jim.daddario

Revenue Recognition what’s all the VSOE about?

Jim Daddario — Fri, 10 May 2013 16:27:39 GMT

Last week, I posted a blog about the planned convergence between US GAAP and IFRS and how that might impact revenue recognition (http://scn.sap.com/people/jim.daddario/blog/2013/05/04/revenue-recognition-and-the-planned-convergence-with-ifrs). I realize that I got a little ahead of myself in that I talked about the potential impact on recently-enacted accounting standards without providing much explanation. Relative to these standards, I’ve heard many people, some inside my own company, lament about their “VSOE issues”. So I did some investigation on the FASB website as well as those of several major accounting firms and what follows is an attempt to clarify what this all means.

Again a caveat; this post is not meant for finance professionals. Rather, this is an attempt to explain some rather complex issues for non-financial business and IT people who are effected by them. I’ve attempted to simplify the discussion so non-finance people can understand the key concepts without the complicated language that those of us with financial backgrounds are used to.

As I said in the previous blog, the accounting profession always tries to match revenue with the costs incurred to produce that revenue, in period in which it is earned or realized. This is called the “matching principle”. This is critical for financial reporting as it provides stakeholders with a more accurate picture of how a business is performing.

Both costs and revenue can be a thorny subject because so many accounting irregularities have occurred when the numbers are miscalculated or misrepresented. The concept behind revenue is that it should be recorded when it is “earned”—that is when all contractual obligations have been met by the seller. Besides the issue of timing, US GAAP also requires that in order for revenue to be recognized, certain criteria must be met: There must be persuasive evidence of an agreement, delivery has occurred or services rendered, the seller’s price is fixed or determinable and collectability is reasonably assured.

At face value, revenue recognition is pretty simple—fulfill the obligation and record the revenue. It gets complicated when certain agreements between two parties contain obligations to deliver multiple goods and services whose timing and value is either uncertain or delivered on different time schedules. A good example is when technology companies sell solutions that are essentially bundles of hardware, software and services--all delivered on different time schedules. Even the services component can be complicated because there are different types of services and they are delivered differently. For example, professional services to configure and install software are essentially completed (and the revenue recognizable) on the go-live date. However, support services—the people you call when you have a problem—extend for the life of the contract which can be a year or more. Under previous revenue recognition rules (“rev rec” in accountant speak), software providers were forced to defer all of the revenue, even though some of the components were fully delivered. This resulted in a distorted view of revenue because particular items could not be booked as long as some deliverable remained outstanding. This also penalized the providing company who had to wait until the entire contract was fulfilled before they could record revenue. Rightly so, companies appealed to the accounting authorities.

In 2008, the Financial Accounting Standards Board’s Emerging Issues Task Force (FASB-EITF) introduced a new pronouncement (EITF 08-01) that changed the way revenue, stemming from contracts with multiple deliverables, was recorded. (There were actually two rules—the other deals with product bundles which contain hardware and software)

EITF 08-01 evolved into a new accounting standard (Accounting Standards Update (ASU) 2009-13. But ASU 2009-13 is far from easy to understand. What is says is in the case of contracts that contain multiple deliverables such as hardware, software, professional services and support—the issuing company must break all of these into their component parts and recognize them independently at different times (i.e. when they are delivered) and rates. This helps to more closely align revenue with costs and allow companies to recognize revenue on individual items faster. The next challenge is how does the company value these standalone components? Remember the previously mentioned US GAAP criterion that states “the seller’s price must be fixed and determinable”. This is not always as straightforward as it sounds. To do this, the standard lays out a methodology for establishing the “fair value” of the individual components to arrive at the monetary amount that should be recorded. ASU 2009-13 establishes a hierarchy that must be used in order to determine the monetary value of separate components, they are:

VSOE—Vendor-specific objective evidence. In simple terms, this would equate to what the company would charge if the component were sold separately. The onus is on the company to provide evidence of how that item would be priced on its own (i.e. 100 hours of consulting at the standard rate of $150/hour).

TPE—Third-party evidence. If you don’t have VSOE on what your company would charge, the accountants will look to third-parties such as competitors to determine how they would price a similar item.

ESP—Estimated selling price. If neither VSOE or TPE can be determined, then you must provide the best estimate on what the component is worth based on market prices.

Once the individual selling price for each item has been established using he above methodology, companies can begin to recognize or defer revenue, depending on whether or not the component has been completely delivered.

For most companies, managing revenue is a tedious process involving complicated, error-prone spreadsheets. Fortunately, financial software can help. For example, SAP Financials OnDemand includes a robust project management module that allows companies who provide professional services to manage the project and include billing milestones that simplify revenue recognition. I hope this was helpful to you non-financial managers. Again, there’s a lot of detail behind these rules that I have deliberately omitted for the sake of simplification—in fact there are multiple rules and to make it even more complicated, the US and international accounting standards are quite far apart on this topic and the governing boards are working hard to reconcile these differences. For further detail into what this means for your company, talk to your CFO.

Revenue Recognition and the Planned Convergence with IFRS

Jim Daddario — Fri, 03 May 2013 23:34:47 GMT

In a recent article in Accounting Today (http://www.accountingtoday.com/news/FASB-Ease-Revenue-Recognition-Standards-66581-1.html), they discuss an aspect of the ongoing work between the Financial Accounting Standards Board’s (FASB) work and its international counterpart, the International Accounting Standards Board (IASB) on the convergence of US-GAAP and IFRS. This particular article is about one of the more challenging aspects of the convergence: revenue recognition standards. Though there is still much work to be done and when adopted, the conversion will be phased in over a long transition period, it brings potentially major changes to how US-based firms conduct revenue accounting, primarily in the change to principles-based interpretation of the rules versus the prescriptive methods contained in the Financial Accounting Standards.

This blog is designed to help non-financial managers and IT professionals understand what’s being proposed so they can be ready to implement the new standards when they arrive. This blog is not intended for accounting and finance professionals who are already well ahead of the curve, although I’d highly recommend reading the Accounting Today article referenced above.

First, a little review. Accounting uses a guideline called the “matching principle” which attempts to align a company’s revenues to the costs that were incurred to generate them. This is the basis for accrual accounting. As simple as that seems, there’s a lot of work that goes in to determining the amount of revenue to allocate to a particular accounting period and for a minority of firms, is an opportunity for accounting fraud. According to the matching principle, revenue should be recognized when it is earned, that is when all goods and services are delivered and no obligations to perform remain.

