By Andrew Jesse, VP at Basware UK
Reputation, fairly or unfairly, governs our businesses in many ways: share price can be impacted, ratings revised, negotiations twisted, deals done and undone. Damaged at the drop of a hat but as persistent as a carpet stain, good ones are fragile but bad reputations can be difficult to shed.
Businesses large and small invest a huge amount in managing their reputation, investing in CSR campaigns, paying PR firms and of course ensuring their business practices are reputable and ethical. However there is one area where I’ve consistently found businesses to be unaware of how reputation is impacting their business. Payment, late or inconsistent payment, to be specific, is one area where businesses seem unaware of the damage they are doing.
If a business is consistently failing to pay its suppliers on time it’s no great leap to the idea that money troubles are afoot. Regardless of whether irregular or inconsistent payments are the result of a faltering business, erratic cash flow or a calculated strategy of taking suppliers to their limits, the perception of a business on the rocks can cause significant issues. Like rats and the proverbial ship, this assumption can rapidly and irreversibly impact share price, credit ratings and supplier networks or negotiations. For businesses large and small, listed and private, accounts payable can have a disconcerting power when it comes to business reputation, whether with suppliers, regulators or shareholders.
And this reputation goes on to have a lasting impact, particularly when it comes to negotiating procurement contracts. Naturally a record as a consistent payer will assist in securing better terms. Early repayment discounts and late payment penalties are commonly used in procurement contracts, but the premium paid by those with a poor reputation for payment is not always as transparent.
Over the years I’ve come across several examples of how poor payment has created challenges for businesses. Similarly I’ve come across a huge number of examples of how good practice has reaped unexpected rewards.
One instance brought both cases very clearly into focus. One customer, a heavyweight of the British high street, acquired a smaller retailer in Europe. On reviewing the price book of the much smaller chain, they were surprised to find that one of their key suppliers, providing many product lines across their stores, was giving more favourable prices to the chain they acquired. The CFO was baffled. How was a much smaller chain of stores securing better prices than the major international retailer? Astonished that the strength of their purchasing power wasn’t at full force, he asked the supplier why this was the case. The answer? “They pay us when they say they will”.
To the supplier certainty of payment was worth far more than the volume of goods ordered. And in this case, we’re talking huge volumes – hundreds of products across over a thousand stores as well as an online business. Even the smallest difference in margin, when extrapolated across this volume, would have had a direct impact on the retailer’s profitability and its ability to offer competitive prices in the marketplace.
This inability to get the best possible price wasn’t the result of missing early payment discounts or negotiating extended payment terms, it was simply due to not paying to the terms agreed – not paying when you say you will; the effect of poor payment practice. When organisations look at optimising payments, they sometimes focus on early payment discounts against the value of money in the bank, but it’s worth assessing how this impacts your supplier relationship and discussing terms that may be more beneficial to both parties.
Needless to say, this finding prompted closer examination of their payment process and the impact it had on procurement, and saw the start of their journey through invoice automation, e-invoicing and adopting a holistic view of purchase to pay. They now achieve world-class metrics across their finance function and remain as one of the UK’s dominant retailers.
Giving the impression of poor financial management through inconsistent payment or by regularly breaching terms can be extremely damaging. Whilst some businesses may think that pushing out terms is supporting cash flow, in reality it could be doing more harm than good.
For some industries reputation with suppliers, customers and regulators can have a huge impact on the wider business. UniCredit were able to use invoice automation to improve the banks reputation, with suppliers and regulators, in tough times
“Our reputation is very important… we’re a bank. Banks have always been looked upon, until very recently, as pillars of the community,” commented Ray Archer, Head of Accounts Payable at UniCredit Bank. “At the moment we have a situation where the banks are not as well-regarded in society so it is absolutely crucial for us to do as much as we possibly can to rebuild that reputation and being a good payer is one of the things that we can do to achieve that”.
