A/P Metrics with IRS Tax Data
Methodology Behind our Free A/P Duplicate Payment Rate Calculator
It is well known in the business world that if you don’t measure it you can’t track it. This means that you can’t determine where you’re at or if you are getting better without measuring. The question is – where do you start if you haven’t done an assessment before? The answer – look to your industry for reference.
The IRS makes plenty of data available and by taking the average of your industries cost of goods sold along with other expenses you can get an idea of the disbursement benchmark for your industry.
Once you have this you can apply a duplicate payment rate to determine what you may be dealing with.
Organizations such as the Ardent Partners, Institute of Finance and Management (IOFM), Institute of Internal Auditors and many others all do research in the A/P realm and provide statistics to help businesses understand where other companies found themselves.
The Need to Convert Average Duplicate Payment Rates to Real Dollars
Because many of the tools we provide enable Controllers and Finance Executives to identify and recover lost profits from duplicate payments, one of our challenges had been articulating the potential ROI of the Acculytic service.
Granted, the real value of Acculytic comes from proving the use and validity of your A/P internal controls processes and systems – even the most elite of accounts payable departments are subject to errors and overpayments. “Cutbacks and computerization have slashed accounts-payable payrolls but also have cost companies billions of dollars in overpayments,” writes Lee Berton (of CFO.com, Bloomberg, Wall Street Journal).
Large organizations, often employing contingency recovery audit firms, have been well aware of the high costs of duplicate payments; but those with revenues below about $2B that are usually overlooked by contingency audit companies seem to underreport or be oblivious to their duplicate payment rates. Perhaps the widely accepted average duplicate payment rates of 0.5-3% don’t seem like enough to prompt action. Our objective, then, is to show what that means in real dollars.
At First, this Seemed Pretty Simple
After comparing a number of research reports, we decided to go with the Ardent Partners’ metric of 1.07% rate of duplicates/overpayments for “Best-in-Class” accounts payable teams for a few reasons:
- Freshness of data (2013)
- Rate was in line with most other ranges reported
- Solid research methodology and sample group
- Publicly available info (AP’s New Dawn), so you can easily check our source
- Gives us the ability to benchmark prospects against organizations with the most advanced accounts payable technologies (as opposed to companies not using things like eInvoicing, P2P, data capture, etc., for which Ardent attributes a 3.12% duplicate payment rate)
To get an idea of your annual duplicate payments, just take your A/P spend and multiply by the standard duplicate payment rate, right?
Payment Volume vs. Invoice Volume
- Some of the business leaders we speak with don’t have an accurate amount for payables off-hand.
- Even if you did, that amount would include things like utilities and rent which really aren’t subject to overpayments. However, some reoccurring payments might still be duplicated.
- Then, there is the fact that the 1.07 - 3.12% duplicate payment rate is a percentage of invoices, not $.
This is going to be harder than I thought.
Four Smashed Calculators Later…
We created a way to calculate a dollar figure for potential recoverable cash from duplicate payments by industry and company size, and dubbed it the Typical Payment Slipups Report (TPS Report). The TPS Report is designed to be an easy-to-use Excel to quickly compute any organization’s likely duplicate payment amount.
First we had to get a great source of data from which to get an estimate of payables subject to duplication based on a metric that our business leaders would know. Because one of the pillars of our company is security (handling business’ financials in The Cloud requires an extreme commitment to privacy and security), we are restricted from using client and user data. Also, we really wanted a larger sample size by sector to provide a more relevant estimate.
Our friends at the IRS were able to provide detailed consolidated income statements by industry. With a sample size of over 5.8M tax returns for the most recent year, we are confident in our ability to get a national average by industry. These tables from Returns of Active Corporations provided totals from income statements. Additionally, they gave us a detailed breakdown of their costs of goods sold, so we could extract only the disbursements subject to duplicate payment.
Estimated Expenses and Profit
Our TPS Report, with this IRS data, can now estimate a company’s annual expenses and profits, based on the average expenses indicated by tax returns in a specified industry sector, as a percentage of revenue. For example: A $100M retailer would expect to see a profit of $2.089M, on average, and $98.15M in expenses.
Estimated $ of Invoices through A/P Subject to Duplication
From there, we can estimate the portion of those expenses going through A/P that are subject to duplication. The TPS Report gets this portion of expenses (again, as a percentage of revenue) by adding repair costs, advertising and costs of goods sold not including inventory, labor, death benefits, and losses incurred. Of course, there are other invoices going through A/P, but we don’t want to risk overstating. For our retail company above, then, we’ll see ~$62M in invoices going through accounts payable that are subject to duplication.
Projected Cost of Duplicate Payments
Now the fun part... To best project the cost of duplicate payments, we decided to make a couple of assumptions. First, we’ll consider you “Best-in-Class” as defined by Ardent (as mentioned above), and apply that lower 1.07% rate. Again, we wanted to err on the side of caution and presume that everyone we talk with has an enlightened accounts payable process and internal control system. Then, we’re assuming that larger invoices attract more scrutiny: Therefore, the assumption follows that all duplicated invoices come from the pool of 80% of invoice volume that account for only 20% of dollars disbursed (the 80/20 rule).
This gives us a cost of duplicated invoices as 0.2675% of invoicing subject to duplication.
This rate was particularly satisfying as it fell in line with ranges reported by other sources – particularly the duplicate payment range cited in the 2013 IOFM AP Department Benchmarks and Analysis report.
So, for our retail company, with top-notch ERP and accounts payable tools, would likely experience an annual cost of $165,737 due to duplicate payments.
TPS Report Screen Shot
Now, armed with a defensible dollar figure benchmark, our retailer’s finance executives can justify a little digging to identify their errors. From there, analysis can help recover these lost profits. More importantly, this newly-empowered finance department can diagnose the causes of these overpayments and take steps to tie up many of those problem areas.
Though that $150,000-$250,000 in potential recoveries wouldn’t be enough to attract a recovery audit firm, there are many things that can be done. For example, developing or using a powerful analytical tool (hint, hint) to verify accuracy and help find duplicate payments could:
- Immediately impact bottom lines
- Provide evidence about the use and validity of internal control systems and procedure
Contact us if you’d like to play around with a copy of our TPS Report.