In the US, the FASB has gone to great lengths to keep up with emerging issues in company business models to ensure that revenue recognition stays true to the intent of the matching principle. In recent years complications arising from certain business agreements where contracts with multiple elements—such as software licenses and support services—were entered into. This caused a lot of ambiguity because while the cost of the software license can be recognized when the system goes live, the related support services are delivered (and recognized) over the period of the contract. The problem was how to “break out” the license from the services so that the license revenue could be recognized early on—rather that recognized ratably, along with the services, over subsequent accounting periods. This all changed with FASB enacted a new standard which went into effect in 2011. This standard, known as Accounting Standards Update (ASU) 2009-13 allowed the “breaking apart” of multi-element agreements and set out strict rules for how each of the elements would be recognized and valued (the term VSOE should ring a bell). This may all change depending on how much of the convergence project balances IFRS vs. US-GAAP methods.

Differences and Similarities

Both IFRS and US-GAAP use the similar conceptual frameworks. For example, US GAAP states that to recognize revenue, the following standards must be met: there must be persuasive evidence of an agreement between the parties, delivery has occurred or services rendered, the seller’s price is fixed or determinable and collectability of the amount due is assured. IFRS uses similar language: a transfer of ownership has occurred, the amount of revenue can be reliably measured, there is a strong likelihood that the economic benefits will flow to the seller and the costs of the transaction can be reliably measured. However, the differences appear in how the two standards implement these frameworks. While IFRS has a single standard (IAS 18) US GAAP has multiple standards that deal with revenue recognition. Moreover, IFRS uses a very broad, principles-based approach that leave interpretation to up to accounting practitioners and auditors while US-GAAP is very prescriptive with detailed rules in how accounting for revenue must be applied. I’ve talked to CFOs who say there is a certain comfort in the US Financial Accounting Standards (FAS) in that there’s not a lot of ambiguity in how to apply them. European CFOs often become frustrated with the IAS because it places much of the burden on them to get it right. They often turn to the US standards for explicit guidance.

Based on what’s reported in the article, the FASB and IASB, along with the US. Securities and Exchange Commission are thoughtfully weighing the pros and cons of principles vs. prescription and much work remains to be done. However, for managers and IT professionals, forewarned is forearmed and this will have a significant impact on your accounting operations and the software vendors you count on.

Cloud Financial Applications: Improving the Information that Drives the Business

Jim Daddario — Fri, 09 Nov 2012 18:32:20 GMT

As financial management systems evolve, they are increasingly required to provide richer management reporting so that non-financial business managers have the detailed and real-time financial information they need to make critical business decisions. Accounting information has always been the basis for business decisions. However, while it is the language of business, the fluency in that language has traditionally resided in the finance staff who have the educational background to classify, interpret and act on the information. Often this fluency is lost on line of business managers who must use accounting information provided to them and apply it to their business context; be it managing a company division such as a cost or profit center or making critical decisions on where to allocate precious capital—such as to product development, markets or channels.

Financial management systems have evolved over the years; they’ve become increasingly oriented toward providing better and more actionable information to non-finance users across the company so that they can make better business decisions. With modern technology and the advent of cloud computing, financial systems are now even more effective and utilize advanced information management technologies to do this.

One of the fundamental challenges with financial management systems is turning a journal entry, with its somewhat arcane account postings, into actionable information the rest of business can use, rather than being just a mechanism for posting a transaction to the general ledger and enabling statutory financial reporting. One of the most effective ways we can do this is through tagging. Tagging allows accountants and business managers to assign attributes journal entries that allocate mainly cost and revenue data to various business units so that we can measure their individual contributions to the company’s performance. Stated another way, rather than simply using the debit and credit entry to post values to an asset, liability, expense or revenue account, we can use tagging to assign these numerical values to a variety of business dimensions (i.e. cost center, profit center, department, market, channel and customer). Coupled with advanced analytics that enrich dry management reporting with more intuitive graphics and key performance indicators (KPIs), we can now place more powerful information in the hands of business managers and knowledge workers across the business.

However, flexibility must have limits. Accounting requires rigor, hierarchy and control and some systems can take tagging and its inherent flexibility too far. The finance organization must have the ability to control certain transactional attributes such as to what specific accounts the journal entry should be assigned. Without this, it would be very difficult for the finance staff to ensure proper controls and accuracy in their financial reporting. Too much flexibility would also make closing the books much more complicated.

SAP Financials OnDemand, our new cloud-based financial management application, was designed using the same principles that made our on premise SAP ERP Financials application the choice of 23,000 of the world’s largest and most complex companies. This includes a great deal of flexibility into how companies assign attributes to their financial data, via tagging, to deliver the critical information that helps the business run better. We also designed it with enhanced capabilities such as rich, embedded reporting and analytics, robust support for mobile devices and greater flexibility for companies to tag their data. Finally, we built it to run on HANA, our advanced in-memory data store to enhance reporting and the speed in which it's delivered. In sum, this enables companies to provide real-time, reconciled financial information when and where people need it.

Please be on the lookout for the Financials OnDemand launch at our upcoming SAPPHIRE NOW event next week in Madrid!

Becoming a Financial Athlete: How SAP is Helping Finance Become more Agile

Jim Daddario — Tue, 23 Oct 2012 22:02:13 GMT

What does it mean when we talk about finance organizations becoming more agile? Well, in simple terms, it means being able to respond to changes in the business and its financial reporting, analytics and processes quickly and effectively. Organizations change in a variety of ways such as new acquisitions, spin-offs and joint ventures to name a few. Often it’s difficult for their financial management systems to adapt to these new changes without costly re-engineering. But responding to change means more than just modifying the chart of accounts to accommodate a new organization structure. It also means adapting business processes such as procure-to-pay, order-to-cash and the way in which the company closes its books to the new realities. In SAP Financials OnDemand, our new cloud-based financial management application, we’ve addressed these requirements to not only allow the system to be easily configured to the organization’s changes, we’ve also “future-proofed” it to enable it to adapt by enabling business people to make these changes relatively easily without having to depend on skilled IT people to support them.