There are alternatives for companies who want to hold onto cash whilst maintaining reputation. New offerings such as factoring or supplier financing can provide valuable breathing room across the business-to-business economy. By offering support for supplier financing businesses will be able to have their cake and eat it too, preserving reputation and holding onto cash.
Whilst reputation can occasionally seem intangible, in some instances poor payment practice could be actively limiting the credit options available to business. For one of our customers the impact of late payment was sharply revealed, not only in failing to achieve rebates and early repayment deals but also in their Dun and Bradstreet scores.
“Late payment to suppliers means that we don’t get the rebates and rates that we should. It also negatively impacts our Dun and Bradstreet scores. We have a very strong financial strength score as we are part of a large group, but our payment history score was not very good. One of the benefits of automation has been that our Dun & Bradstreet score is now improving over time.” Commented the Financial Controller at a large integrated services company.
Whilst their buying power meant many suppliers would still do business with them supplier relationships and negotiations were negatively impacted by poor payment practice.
“We’re part of a very large group, which actually means that most suppliers would do business with us. Supplier relations are more important to us because previously we haven’t been in a very strong position to negotiate better rates, negotiate better rebates and effectively impact our bottom line,” the customer concluded.
So clearly payment to terms had a very tangible impact on the financial reputation, and a result the financial operations, of the company. Whilst some companies push out payment terms to preserve their cash flow position failure to keep to terms is often a result of poor internal processes. Inability to match purchases to payments, failure to get the necessary approvals in the required time frame, process bottle necks cause delays.
These delays result in missed discounts, penalties and suppliers who view the cost of doing business with you as high. Regardless of your purchasing power, once reputation of poor payment is in place it can have a significant impact on the business. Poor reputation will result in suppliers seeking to recoup the cost of dealing with you by other means, with discounts drying up and flexibility on pricing becoming a thing of the past. This, combined with reduced lines of credit, can all contribute to businesses feeling the burn of a poor payment reputation.
However by improving processes businesses can bring these factors back under their control. Whilst this improves reputation, crucially this control and transparency allows businesses to make payments on their own terms. The good news is that with effective tools, technology and processes a reputation can be swiftly repaired. Finances are fickle like that.
High-yield bonds will help, not hinder, businesses’ recovery
By Jesse Chenard CEO of fintech MonetaGo,
One of the best indicators of stock market growth is high-yield bonds. The junk bond market is more important than ever as we recover from coronavirus – allowing companies to raise vitally needed capital and giving investors the opportunity for returns that will fuel speculation and drive growth across the whole economy. Junk bonds, or ‘high-yields’ to give them a less derogatory name, will drive the recovery just as surely as the rebounding stock market will.
Companies who have suffered with low liquidity under the pandemic need to raise capital and return to viability. According to J.P. Morgan Chase, bond-issuance has already reached $238 billion – almost double this time last year. It is clear that high-yield bonds are going to drive economic recovery and allow viable, but cash-strapped, companies to regain losses caused by Covid-19.
Companies striving to boost their capital, improve liquidity and rebuild after the pandemic need systems around issuance to be quick, effective and secure. Yet, the issuance process remains slow, costly and encumbered by legacy systems.
Avanade’s research found that up to 80% of IT budgets are allocated to keeping legacy systems running. Technology can help reform the process and give companies the funds they so badly need.
According to Bloomberg, global corporate bond issuance is on track to reach a historical high in 2020, as total capital raised neared $6.4 trillion (June)— already 71% of 2019’s total.
But the process of issuing bonds is unbelievably slow and largely manual. It takes an average of 30 stages with human intervention at each point, including physical paperwork and contact between multiple parties and intermediaries.
The fact that so many of these processes are still multi-step and using people and paper is archaic and inefficient in normal market conditions.
During the lockdown, it looks positively stone-age. And then there is the risk of data leakage and security, which are horribly compromised by existing processes. Two years ago, I visited Credit Suisse’s office on Madison Avenue where they told me that they send 20,000 to 30,000 faxes a day to carry out activities that could be very easily automated and digitized: a scary thought from a data security perspective.
