Stop The Bleeding

Do owners of small and medium-size businesses worry about needlessly lost profits? Do they worry that their bookkeeper paid a significant invoice twice or made some other large dollar mistake in cash disbursements?

Business owners shouldn’t panic as there are many profit recovery firms that can give them the answer. But, if an owner of a small to medium-size company does not want to hire an outside firm to find duplicate payments and cash disbursement mistakes, he or she can implement a few handy techniques to keep mistakes at a minimum.

About profit recovery firms

Some firms specialize in sales tax audits and some in identification of duplicate payments during accounts payable (A/P) audits. Some firms do both or develop any angle they think would be successful to find money a business has left on the table. One of the leading accounts payable audit firms was formed because the founder, an A/P manager, was asked to look into a friend’s business for duplicate payments and was promised he could keep half of anything he found. He found one duplicate payment for $30,000 and a new career in a business, which, after 10 years, grossed $20 million per year.

These A/P auditing firms quickly learned to go after Fortune 1,000 companies. Most accounts payable and corresponding accounts receivable departments are competent with built-in internal controls, and most vendors quickly credit or refund duplicate payments. However, high-volume A/P departments are more likely to make significant monetary errors. For example, in the A/P audit industry there is a completely unscientific rule that states for every client with $100 million in gross revenue, the audit firm will find $10,000 in mistakes. Most recovery firms work on a commission basis, which is typically one-half of the finding. A large company may have made the same mistake many times and it adds up. Or, it can make only one mistake for a very large amount of money. Utilizing the unscientific rule, one would expect that a $10 million company would only yield $1,000 in mistakes in disbursements. One thousand dollars may not be worth any audit company’s or any busy business owner’s time.

Profit recovery for smaller companies

It is difficult to compare Fortune 1,000 companies using sophisticated million-dollar financial software managed by seasoned accountants to much smaller businesses that use QuickBooks and a bookkeeper who is a relative or employee lacking a formal accounting education. However, these smaller companies can easily make common mistakes such as paying sales tax when it is excluded, paying from a statement when the invoice has already been paid and writing a check for the wrong amount. The only method to find these mistakes is to open the desk file drawers and study each invoice or bill and check amounts for at least a second time.

However, profit recovery and audit companies have a few short cuts that can be somewhat replicated in QuickBooks to give owners of small to medium-size businesses the tools to locate mistakes or provide some assurance that disbursements are not diminishing profits. Typically, a recovery firm requires the last three years of a client’s disbursements in a large data file, which will be sorted into reports. The most useful report to find duplicate payments is one that matches disbursement transactions for the same invoice numbers and same amounts. This report basically shows a company all duplicate payments. The auditor then examines and confirms the duplication, which results in a call to the vendor. Another report often used is one that matches same invoice dates and same amounts.

To begin an effective recovery program using QuickBooks, every bill or invoice must be meticulously entered into the Pay Bills function of QuickBooks with an invoice number and invoice date. Using the Pay Bills function is a good idea if several bills are paid each month or if cash disbursements are made monthly. To build a report that will match invoice number and invoice amount paid, open the QuickBooks company file. From the “Reports” tab choose “Banking” and under the “Banking” tab choose “Check Detail.” Once a report has been built, dates must be chosen so that a particular period may be examined; this also allows the report to be refreshed. To make the report more useful, click on the “Modify Report” button in the “Check Detail” report box, and in the “Columns” box click the “Source Name” so that it is also checked. This will put the vendor name on every line in the report.

Click the “Export” button, select a new Excel workbook and click on “Export.” Save the new Excel spreadsheet using a desired file name. Make a copy of this spreadsheet and save it. The easiest way to make a copy is to “right click” on the bottom tab named Sheet 1. Then choose “make a copy.” The only rows that are wanted in this spreadsheet have a “Type: Bill.” To hide the other rows, click on the “Data” tab and then the “Sort” button. In the “Sort Menu” box, first, go near the bottom and dot the “Header” row. Then, go to the first “Sort By” drop down box and select “Type.” Click “OK” and the spreadsheet should have every row with “Type: Bill” as the first rows of the spreadsheet. Next, delete all the rows and formatting below the last “Bill” row. Also, extra or unneeded columns like Check Amount can be deleted. Make three copies of this spreadsheet. Finally, to line up all same invoice numbers and amounts, highlight the entire spreadsheet and choose “Sort” and dot the “Header” row. Finally, sort by “Original (or Paid) Amount” and second “Num” invoice number.

Ideally, the report would have a presentation that deleted all “no matches” and have sets of matching invoice numbers and amounts with a blank row inserted between descending amount matches; however, writing macros is more complicated and not necessary. Scan through the report and look for pairs or more of like invoice numbers and amounts. Once a duplicate is spotted, investigate the accounts by examining the original invoices and disbursement check stubs. Take the second copy of the spreadsheet with all “Bill” rows and sort by “Original (or Paid) Amount” and by “date.” Investigate any date and amount matches that have the same vendor and similar invoice numbers. Sort the third copy of the spreadsheet for “Original Amount” only and investigate suspicious amount matches.

Final tips

A few tricks of the trade will also help. In the vendor list, many companies have more than one vendor name for the same company. Discovering that two vendors are actually the same vendor paid with the same invoice number may result in finding a duplicate payment. Look for altered invoice numbers like 1023 and 1023A or 017141 and 17141. Numbers such as 0570998010 could be shortened to 0570998. It is possible that the automatic duplicate number checker does not compare between years; the same invoice could be paid in December 2008 and January 2009, for example. Data entry may have picked the wrong vendor and a payment was made to, and not returned by, the wrong vendor. Meanwhile, the correct vendor sent a follow-up invoice and was paid.

For peace of mind, business owners should make these spreadsheets every six months. One final secret of the trade can also help: a large amount of audit recoveries have nothing to do with direct identification of incorrect or duplicate payments. Most audit firms send a letter directly to the vendor and ask if there are open credits available to the client. Therefore, be sure to read monthly statements for unused credits. Whether a business owner recovers $1,000 or $10,000, utilizing these practical tips on a regular basis may assist in increasing the bottom line. Additionally, these review procedures are part of good business practice and will keep business owner worries to a minimum.

NOTE: The author is not rendering tax, legal or accounting advice. This is a presentation of ideas for business owners to consider in the context of appropriate professional advice.