SAP Financials OnDemand uses the SAP Business ByDesign platform and borrows many of the features that makes that application unique; one of the more important is its native configurability. Prior to implementation, business people can configure the system to their organization structure using the business configuration work center. This module uses very intuitive “drag and drop” visual design capabilities to set up organization structures. From the same module, you can assign attributes to each organization unit such as cost center, profit center, and the like. Further, to accommodate the requirements of multi-national companies, you can assign to each organization unit financial attributes such as the financial reporting standards it uses (IFRS, US-GAAP and local accounting standards) its transaction currency and tax jurisdiction by simply selecting these options from the configuration list. This sets up the organization’s financial reporting structure and makes it easy to post financial transactions and allocate costs and revenues to it for reporting purposes. The same capability applies after you’ve implemented Financials OnDemand to accommodate change such as when a new organization unit needs to be added or deleted due to a business event such as a spinoff or acquisition. Of course, the benefit for finance professionals is you can immediately make use of these business changes to accommodate your financial transaction and reporting requirements.

Another option to help your finance department be more agile is the way the system allows you to simplify reporting through the use of tagging. Tagging provides Google-like search capabilities on Financials OnDemand’s transactional data that can be organized in analytic views. I covered this in greater detail in my previous blog.http://http://scn.sap.com/people/jim.daddario/blog/2012/10/10/simplifying-the-general-ledger-to-achieve-greater-business-insight

For both finance people and non-financial knowledge workers across the business, Financials OnDemand’s intuitive user interface is completely configurable to provide user defined views analytic information that’s delivered pervasively across the business. Finance people can take advantage of similar analytics embedded in their transaction screens. For example, accounts receivable people can take advantage of analytic views that show receivables aging and drill down into each customer’s account detail in the same screen where they would generate a customer invoice, check on a past due invoice or post a customer payment.

All of what I’ve described points to Financials OnDemand’s capabilities at the user level. However, what happens when more complex change requirements arise? Assimilating a new company into your existing organization can become very complicated, particularly when the acquired company has their own IT systems that are still providing utility and not yet fully depreciated. The “rip and replace” method is often too disruptive because of existing business processes, reporting requirements and user familiarity, let alone the need to preserve the investment in valuable IT assets. SAP Financials OnDemand is built to accommodate this. Whether the acquired company’s systems are on premise or in the cloud, Financials OnDemand uses modern technology to allow you to connect these systems and ensure business process integrity. We do this through open-IT standards and a software development kit that allows your IT people to build the system-to-system connections that enable data to flow unhindered. For example, an acquired company with an on premise procurement system can send purchase orders to SAP Financials OnDemand to ensure a seamless procure-to-pay process while ensuring that rigorous audit trails are available to track the PO all the way through to the vendor payment. These are just some of the ways Finance departments can become more agile through the adoption of modern, cloud based financial management systems. I encourage you to stay tuned to this blog and those of my colleagues for more information on how you can become a more agile finance organization. I also encourage you to watch for our product launch at SAPPHIRENOW in Madrid.

Simplifying the General Ledger to Achieve Greater Business Insight

Jim Daddario — Wed, 10 Oct 2012 20:54:13 GMT

As finance professionals, one of the more significant values we add to the business is providing insights to line of business managers and other professionals about the performance of their business unit or department. This is beyond dry managerial accounting, I’m talking about intuitive analytics that can provide detailed information on why profit margins are declining, which products are selling, what regions or channels are driving the greatest sales volume and why.

As we all know, this is often easier said than done. We can deploy expensive and complex data warehouses with analytic dashboards that can slice and dice accounting data at precise levels of detail. However, the Achilles Heel in this mix if often our single source of the truth—the general ledger. Over the years we’ve had to adapt the GL’s chart of accounts to enable the capture of detailed postings at more granular levels to support profit centers, cost centers and the like. Often this means expanding the chart of accounts so much that it becomes unwieldy to the point that it becomes a hindrance to basic accounting processes like closing the books. It also increases the likelihood of errors.

I know many finance professionals agree that what we’ve gained in being able to analyze critical business data at more and more granular business dimensions, we’ve had to trade off by making the COA more and more complex. In a sense, we’ve woven a very tangled web.

There Must be a Better Way

With SAP Financials OnDemand, we’ve taken a completely different approach. We start with the organizational unit that we want to measure—it could be a segment, profit center or cost center. To each of these organizational units, we attach a chart of accounts. Notice we’ve already simplified the GL by not embedding the segment, or any other organization element for that matter, in the main chart of accounts.

Enabling More Granular and Actionable Reporting

Beyond simple organization unit reporting, we often want to analyze information for other business dimensions such as customer, channel or even a project if we’re a professional services firm. With SAP Financials OnDemand, that’s easy too—we do it at the transaction level. When creating a journal entry, you can assign dimensions at the line item level through tagging. For example, when we sell a Widget, we create a debit entry in accounts receivable and a credit entry to a revenue account. This is where it gets interesting. With each line item, we “tag” the transaction by assigning a value such as cost center, department, sales organization, customer number or channel. This allocates key data such as the revenue generated, the type and quantity of product sold and other important attributes that are posted in the system’s in-memory data store, to various departments and individuals who need that information via reports, dashboards or KPI’s on their mobile devices. In other words, we've turned the general ledger into a system that serves the entire business, not just the accounting function.

This also enables the finance organization to accelerate strategic execution for their business. At the same time, SAP Financials OnDemand boosts their operational efficiency by providing a simplified, trusted, single source of truth that’s designed to drive action from superior insight.

By the way, if you want to see SAP Financials OnDemand's analytics in action check out this video http://youtu.be/zz-X3JOU3ZA

Financials OnDemand; Using Collaboration to Streamline Finance

Jim Daddario — Mon, 08 Oct 2012 15:59:54 GMT

According to the latest IBM CFO survey, Finance departments spend almost half their time processing transactions. The disturbing news reported in this survey is this number hasn’t changed in 6 years. As you finance professionals know, “transaction processing” is a generic term but lends itself to easier categorization. Perhaps a better way to describe it is the time engaged in manual data entry, document retrieval, gathering or validating data and reconciling numbers in order to complete an accounting process. Anytime an accountant uses a spreadsheet, whether creating a report, reconciling numbers across several systems or using it as a revenue recognition schedule, this is transaction processing—and more importantly, it is time that’s not spent interpreting, analyzing and drawing conclusions that could help the business improve its performance.

Transactional Workflow

The time spent in manual data gathering or entering invoices into a financial management system is proportional to how “manual” the system is. Modern financial management systems use many functions to help automate and streamline an accountant’s work. In my opinion, one of the most powerful system functions is workflow. In a generic sense, workflow is a sequence of steps performed to complete a particular business task. Workflows also model business processes. Finance processes are often described as “record-to-report”, “order-to-cash” and “procure-to-pay”. Let’s take a deeper dive into “procure-to-pay” more commonly referred to as the accounts payable process. When I used to do this for a living, it was a hair-pulling exercise starting soon after I’d receive an invoice from a vendor and then I’d try to match it to a PO (invariably, there wouldn’t be one). Then I’d have to track down the purchaser to determine whether the invoice was legitimate, correct and to what project I needed to allocate the expense (this was a real estate management firm) and finally, have the purchaser sign the invoice as an approval to pay. Then I could enter the invoice into our accounting system and queue it up for the next check run (this was before electronic payments). I often fumed “there must be a better way!”

