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What’s a CFO’s biggest fear, and how can machine learning help?

 

It’s 5:05pm EST. Bob, CFO of ABC Inc is on an earnings call and is reporting a 20% miss on earnings due to slower revenue growth than forecasted. Company ABC’s stock price is plummeting, down 15% in extended hour trading. The board is furious and investors demand answers on the discrepancies.

Inaccurate revenue forecast remains one of the biggest risks for CFOs. In a recent study, more than 50% of companies feel their pipeline forecast is only about 50% accurate. Projecting a $30M revenue target and coming in short $6M can leave investors and employees frustrated and feeling misguided on the growth trajectory of the company.

In the past 10 years, supply chain has become much more complex with omni-channel distribution and the increasing number of indirect participants that can influence product demand. Advertising and promotions can create an uplift in demand that spikes sales by 20% or more. In addition, different types of customers have different purchasing behavior. These behavior are driven by myriad of underlying indicators and should be modeled individually. Yet, Financial Planning and Analysis (FP&A) has not changed fundamentally despite the changing landscape in the way companies do business. The process is still largely manual and dependent on time-series estimation techniques dating back to the 1980s.

Machine learning is a new technology that uses algorithms to learn from the data and guide us in making more informed decisions. Leveraging the power of machines allow us to consider more scenarios and combine the effects of thousands of indicators to improve forecast accuracy. For revenue forecasting, machine learning excels in the following 3 areas:

1. Trend discovery from unlimited amounts of data

With the advances in big data technologies, computers can crunch through data of all types and sizes. Unlike humans, algorithms can simulate numerous scenarios and recognize patterns that keep re-emerging in the data. It is also not limited to structured data and can examine unstructured data such as emails and logs to extract meaningful indicators.

2. Granularity of forecast

Instead of looking at product line level aggregate sales values, machine learning algorithms can detect patterns at SKU, purchase order and invoice level to discover interesting relationships and dependencies. For example, algorithms may find that the demand of one product (iPhone 6) is a leading indicator of demand for another product (iPhone 6 accessories).

3. Adaptive and Dynamic

Machines can also automatically adapt and re-run forecasting scenarios to adjust to changing market conditions and consumer demands.

Companies such as Flowcast are leading the charge in introducing machine learning techniques to the finance department of organizations.

FOUR THINGS YOU NEED TO KNOW ABOUT DEDUCTION CLAIMS

 

Large firms take a position of power when it comes to paying vendor invoices. They make deductions just about everywhere. Here are some key points to consider.

According to a recent study by US Bank, nearly 82 percent of all startups fail due to poor cash flow management. Sometimes, it’s not even the fault of the accounting department. Instead, cash flow problems are often the result of large clients taking their time to scrutinize and pay invoices. This rings especially true for business-to-business (B2B) companies that supply the big guys; mass merchants like supermarkets, the US government, department store retailers, drug store chains, and more.

 

Hiccups also occur when large firms find ways they can make “deductions” from their vendor invoices. The problem is not limited to startups and SMEs. In fact, firms of all sizes are increasingly finding themselves at a disadvantage when supplying big corporates. Not only can names like Walmart or Burger King take months to settle invoices, but when suppliers do eventually get paid, it’s often less than the amount the invoice called for. In an article that appeared in Business Credit magazine, Robert Wirengard writes:

 

Can you imagine what would happen if you went into a store and, after the cashier rang up your total, you said, “Take $5 off; I am deducting that amount because you were out of my creamer.” After stunned silence, your head might be spinning while security guards escort you out against a backdrop of whispers and laughter.

 

The anecdote sounds silly, but it’s actually what happens with corporate invoices. Compliance claims and fines are everywhere in B2B invoicing. Wirengard says debtors can claim $5 to $50 for leaving a PO number off of an invoice or sending a hard copy instead of an electronic one. Other charges can conceivably include $100 or more if the carrier was late, or $5,000 to $15,000 if the UPC scanning code for a consumer good contains errors.

