issued
• vendor
• requester
• return authorization number
assigned by vendor
• original purchase order number
• original invoice number
• buyer and total dollars
• who pays for shipping

This can be a multi-copy form where one copy goes to the vendor with the return, another copy goes to the shipping department, another stays in your files and, most important, one goes to accounts payable who can watch for the bill and flag it as a return. “Make sure the person responsible for filling out the shipping authorization/debit memo does it completely,” he says.

Take the credit upfront.
Not all vendors issue a credit memo on returns. “We strongly suggest that you take the shipping authorization for a return and you immediately take it as a credit on the next invoice from the vendor. We saw one return take place and the components were credited at a much lower price than what the company paid. Be specific on the credit taken on the invoice about the price you paid and the quantity. That’s why the shipping authorization form should carry the purchase and invoice numbers,” he says.

Keep a log of shipping authorizations so you can review shipping authorizations at least quarterly. It will help you locate vendors who inadvertently did not credit you for the amount returned, or credited you for the incorrect amount, he adds.

If the vendor will be sending replacement product, it’s best to have them issue a credit and re-bill. “Issue a new purchase order and also note that number on the debit memo,” Angel advises.

Make sure anyone who can issue a return knows how to handle the shipping authorization/debit memo paperwork.

This article appeared in the June/July 1998 issue of MRO Today magazine. Copyright, 1998.