Example: "Procure-to-Pay" in SAP Financials OnDemand

Well, there is a better way. SAP Financials OnDemand, a cloud-based, integrated financial management system that uses workflows (in addition to other advanced functionality) to automate financial business processes. Within the system, purchasers create a PO (or an employee can initiate the process via self-service procurement), and send it to the supplier. When the goods or services are received, the purchaser or requesting employee can verify receipt through the system’s workflow. At the same time, when the accountant receives the vendor’s invoice, they’ve received the receipt notification in their workflow. If more precise verification (matching) is required, the accountant can ask the receiving department to pull up the PO in the system, verify the quantity received and create a goods receipt to notify the accounting department that the invoice is OK to pay. This is an ideal method because it shifts the matching task to the people who are in the best position to do it and significantly decreases the workload on the accounting staff. Discrepancies in the payment amount can be easily handled by either creating variance thresholds (i.e. if the difference between the PO and the invoice amount is under 2%, the accountant can simply accept the variance and process the payment.). However, in the case of more significant variances, the accountant can use the system’s workflow to request clarification from the purchaser. Once the accountant receives the authorizations she needs, she simply approves the invoice and schedules it for the next payment run.

Audit Trails, Internal Controls and The "Document Flow"

The great news is all of these process steps and verifications are recorded in SAP Financials OnDemand’s document flow view. This not only provides a full visual representation of what steps have been completed, they also a full audit trail showing the sequence of steps, approvals (and by whom) all the way to the journal entries and accounts to which they we’re posted. More importantly, when internal controls are so critical, the whole process can be designed--the steps, approvals and authorizations-- in a graphic “business configurator” that business people can use without the help of IT staff. The end result is its more automated, documented and streamlined and document flow makes everyone’s job, including the auditor’s job much easier. Companies using accounting point solutions should consider the benefits of SAP Financials OnDemand to help streamline core business processes. This is one example of how it’s designed to reduce the accounting staff’s transaction processing burden and allows us finance professionals to focus on higher value-added activities to help drive better business performance.

Optimize Working Capital through Effective Financial Supply Chain Management

Jim Daddario — Thu, 28 Jun 2012 00:00:30 GMT

As global economies gyrate from apparent stabilization to heightened risk from the EU monetary crisis, companies face changing financial supply chain challenges—among them are rising pressure from global competition, increased risk, and fluctuating customer demand. Most companies have already taken steps to achieve cost savings and improving productivity.Organizations today are attempting to make improvements in their financial supply chains to maximize working capital, increase cash flow and reduce liquidity risk. The financial supply chain involves the flow and use of cash within the physical supply chain, during the transfer of products and services between a company and its customers and suppliers.

Optimized financial supply chain management is designed to increase transparency and the level of business processes automation. The goal is to reduce the amount of working capital tied up in the process of buying and selling goods and services between business partners. A key strategy is to streamline a company’s order-to-cash and procure-to-pay cycles to reduce latency, ensure timely billing and cash collection.

To help frame the discussion, it’s helpful to re-examine the concept of a company’s operating cycle. Companies purchase inventory—either raw materials that will be converted into finished goods or merchandise—that will be sold to customers. Service companies face similar challenges in that they hire staff to provide services to their customers and assign them to projects. In both instances, cash is disbursed (either as a payment for inbound goods or the salaries, benefits and expenses of the service employees) well before the company receives payment from the sale of goods and services. The time between when a company pays its suppliers or employees and receives payments from its customers is called its cash conversion cycle. It is this period that financial supply chain management seeks to optimize to improve cash flow. The key to shortening the cash conversion cycle is establishing integrated workflows along with reporting and analytic technologies that provide insights into why and where in the process errors are occurring throughout the financial supply chain. Most companies don’t have the luxury of delaying payments to suppliers as a way of bolstering cash flow. Accordingly, they should focus on the inventory and order-to-cash cycle. Is the company accumulating too much inventory due to inaccurate demand planning or sales forecasting? Are customer invoices being sent out in a timely manner? Are billing errors—such as incorrect amounts, unclear goods descriptions or invoices sent to the wrong address delaying cash collections?

Technology plays a critical role in streamlining financial supply chain processes by providing increased visibility into key metrics, improving process efficiency and cash flow. Companies increasingly use integrated systems to manage these processes across functional and departmental silos—for example, across sales, shipping and accounting. Often the key to receiving customer payments faster is as simple as eliminating errors on invoices. When companies have disparate order management and billing systems, issues such as incorrect billing addresses can delay payments because the invoice takes a circuitous route to the customer. More complex issues such as incorrect invoice amounts, unclear descriptions of delivered goods or missing PO numbers can cause delays in the customer’s accounts payable department as accountants scramble to match PO numbers and verify goods receipts before they can authorize a payment.

Integrated order management, billing and accounting systems eliminate this problem by sharing data and ensuring that items from a customer order are transferred to the invoice—along with the PO number and any other detail to help the customer with AP matching. End-to-end processes help streamline the financial supply chain by reducing delays with workflow and analytics. For example, integrated sales forecasting and demand management capabilities can help companies reduce excess inventory, leading to lower costs and free up cash that can be better used to finance the business. In addition, integrated order-to-cash processes with automated workflow helps to ensure faster billing and lead to timelier customer payments. These systems can also provide integrated analytics that deliver critical insights into overdue invoices and use case management and workflow to help drive faster collections. SAP provides several solutions to help companies solve their working capital issues and improve cash flow. Whether cloud-based or on premise, these solutions help optimize working capital, improve cash flow and reduce the risk of running out of liquidity. In today’s uncertain economy, these are critical capabilities that companies need to survive tough business conditions.