It seems odd that in a world where we are used to securely accessing our personal finances at the click of a button, the same cannot be true for business finance.
This is a massive, liquid market. It needs modernizing. Add to that the fact that volumes have ballooned as crisis hit firms work to raise working capital and return to viability. That process should be entirely digitized and speeded up. Companies recovering from the pandemic deserve better than outdated, unsecure systems.
There is no question that technology is the key here. There are solutions to digitize the entire process, allowing businesses to greatly reduce their time to market and their banks to provide a vastly improved service to their corporate customers.
When normal ways of working are disrupted, it brings to light the inefficiencies in document workflows that cost businesses thousands of dollars in fraud each year, not to mention the other cost of lagging behind due to outdated processes.
There is now an opportunity to take the lessons learned from the pandemic and digitize processes that have shown they need it. Covid has forced financial services to digitize in many ways but the high-yield bond market is lagging behind. We need to bring this crucial sector up to speed. Companies deserve fast, efficient and secure issuance systems to stimulate their recovery and kick start the global economy.
Finance leaders must act against increasing fraud
By David Thorley, Director of Customer Development, FISCAL Technologies
The COVID-19 pandemic has resulted in a whole host of increased pressures on both business and individuals, worsening issues and vulnerabilities that were already present, as well as shining a light on new issues, never witnessed before. With this in mind, retaining and protecting cash has never been more important and therefore the role of accounts payable and the procure-to-pay function are crucial. These functions need to work together and do so proactively in order to succeed in the current climate.
It is also key that AP teams have all the right financial controls in place to minimise errors, maximise visibility of transactions, and streamline processes – especially with so many people now working from home and the various compliance challenges this creates. In essence, it is about taking a more forensic approach to AP activities.
According to fraud experts, each company has around a one in three chance of experiencing internal fraud this year, with enterprise organisations averaging losses of $1⁄2m. These attacks typically claim payments which are under the financial risk review threshold, hiding within the hundreds of small invoice transactions until found by AP Audit software or internal audit routines.
Finance ERP and P2P systems – often described as the heart and lungs of a company – have a complex relationship and are known to have vulnerabilities, opening them to fraud. This is especially true in enterprise organisations where the adoption of artificial intelligence (AI), complex system integration and automation delivers a touchless-AP process, but may lack in the controls of traditional processes.
Additionally, centralisation or de-centralisation of the P2P function and systems, acquisition or mergers also creates a higher vulnerability to duplicates, errors and fraud. When systems are being configured and resources are stretched, errors and omissions occur, processes take time to adapt and this allows sophisticated fraudsters to target these types of transformation projects.
Missed historical data creating risk
As migration projects typically copy only open transactions to the new system – historical transactions seen as being of little value – transaction history can be lost. Spotting irregularities relies on comparing transactions with historical data so that the validation of duplicate payments is hindered.
During ERP migrations the Master Supplier File (MSF) is frequently left untouched and copied in its entirety from the old to the new system. This creates heightened risks as supplier reference changes in the new ERP’s MSF make historical look-ups impossible and the opportunity to remove unused, out-of-date and duplicate suppliers – a hotbed for fraud – is removed.
Particularly at a time like right now, it’s crucial that organisations are able to take action in recovering missed payment errors.
Internal planned attacks
Over the past few years, there has been no shortage of stories about internal company fraud or senior finance professionals being tried in court for finance fraud. While only a small proportion of these incidences become public knowledge, as organisations fight to keep reputational damage at bay, it’s essential that companies place finance fraud high up on the corporate radar in order to protect against these threats.
According to the KPMG Fraud Barometer, there was a six-fold increase in the number of alleged procurement frauds appearing in court in 2019, usually involving fake invoices. Six cases worth over £16 million appeared in court in 2019 compared to £2.9 million in 2018.
The individuals and groups who are deceiving businesses to gain payments, usually gain some inside knowledge of the processes or systems to enable them to set up fraudulent suppliers and divert funds to their accounts. They are sophisticated and plan their attacks.