 

The list is growing and creditors are increasingly seeing arbitrary deductions for vague reasons. It’s difficult to manage these deductions, and debtors know it. With this in mind, and in no particular order, here some key points that all business owners need to keep in mind about “deduction claims” from their clients.

 

  1. It affects nearly every B2B firm

 

Studies show that 5 to 15 percent of all invoices are affected by deductions from clients. This equates to between 4 and 10 percent of all open items on accounts receivable. Essentially, it means if your firm is billing big clients, you’re likely experiencing deduction problems, maybe without even knowing it. Corporates like to use the term “vendor compliance” to justify deductions.

 

A deduction is the hardest type of open item in accounts receivable to resolve because most departments in your company are involved to various degrees, according to the Credit Research Foundation. The customer takes the deduction based on their policy and procedures, and it’s up to you to prove they are wrong or right.

 

  1. Most deductions are valid

 

While the statistics for invalid deductions warrant investigation from creditors, 85 to 90 percent of them are in fact valid. This means companies must spend considerable time and resources sifting through vendor compliance claims, hunting for the bad apples, which are not easy to spot. Hundreds, sometimes thousands, of transactions must be checked to locate the few that can be returned to the customer with a demand for payment.

 

  1. But without scrutiny, revenue will be lost

 

It’s often tempting to just trust your big-name clients when they say the costs they are deducting are justified. After all, SMEs don’t necessarily have the time or resources to follow up on such things. Or perhaps creditors don’t want to rock the boat, considering they strive to maintain a positive rapport with each of their clients.

 

However, CRM Software Blog says 14 percent of deductions are usually found to be invalid. Businesses can pull in large sales and profit savings if they address invalid deductions from customers properly. If firms are not able to reconcile these amounts, significant revenue is sure to be lost.       

  1. Invoice remittances may contain 5 to 10 separate deductions

 

More than 32 percent of financial transactions in the consumer products and goods industry involve deductions, according to the Grocery Manufacturers Association. Some types of deductions retailers commonly take include: costs associated with shipping terms, in-store display allowances, fees related to damaged goods, fees related to price discrepancies, fees related to discontinued products, and more.   

 

Most companies do not approach deductions analytically, says Credit Research Foundation. Instead, deductions are often treated as distractions to the core business, rather than warning signs that something within the operation is wrong.

 

Companies that operate in the B2B space, and send invoices to large firms, need a fast and systematic way to evaluate “vendor compliance” checkboxes, and resolve deduction claims from their corporate clients.

 

Experts will tell you that outsourcing the work makes sense. There are a few reliable providers of software and services that can proactively identify root causes and invalid deduction claims for you. Doing this will save you from headaches, but also potentially save your firm hundreds of thousands of dollars in billings each year.

Five reasons why Obama’s SupplierPay isn’t working

 

While the roster of companies signing up for SupplierPay initiative has certainly grown, Obama’s program has limited substantial results to show for itself.

In 2008, multinational beer giant InBev acquired one of the largest American brewers, Anheuser-Busch, to create the world’s largest beer company. InBev is an affiliate of 3G Capital, a conglomerate that also owns food and beverage staples like Heinz and Kraft Foods.

In the wake of the Anheuser-Busch and InBev merger, 3G Capital began requesting that its suppliers give it up to 120 days to make payments, rather than the standard 30. Not in a position to refuse, the much smaller farmers and manufacturers that supply 3G Capital companies reluctantly complied.

The extended payment arrangements marked a paradigm shift in supply chain economics. The practice soon caught on almost everywhere, giving big companies breathing room in the aftermath of the 2008 financial crisis. But it led to cashflow problems for the small, captive suppliers with little financial cushion, and the tactic still affects them today. Irked at being treated like lenders instead of suppliers, the UK’s Marketing Agencies Association encouraged advertising agencies to strike against Anheuser-Busch InBev.