Process Controls Make Internal Controls Easier

Jim Daddario — Wed, 30 May 2012 20:40:34 GMT

In the accounting profession nothing seems to generate more anxiety than the topic of internal controls. For the “finance-challenged”, internal controls are processes, practices and procedures designed to prevent fraud and ensure that a company’s financial reports are fair and accurate representations of the economic activities and value of the company. For the record, the subject of internal controls is very broad and deep an area of study unto its own (my trusty Keyso and Weygandt’s Intermediate Accounting textbook barely mentions internal controls in the index). What brought internal controls out of the droll area of accounting practice and into the public eye were headline accounting scandals such as Enron and Worldcom that involved significant accounting fraud and resulted in material misrepresentation of the company’s financial reports. This lead to sweeping legislation in the form of the Sarbanes-Oxley Act of 2002 in an effort to restore the investing public’s faith in financial reporting.

While accounting fraud can happen almost anywhere and by anyone—from “padding” expense reports, fudging depreciation schedules, capitalizing items that should be recorded as ordinary expenses to misrepresenting revenue—arguably, the accounts payable process can be one of the more vulnerable to dishonest employees. An obvious case is creating a fake invoice and then making a payment to the “vendor” who happens to be the dishonest employee or an accomplice. This situation is easily remedied by something called “segregation of duties”—i.e. the person who enters the invoice into the accounting system should be a different person than the one who actually cuts the check. However as companies get larger and more complex, these kinds of process controls become harder to enforce. In addition, companies will want to incorporate controls and approvals further up the value chain and throughout the “procure to pay” process. This is the design principle behind SAP Business ByDesign. Its process orientation give companies the flexibility to apply process controls as widely and stringently as required.

Let’s take the “fake vendor” issue. Your company can use Business ByDesign’s controls to limit employees to ordering goods or services from only pre-approved vendors. This vendor data is stored in the system and is the source of the vendor list from which an employee selects to make a self-service purchase via the system’s shopping cart. Another type of control is making sure the employee’s supervisor checks and approves the purchase before a purchase order is issued to the vendor.

The Process Flows Seamlessly into Accounting.

Accountants have their own internal controls and verification checks. For example, when the vendor sends an invoice, the accounts payable person will check the system for an approved PO and once they verify it exists, they need to ensure the goods or services have been received to their satisfaction. They use Business ByDesign’s approval workflow to contact the ordering employee and receive an OK to pay (there’s nothing worse than paying a vendor who hasn’t delivered—all leverage is lost with the outbound payment!). Once received, the AP person will queue up the invoice for either the next check or electronic payment run. Perhaps the real beauty of Business ByDesign is the system’s document flow which captures the entire process in one convenient and intuitive view from purchase request to approval, purchase order issuance, goods receipt, approval to pay, payment, accounting journal entries and who made them. This helps ensure that every employee follows the company’s policies and that the data is available to anyone who needs to verify that proper procedures and internal controls exist. From the controller and CFO to external auditors, everyone can clearly see a well-documented audit trail and that good internal controls have been followed. The best part is the accounting staff can relax--at least for a little while!

Indirect Procurement: What’s in it for Finance?

Jim Daddario — Thu, 29 Mar 2012 00:37:51 GMT

Companies face constant pressure to reduce costs in order to offset other rising costs such as oil prices, health care insurance premiums and, at least in some instances, salary costs. In light of both domestic and global economic uncertainty, companies are struggling to find growth opportunities. In order to boost earnings, they have resorted to cost cutting.

However after such drastic cost cutting enacted during the global economic crisis 3 years ago, have companies run out of places to cut? With current US GDP growth barely topping 2%, a probable recession in the Eurozone and a slowing China, the prospects of increasing revenue look dim. Increases in earnings will have to come from further cost reductions and one item that’s often overlooked is indirect spend. CFOs typically have their finger on the pulse of spending on direct materials (or their related component, cost of revenue in service firms), However, indirect procurement—such as expenditures on travel, advertising and office supplies—may be overlooked in many organizations. In this blog, I’ll discuss why its overlooked and how cloud-based software from SAP can help identify and control indirect spend to help companies improve their earnings.

Why don’t CFOs pay more attention to indirect procurement? I’m sure it varies from company to company (one Fortune 1000 CFO dismissed my attempts to get him interested in my former company’s procurement analytics as “tracking toilet paper and light bulbs”). This cynical veteran’s views aside, CFO’s often overlook indirect spend because it’s not always visible at their level. The reason is that the purchasing of indirect goods and services such as professional services, office supplies and travel is often managed at the department level and finance executives rarely see the aggregated results of the overall expenses these line items represent. When looked at individually, the dollar amount of indirect spending in each department seems insignificant. But when added together, they can account for a significant portion of a company’s costs. Look at the income statement line “general and administrative expense” which for some companies can represent as much as 20 to 40 percent of revenue.

Another issue is how to control it. Indirect spend is complex and is typically fragmented across departments and geographies. What’s more, thousands of end-users across the company purchase services across diverse categories that often require nothing more than a manager’s authorization. Even when CFOs understand the need to get a handle on indirect spend, they may be put off by effort and time required to track and control it. In addition, managing and tracking indirect spend efficiently requires specialized software solutions which can be costly.

On demand solutions such as SAP Business ByDesign can help companies get a handle on their indirect spend, and ensure the process is properly controlled including working with approved vendors and securing the necessary approvals. In addition, SAP Business ByDesign is a cloud-based solution which means companies don’t have to spend a lot of money to acquire it and can be up and running in weeks.

Let’s walk through a procurement scenario to show how easy it is to manage procurement in SAP Business ByDesign. The solution’s user interface is organized into logical functional groupings called “work centers” and uses embedded workflows to streamline the process. Here’s an example: an employee needs a new computer monitor and logs in to SAP Business ByDesign. She starts in her Home screen and selects the “self-services” option. Here employees can perform many tasks on their own that eliminate the need to burden specialized staff in other departments such as purchasing in this case. From her self-service view, she clicks on the “Go Shopping” icon which lists several options such as office equipment. From the intuitive menu, she selects computer monitors and is presented with several options that her company has already approved. Upon making her selection, the item is placed in a “shopping cart” where she can review her selection and click “finish” to complete the process. SAP Business ByDesign’s powerful workflow automatically routes the request to the employee’s manager, who after reviewing the request, approves it by simply clicking a button. This sets the next stage of the workflow into motion where the approved request is sent to the company’s purchaser. The purchaser opens his “Sourcing and Contracting” work center and selects the “New RFQ” option. From a list of pre-approved computer equipment vendors, the purchaser can specify the item and delivery terms and transmit requests-for-quotes (RFQs) to multiple vendors, either electronically or in hardcopy PDF form. When the quotes are received, the purchaser again enters his “Sourcing and Contracting” work center and selects the compare quotes option. Form here he can evaluate prices and delivery terms and award the contract by with a click of a button. This action creates a purchase order that is transmitted to the successful vendor. The whole process is completed when the employee who created the original request receives the equipment and acknowledges that through a goods receipt. Later, when the company’s accounts payable staff receives the invoice from the vendor, they have all the information they need to process the invoice (including manager approvals, PO and goods receipt) for payment visible in the solution's Document Flow. SAP Business ByDesign also features robust analytics to help you understand spend by different categories, vendors and cost centers. For more information on customer invoicing and sourcing contingent workforce, please see my previous blogs on Supplier Invoicing and Project Purchasing.

