frustrated businessman
Courtney Keating_iStock_frustrated businessman

Why the Hidden Costs of Payment Errors Matter

Nov 20th 2015
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As accountants take on greater responsibility, coupled with stretched resources, it becomes clear that managing the AP process is incredibly time-consuming, not to mention mostly manual and tedious. This is why the more savvy AP departments – and accountants who work with them – are exploring and adopting AP automation solutions.

Still, when most people talk AP automation, this investigation often only revolves around the beginning of the accounts payable process – the pains of digitizing inbound invoices and the workflow related to approving them. Very few technologies address the damaging issues that occur at the end of the process: the errors related to payment remittance and reconciliation.

Payment errors are even more likely to happen when working with global suppliers – as when multibank and cross-bank payment methods, such as wire transfers, ACH, SEPA, PayPal, and paper checks, are involved. This is the last mile of the accounts payable process, and it's usually an unpaved road.

That's because companies typically use a manual, makeshift process involving AP staff to gather supplier payment information over email, logging into multiple bank portals, funding and executing payments, and tracking and reconciling their status. But when processes are manual, human error is bound to happen, and those errors cause headaches.

These errors also impact the relationship with the supplier partner, reducing the vendor's confidence in the company. In a competitive supply chain, the inability to pay reliably can lead to the attrition of high-quality suppliers.So how do you avoid these costly payment errors? Before you can fix the problem, you need to identify it.

Known Payment Errors

Known errors are those where the cause can be identified. For example, the bank reports back to the payer that there is a lack of funds, a payee/beneficiary doesn't exist, or a supplier's bank information data is incorrect.

Regardless of the nature of the problem, fixing the mistake can be tedious. Although a simple typo may have caused the problem, identifying which information was wrong and correcting it requires hunting down the payee to get the right information. Once the information is corrected, you then need to resubmit the payment, which could involve additional bank fees. By the way, this can take days because you're manually working with two different parties.

“Direct deposit” or “clearinghouse” transfers often tend to fail at a much higher rate in international transactions because each country has their own unique rules for bank routing and syntax, and it's up to the accounts payable staff to know what information to collect. If a field is missing or a payment field character count or pattern is different from what a specific country requires, then payment will fail.

Unknown Payment Errors

Unknown errors require more in-depth investigation. These errors often don't show up until it's time to reconcile accounts. Identifying them can be a cumbersome process involving the downloading of transactions from various banking portals, matching those results with the payment execution orders, and determining if funds were cleared from the bank.

The Costs of a Poor Payment Process

So what do these payment errors cost your business? Consider any bank fees, including those to investigate and reissue payments, and the time it takes staff to identify, investigate, and correct errors. Costs also include the time spent communicating with payees and any damage to the reputation.

If a company is making 500 payments a month, a 2 percent error rate is only 10 payments and may seem acceptable. But even 10 errors a month can result in $10,000 a year in fees and labor depending on the people and time involved.

This cost estimate incorporates the fully-loaded salary and overhead associated with a staff member tasked with identifying, investigating, communicating, and resolving those errors. It also includes the multiple bank fees that add up due to these errors. Not to mention the effort is essentially nonrevenue generating and distracts staff from more valuable projects.

Demand Quality

Too many organizations simply write off errors as a cost of doing business, rather than improve their processes. It's a form of waste that senior management and shrewd accountants should consider a problem and an obstacle to profitable growth and scalability. It's time to start recognizing that the last mile of accounts payable is the payment itself and the ROI for eliminating these errors is highly achievable.

How much do payment errors cost the businesses you work with?

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