In response to the increasingly unfair terms imposed by companies, the Obama administration launched the SupplierPay initiative in 2011. The primary function of the initiative is that companies pledge to pay their suppliers earlier, unclogging capital flows and helping small businesses.

While the roster of companies signing up for SupplierPay has certainly lengthened since launched (growing from 26 in 2014 to 47 in 2015), the program has limited results to show for itself. We examined the days payable outstanding (DPO) of 17 of the first 26 pledged companies, we found that more than half of those companies have actually extended their overall payment days, to a median of +1.9 days.

Here are five reasons why Obama’s SupplierPay initiative is not the answer:

  1. No enforcement

Perhaps the single biggest flaw with SupplierPay is the fact that there is no enforcement for companies that have pledged to pay suppliers faster. David Gustin, the founder of Trade Financing Matters, writes, “the White House has no teeth in their proposal.”

“Getting companies to volunteer and pledge without mandating change via regulations (like Brazil or Mexico have mandated electronic initiatives around trade flows) is just a tough road to travel,” Gustin explains in a blog post.

As a result, the average payment time for pledged companies has actually increased, not decreased.

  1. The Prisoner’s Dilemma Paradox

A report from the US Department of Commerce explains a fundamental disincentive for companies to pledge. The Prisoner’s Dilemma is a hypothetical scenario that explains why two rational entities might not cooperate even if it is in both their best interests to do so.

If two firms pay their suppliers quickly, they receive the same adequate compensation. However, if Firm A decides to delay payment in order to invest the savings or finance short-term projects, it can benefit from higher compensation. Firm B is put at a competitive disadvantage and might even have to absorb the costs of Firm A’s delay. Firm B now wants the same benefits as Firm A, so it decides to delay payment as well. Now the supplier is being squeezed by both firms, resulting in shoddy goods, unstable output, and/or higher prices. In effect, everybody loses.

Even if SupplierPay means well, it accomplishes little unless everyone participates and pays earlier, not just pledged companies.

  1. Cost is passed back to suppliers

Because most of the pledged companies are large corporates, they can leverage their huge buying power to force the added costs resulting from earlier payments back onto suppliers. In addition, those with extended payment terms are typically non-strategic suppliers and therefore, are are not the suppliers that are high up on a large buyer’s priority list. A farmer might only sell his or her barley product to a single brewer, for instance, so that brewer can dictate the terms. If a corporation can no longer gain an edge from extended payments, then it can force captive suppliers into discounting their products instead.

  1. Ineffective without Supply Chain Finance

Supply Chain Finance (SCF) needs to be more widely available to both the suppliers and the buyers. Dynamic discounting solutions, virtual cards, and working capital platforms can all help suppliers get paid faster. Innovative SCF solutions can help companies extend their payment terms in a way that’s fair to both parties. However, SupplierPay does little to encourage more supply chain finance solutions. In fact, it fails to acknowledge the economics for large buyers to offer such options without tying their availability to an extension of payment terms.

  1. Paper checks are slow

In addition to more supply chain finance options, experts agree that upgrading to more efficient payment methods can also reduce the strain on suppliers. Simply switching to electronic payments instead of sending checks and invoices through the mail could go a long way toward alleviating unnecessarily long payment periods.

Despite the significant cost savings of moving from paper checks to e-payment, a recent report suggests B2B checks will not go away. Some 70 percent of organizations it surveyed are struggling to convert to electronic payments, and most companies cite customer/supplier hesitance to adopt and IT barriers as the top obstacles.

Yes, we are in an election year. So the question is: is SupplierPay 2.0 in the cards? Given the lackluster results thus far and notwithstanding who wins the White House later this year, my money is on a radical change in the current initiative. If the new administration does double down to have any impact, it will require direct intervention such as regulations, tax incentives, and repatriation credit. I am much more optimistic about the technology innovation happening in SCF to help small businesses. Such innovations from digitization of invoices to cloud solutions to new ways to optimize working capital to new alternative forms of B2B financing, collectively will have a far more substantive impact to the entire supply chain ecosystem.