As CFOs look for ways to reduce costs, they should focus on a simple but often neglected category—items such as office supplies, services and travel being purchased and expensed across the entire organization. Properly managing indirect procurement can be a significant undertaking, requiring specialized skills and software. Fortunately, SAP has cloud-based options such as SAP Business ByDesign and our Sourcing OnDemand application that are both inexpensive to acquire and can be up and running in weeks.

Can Finance People Learn to Love the Cloud?

Jim Daddario — Thu, 19 Jan 2012 15:32:46 GMT

For finance professionals, cloud computing can bring a lot of anxiety. A key contributor is ensuring the security of sensitive financial data and the ability to enforce internal controls when this data resides in the “cloud”, at a third-party service provider. In the US, with Sarbanes-Oxley and the hard-to-forget memories of hoops finance departments had to jump through to comply with it, should finance departments ignore the cloud and keep their data securely on premise? We could debate ad infinitum whether your on premise data is really secure but what about the cloud computing providers? The economics of the cloud are certainly compelling but what about the compliance risk?

Fortunately, there are standards to help ensure that your cloud provider has taken the proper steps to keep your financial data secure and compliant. These standards, namely the Statement on Standards for Attestation Engagements No. 16 (SSAE 16) in the US and its international cousin, the International Standard on Assurance Engagements No. 3402 (ISAE 3402) provide guidance to accounting firms who audit a service provider’s books. These standards are relatively new, having gone into effect just last year. In the US, SSAE 16 replaced the better known Statement of Auditing Standards 70 (SAS 70). SAS 70 was issued by the American Institute of Certified Public Accountants (AICPA) several years ago for the same purpose—assessing a service provider’s internal controls. However developments such as the globalization of information technology and a desire to align global accounting standards necessitated the adoption of the newer standards (the AICPA now requires its members to follow SSAE 16).

As I started to say, the new standards assist accounting firms who audit a service provider’s financial records (for the record, a “service provider” is any company who provides outsourced work to another company and a cloud provider falls squarely in that camp). When performing an audit, accountants must also assess the effectiveness of a provider’s processes to safeguard financial data from tampering. These processes are called internal controls. Upon completing an internal controls audit, an accounting firm will issue a report attesting to the service provider’s compliance to its customers and other external stakeholders.

The standards also apply to companies who use service providers. They offer similar guidance to accounting firms who audit the books of companies who use external service providers. Because certain service providers—and most certainly providers of cloud-based financial systems—can have a significant impact on the customer’s control environment, external stakeholders need to ensure that both the company and the cloud provider have followed proper internal control procedures.

What does this mean to cloud providers? Among other things, it’s a powerful marketing tool—like the venerable Good Housekeeping seal, it helps dispel the concerns of would be financial buyers that somehow their data is not safe or they’ll have compliance problems if they ditch their old accounting systems for a cloud-based system. Additionally, a cloud provider’s sales people should be able to articulate what this means to reluctant financial decision-makers. Now before sales people start flaming me, let me say that finance people get confused by this stuff (just ask them if they clearly understand the rules on revenue recognition or foreign exchange valuation). You don’t need to quote SSAE 16 or ISAE 3402 chapter and verse. Rather, you should be able to communicate just what I’ve written above and if the finance person still has doubts, they can call their auditor. Cloud computing offers many significant benefits but for some, the perceived risks prevent them from adopting it. Hopefully, this blog offers a bit more assurance that data in the cloud may indeed be better than data stored on premise.

Getting the Rythm of the Business with SAP Business ByDesign

Jim Daddario — Thu, 29 Sep 2011 12:41:02 GMT

Last month I posted a blog encouraging CFOs to embrace CRM—or more precisely, sales force automation applications. I recounted how a former customer’s key executives performed a weekly examination of the sales pipeline and the status of each opportunity contained in it to re-affirm their earnings and cash flow forecasts as well as their supply chain sourcing and production activities. In doing so, the business was always in synch and they rarely had earnings, cash flow and excess inventory surprises. The CFO commented to me that he felt very little risk of being “blindsided”.

In this post, I’m going to walk you through how you can use SAP Business ByDesign to similar effect. The logical starting point is in the CRM New Business work center/opportunity pipeline view. This provides a roll up of all the opportunities and more importantly, their probability of closing based on their stage in the pipeline. Business ByDesign multiplies each opportunity’s expected value by the associated probability to derive a weighted value—a figure that’s widely used in sales and revenue forecasts. Next, you would check the Sales Orders work center for all open orders. Here is where many problems can be identified. How big is the order backlog? Are logistics issues preventing orders from being filled? Are there filled orders that have yet to be invoiced? These issues don’t show up in finance because most GL postings aren’t triggered until an order is invoiced. However, a lot of issues that affect revenue and cash flow reside in the order pipeline and regular examination or better yet, time based alerts can notify responsible managers to take action while there is still time.

Finally, we come “home” to the financial side of Business ByDesign. In the Liquidity Management work center/liquidity forecast view, items such as opening and closing bank balances (from multiple banks), receivables and payables and other items form a comprehensive cash flow forecast that can be broken down by any number of time periods. Bank statements can be automatically imported using the SWIFT (MT940) and BAI2 file formats and the forecast sources its receivables/payables data directly from the GL and pending payments from the payments monitor in the Payment Management work center. Additional items such as forecasted revenue and pending orders can be easily added to the forecast in Business ByDesign or, if you prefer, an Excel spreadsheet exported from the liquidity forecast. The key message here is all the data you need to get a read on the “rhythm of the business” is contained in Business ByDesign which eliminates a lot of data gathering, re-keying and errors. We finance people hate surprises and SAP Business ByDesign can go a long way to making your life easier and a lot more predictable.