The biggest risk factor when it comes to ERP fraud is allowing users to access parts of the system that they shouldn’t be able to see, thereby enabling them to commit fraud in a variety of ways.
The most common type is the dummy company fraud, where a user sets up a false supplier, processes fictitious orders and invoices, and pays for goods or services that are never received. This is surprisingly easy to perform for a user with a little too much access. But there are many other forms of deception, including supplier bank account changes, inventory manipulation and unauthorised changes to payroll data. Proper control measures can mitigate these vulnerabilities to a large extent.
Nobody wants to believe that they are at risk of fraud, that their processes, systems and governance cannot safeguard their profits, however, invoice fraud is becoming a lucrative industry. Today’s finance leaders need help to keep ahead of the threat in order to protect and retain cash – the number one priority.
The UK Property recovery has begun
By Jamie Johnson is the CEO of FJP Investment,
The UK property sector will be integral to the country’s economic recovery from the direct and indirect effects of COVID-19. The Government certainly believes as much, with Chancellor Rishi Sunak implementing a series of sweeping changes to support property transactions amidst the pandemic. Most recently, on July 6th, 2020, it was announced that the first £500,000 of all property sales are now entirely exempt from Stamp Duty Land Tax (SDLT); including buy-to-let properties and second homes.
This attempt at boosting stimulus in the market is understandable. The real estate market is a key driver of national productivity and a big attractor of foreign investment to the UK. Thankfully for the Government, this policy has already been shown to be going some way in unlocking the stagnant demand for property that has been held back by COVID-19 uncertainty.
The boost the market needed
Mere weeks after this tax break was introduced, property journalists were already reporting a mini-property market boom. The property listing site Rightmove recorded an incredible 75% year-on-year increase for the month of July and a 2.4% rise in the asking prices of new properties on the website when compared to March levels pre-lockdown.
Whilst it is still too early to gauge how actual transaction numbers have been affected, this is a huge indicator that the Government’s policy has, thus far, been a success. After months of property price decline and housing market inactivity due to contagion fears surrounding COVID-19, the slump has finally ended, and buyers now feel confident enough to close on purchases once again.
But this demand will not be spread across the UK entirely evenly, so it’s worth examining how the continued presence of COVID-19 in our lives is shifting priorities in the minds of prospective buyers.
Stable demand, popularity shifting
With the working from home revolution seeming like it’s here to stay, it’s understandable that many of the working professionals who have found themselves having to turn their living spaces into work spaces may seek larger properties further from their employer’s traditional office space.
The aforementioned Rightmove figures support this claim. The rise in interest of London properties was just 0.5%, far behind the national average. This would make a change from the traditionally London-focused drive of the nation’s housing market; especially if we consider that this change in buyer sentiment may spur investors to look to places other than the capital when deciding where to invest in new high-end developments in the future.
Sunny skies ahead
This imbuing of market activity is likely to push up house prices for the foreseeable future. This would certainty follow expert’s forecasts, as global estate agent Savills recently stood by their prediction of 15% general house price growth in the UK by 2024. They cited the inevitable return of the buyer demand we witnessed in January 2020 once the novel coronavirus was in retreat; and it largely seems like, in conjunction with the Government SDLT holiday, this is exactly what’s happening.
FJP Investment commissioned research earlier this year which supports this projection. We found that 43% of property investors weren’t planning on making any financial decisions until COVID-19 had been effectively contained. With the virus now in retreat, it seems like confidence has risen. As a result, both investors and buyers are returning to the market in droves. Nationwide’s House Price Index for July, for example, showed that house prices have increased by 1.7% month-on-month.
Of course, I must taper this optimism with the knowledge that a second spike in cases or virus mutation could well set this recovery off-course. In short, there are still plenty of unknowns to content with.
However, as it currently stands, it seems as through the Government’s SDLT tax break will successfully encourage buyers (and sellers) to push up housing market activity for the foreseeable future. I look forward to being to a part of the UK property renewal in the coming months, and for the housing sector to provide the impetus for a strong UK economic recovery more generally.
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