Managing Uncertainty: Why CFOs Should Love CRM

Jim Daddario — Wed, 17 Aug 2011 12:04:04 GMT

CFOs don’t usually get involved with CRM systems—namely their sales management component, more commonly known as sales force automation. These systems evolved twenty or so years ago out of contact managers to help sales people keep track of their specific sales opportunities, their progression through the sales cycle and allowed their managers to manage sales strategies by tracking the entire group’s opportunities through the stages of the sales pipeline until they reach the end—hopefully in the form of a win. Sales managers also use SFA systems to build their forecasts. This is done by taking the currency value of each opportunity and weighting it by the probability of closing, which is determined by a defined stage in the cycle. So for example, an early stage opportunity of $100,000 would be weighted by the low probability of say 20% (later stage opportunities will have higher weighting) and you have a projected revenue amount of $20,000. The sales manager simply adds up all the weighted opportunity values resulting in a fairly accurate revenue forecast. Sales managers use the visibility these systems provide into the pipeline can also take action by focusing on problematic opportunities or those that aren’t progressing as fast as expected.

So why would a CFO care? First, the obvious. CFOs care about revenue. They often make forecasts for the board or if they’re publicly traded, the shareholders and need to ensure the company will hit its numbers. If they catch a revenue shortfall in time, they can make adjustments to expenditures so earnings come in on target. CFOs who miss their forecasts are often penalized with a plunging stock price or damaged credibility. There are other reasons. In a troubled economy, CFOs also care a lot about managing cash flow. Since sales revenue is the company’s primary, if not only source of cash, the finance people can use the revenue forecast to construct their cash forecast. They only need to make adjustments for the average time it takes for customers to pay their invoices, add in an allowance for late payers, net that against their projected outgoing payments and you have a solid cash forecast as well.

Some savvy CFOs with whom I’ve worked take it a step further. They use the sales pipeline and with the aid of analytic applications, they can use it as a planning tool. One company I worked with held a weekly conference call attended by the CEO, CFO, EVPs of Manufacturing and Sales along with the regional Sales VPs. They referred to this as the “rhythm of the business” and each week they’d review the pipeline, discuss status of each opportunity and booked orders with the regional VPs who would re-affirm their “commits” for the week. When problem deals were identified, they regional VPs would take action in the form of personal visits or coaching their sales reps to accelerate lagging deals. The CEO himself would often visit these customers to help seal the deal. The information from these weekly meetings automatically updated the company’s rolling revenue, cash and production forecasts. The latter determined how much the company would ramp up or scale down production plans and ensured they never had too much cash tied up in work in progress or finished goods inventory. The other advantage they had was that their sales and financial management systems were integrated so the senior managers were always looking at the most up to date information. They didn’t have to wait for the finance staff to gather data and compile reports.

As you can imagine, this company was a stellar performer and it was also a mid-sized company--though it ran like a Fortune 500. They’ve since gone public and even through tough times, they continue to outperform their competition. By applying the same discipline and making the right technology investments, any company—small, midsize or large—can run their business like this and in a tough economy, it can be the key to survival.

In my next post, I’ll walk you through how SAP Business ByDesign can help companies become a “best run business” just like the one described above.

Customer Invoicing with SAP Business ByDesign

Jim Daddario — Thu, 05 May 2011 09:52:33 GMT

I recently posted on ways in which companies can streamline the customer invoicing process to ensure invoices are paid on time, keep DSO low as well as provide a strong cash flow. I also described how errors, inaccurate data and other issues in the billing cycle can result in late invoice issuance, delays in customer payments and increase the accounting staff’s workload. I concluded that the most effective way to speed up customer invoice processing and reducing errors is though an integrated software system that combines sales order entry, shipping notifications, accounting journal entries and invoice creation within a single, workflow-enabled application. In this post, I’m going to describe how SAP Business ByDesign’s process-centric design enables an integrated order-to-cash cycle. The order to cash cycle is critically important because it represents a company’s major, if not sole source of revenue and cash flow. To illustrate this point, I’m going to take you slightly upstream in the “02C” cycle to the sales quote (some refer to this as the quote-to-cash cycle). SAP Business ByDesign is a cloud-based integrated business management solution. Its CRM functionality is completely integrated with the supply chain and financial functions to form an end-to-end process. In fact, the CRM, supply chain, financial and other functions are delineated more by user access rights than organizational or functional boundaries. To initiate the process, a sales representative can create a quote within Business ByDesign and deliver it to their customer. In addition, from within the sales quote and order screens, the rep can check product availability to determine if they can meet the customer’s delivery requirements. This “ability to promise” check is also critical to the company’s revenue recognition in that if their goal is to maximize revenue in the current period, the ATP check helps ensure they can meet that goal by delivering and billing the product in the current period. This is a critical item on which accountants don’t normally focus but by collaborating with their colleagues in sales management, they can help focus the company’s efforts on generating near-term revenue. I’ll discuss this more in a future blog on sales strategy.

Having received an acceptance from the customer, the sales representative can now create a sales order. She does this by opening her Sales Orders work center and opening a new sales order “with reference” by referencing the previous quote to forge another link in the accounting trail. Business ByDesign also automatically populates the sales order with data from the customer’s master data including “ship-to” and “bill-to” addresses and contacts. Recall from my previous post that a common cause of late payments is something as simple as issuing an invoice with the wrong billing address or contact. Placing the responsibility on the sales person to make sure this information is always up to date can help reduce payment delays by ensuring the invoice doesn’t get lost. Once submitted, depending on the type of business and the rules configured in Business ByDesign, the sales order is either routed to a supply planner or to the warehouse where the order is shipped and a goods issue document is created in the system. Upon receiving a workflow notification that the customer’s order has shipped, the sales representative can now trigger the invoicing process. She does this by opening the Customer Invoicing work center and selecting from a list of items to be invoiced. She checks the source documents for accuracy, creates and then releases the invoice to the customer. This action also automatically creates a (debit) journal entry in Business ByDesign’s accounts receivable general ledger account along with a corresponding credit entry in an appropriate revenue account (the shipping process also created appropriate entries in inventory and related accounts). This illustrates how SAP Business ByDesign’s workflow crossed organizational boundaries from sales to the supply chain or warehousing function to the accounting function. In addition, the invoice creation step generated a workflow which delivered an alert to the accountant’s general ledger work center in box, notifying her of the new posting. The accountant can pull up the journal entry detail and the use the system’s document flow to see an graphical view of the document trail from the initial sales quote, order, goods shipment and general ledger postings. In the event of a billing dispute, late payment or other problem, the document flow will save the accountant countless hours of research to resolve the issue. It also provides a solid audit trail for financial reporting purposes.

For many companies still struggling with stand alone systems, separate business functions and paper-based business processes an integrated solution such as SAP Business ByDesign can improve efficiency and reduce billing cycle errors. And since Business ByDesign is delivered on demand, the solution is very affordable for SMEs and subsidiaries of large corporations looking to streamline their order-to-cash cycle and improve their cash flow.

Streamlining Customer Invoicing

Jim Daddario — Wed, 20 Apr 2011 15:02:24 GMT

This blog is part of my series on streamlining finance processes. I previously wrote about the procure-to-pay process (see link), specifically the supplier invoicing component, how it consumes a great deal of the accounting staff’s time and what companies can do about it. On the other side of the cash conversion cycle, the order-to-cash process, namely its more accounting ̶ focused component customer billing, is equally fraught with paper-based processes, time-consuming information checking and manual re-keying of data. However, the accounts receivable cycle is arguably more critical because of its impact on days sales outstanding (DSO), cash flow and liquidity. The reason is one of control. In the AP cycle, we have more control in that we can always delay vendor payments to stretch our cash. But since one company’s payable is another’s receivable, if a customer were to do that to us, we could experience a cash crunch.

So how do we streamline invoice creation to ensure that customers pay in a timely manner and enable a healthy cash flow? The obvious tactic is the early payment discount. If standard payment terms are net 30 (i.e. payment is due 30 days after the invoice date) we can offer customers discounts for paying early. Typical early payment discounts run 2% if the customer pays the invoice within 10 days.

Incentives are great and can go a long way to reducing DSO and accelerating cash collection. However payment delays can often result from other problems such as hard to find invoice numbers, incorrect line items or sending the invoice to the wrong person. Invoice disputes, according to some studies, can tie up as much as 25% of a company’s accounts receivable. Frequently, disputes result from something as simple as line items on the invoice that are unclear or not recognized by the customer. In either case, it requires the accounting and purchasing staff to investigate the item in question by either matching it to their purchase orders or speaking directly with the person who received the product or service to make sure the item is valid and OK to pay. A simple line item dispute like this can hold up an entire invoice for days. Another cause of payment delays is invoices that are sent to the wrong person or address. Often, this happens when sales force automation and order management applications don’t share data with the accounting or billing system. Lost invoices are particularly problematic because the issuing company typically doesn’t detect the problem until the receivable trips an aging threshold or goes into collections.

Fortunately, there are steps companies can take to ensure invoices are completely accurate and issued in a timely manner. Many of these steps are manual, such as working with customers who have online billing websites. Though keying invoice data into the site may add to the workload, most of sites are front-ends to their accounting or supplier invoice systems and this ensures the invoice is both received properly and the data is entered into the customer’s accounting system.

The most effective way to speed up customer invoice processing and reducing errors is though an integrated software system that combines sales order entry, shipping notification, journal entry and invoice creation within a single, workflow-enabled application. This is preferable to developing custom integrations between stand alone accounting and customer relationship management systems because integrations are costly to develop and maintain. Conversely, an integrated system ensures several things. First, the sales people who interact with your customers are usually the first to know about changes in the customer’s accounts payable process and organization and they should be tasked with keeping the account and “bill to” information up to date. Systems that have automated workflows notify the shipping staff when a sales order is entered and in turn, notifies the accounting staff when the order ships. System notifications tell the accounting staff to create a journal entry and issue an invoice. In addition, the information contained in the sales order is used to populate the invoice. Line items, monetary amounts and “bill to” information as well as references to customer’s purchase order ensures that the invoice is accurate and spares the customer’s AP staff from having to perform more than cursory validation. Moreover, enabling the shipping notice trigger the customer invoicing process allows companies to issue invoices early which helps cut even more time off the payment cycle. These are examples of how an integrated order-to-cash process can save your accounting staff time, send invoices out quickly and with fewer errors and help speed up incoming payments to ensure you have strong cash flow and low DSO. In the next blog, I will discuss how the order-to-cash process works in SAP Business ByDesign along with a link to a short demo so you can see it in action.

Procure to Pay in SAP Business ByDesign

Jim Daddario — Fri, 15 Apr 2011 07:04:16 GMT

On March 25 I created a post about streamlining the supplier invoicing process and discussed how this can be accomplised in SAP Business ByDesign. As a follow up, I thought I'd walk you through the Procure-to-Pay process (or at least most of it) in a step-by-step description of how this is accomplished in SAP Business ByDesign. Before I dive into the details, I want to say what is unique about Business ByDesign is its process-centric approach. All point accounting systems enable the accounting staff to enter supplier invoices-either through manual entry or electronic scanning. However creating the invoice in the system (and the AP journal entry in the GL) misses some important steps in the process--steps that should be properly documented for process integrity and internal control purposes. Supplier invoicing that starts with the accounting entry still leaves a lot of manual work for the accounting staff--mainly searching for POs, verifying invoices, and securing approvals.

Let's walk through this in Business ByDesign. The process starts out with a requisition--either created by any employee from their Home workcenter--self services shopping view or other employees through a more formal requisition process. Built-in workflows automatically forward the request to the appropriate manager for approval and then on to the procurement people for request for quote creation and transmission to vendors. After a vendor is selected, the PO is issued. When goods are delivered, a workflow is sent to the original requester who confirms the correct goods or services have been received and a goods and services reciept is created in the system. Understand, that from the point the first requisition was created, this entire process is carried out and documented within ByDesign.

The accounting process--that is payment of the vendor invoice-- starts in the accountant's Supplier Invoicing Work Center/Invoice Entry view. The process is created from the work list of deliveries to be invoiced by highlighting the particular item and clicking on the "New Invoice" button. This brings up a new screen that's already prepopulated with the vendor's information and references to the purchase order. The accountant can further confirm what has taken place by checking the document flow--which provides a visual depiction of all the steps which have taken place to date. At this point, if there are discrepancies between the physical invoice and the data in Business ByDesign, the accountant can create a workflow--a clarification request and send it to the purchaser. Assuming the purchaser OKs the discrepancy, the accountant can check the document flow or the exceptions or actions log to verify that all steps have been completed properly and that she has received authorization to pay the invloice.

For those who haven't experienced AP processing first hand, you'll notice that this automated process avoided a lot of manual checking, looking for original POs or checking them in a separate system or spreadsheet. We've also avoided having to chase down the purchaser by email or phone calls to get the "OK to pay" and of course, the real advantage is every step and who completed it is documented in Business ByDesign. This is just one example of how ByD's process-centric approach can streamline accounting processes and ensure that proper internal controls have been followed.