Moderated by Sherry, Financial Technology Consultant at Hyperbots
Sherry: Hello, and welcome to all our viewers on CFO Insights. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have Shaun Walker here with me, who is a seasoned internal audit leader with a wealth of experience in driving risk management, compliance, and governance initiatives across diverse industries. Thank you so much for joining us today, Shaun. Today we’ll be talking about strategic management of late payment penalties for optimal cash conservation. To get us started, can you explain what late payment penalties are and why they are important for businesses?
Shaun Walker: Certainly. Late payment penalties are fees imposed by vendors when invoices are not paid within the agreed-upon payment terms. These penalties serve as a deterrent against delayed payments, ensuring that vendors maintain their cash flow and financial stability.
Sherry: And how do companies compute the cash conserved by avoiding late payment penalties?
Shaun Walker: To compute the cash conserved by avoiding late penalties, companies need to calculate the potential penalties they would incur if payments are delayed and compare this to their cost of capital. The key formula used is the annualized penalty rate, which helps determine whether it’s financially beneficial to pay on time or conserve cash by delaying the payments.
Sherry: Can you provide an example where the annualized penalty rate is higher than the cost of capital?
Shaun Walker: Sure. One scenario would be a 1.5% penalty after 30 days every month, with an 8% cost of capital. If the penalty percentage is 1.5% per month and the penalty period is 30 days, the annualized penalty rate comes out to 18%, while the cost of capital is 8%. In this case, it’s financially detrimental to incur the penalty, so paying on time is preferable to avoid higher penalty costs.
Sherry: And can you also provide an example where the annualized penalty rate is lower than the cost of capital?
Shaun Walker: Yes. For example, let’s say the penalty rate is 0.3% after 25 days, with a 10% cost of capital. If the penalty rate is 0.3% per month, the annualized penalty rate is 3.6%, while the cost of capital is 10%. Since 3.6% is less than 10%, incurring the penalty is advantageous. By delaying the payments, the company conserves cash that can be invested elsewhere at a higher return than the penalty cost.
Sherry: How does the cost of capital influence the decision to incur late payment penalties?
Shaun Walker: The cost of capital represents the company’s required return on its investments or the cost of borrowing funds. If the annualized penalty rate is greater than the cost of capital, incurring the penalty is financially detrimental. If the annualized penalty rate is lower than the cost of capital, incurring the penalty can be financially advantageous. Understanding this relationship helps CFOs make informed decisions about whether to pay early or delay payments to optimize cash flow.
Sherry: What strategies can companies use to minimize the impact of late payment penalties?
Shaun Walker: Companies can implement several strategies, including:
Leveraging tools like Hyperbots’ Payment AI Copilot helps analyze payment data, identify potential delays early, and recommend corrective actions.
Sherry: How does Hyperbots’ Payment AI Copilot assist in optimizing late payment penalties and cash conservation?
Shaun Walker: It offers multiple features, including:
These features enhance efficiency and accuracy in payment management.
Sherry: In what scenarios might a company choose to incur late payment penalties, and why?
Shaun Walker: Companies may choose to incur late payment penalties in several situations, such as:
Sherry: What advice would you give to other CFOs regarding the management of late payment penalties and cash conservation?
Shaun Walker: My advice would be:
Sherry: Thank you so much for joining us today, Shaun, and for such an insightful conversation.
Shaun Walker: Absolutely, thanks for having me.
Moderated by Kate, Financial Technology Advisor at Hyperbots
Kate: Hello, everyone. My name is Kate, and I’m a financial technology advisor here at Hyperbots. Today I’m absolutely thrilled to have the amazing Claudia Mejia with us. Hello, Claudia! How are you doing today?
Claudia Mejia: Hi Kate, nice to see you again.
Kate: Yeah, nice to meet you. It’s so wonderful to have you here. For those tuning in, Claudia is the managing director at Ikigai Edge Consulting. Today we are diving into a crucial topic, handling overcharged sales tax invoices. Let’s get started. So, Claudia, let me ask you the first question. What should a company’s first step be if a vendor has overcharged sales tax on an invoice?
Claudia Mejia: Well, the first step is to contact the vendor. Obviously, we want to have a really good relationship with vendors and ensure they have proper tax controls and follow tax regulations. That said, you contact the vendor, ask for a new invoice, and ensure the correct tax amount is applied. It’s essential that the taxes align with state and local regulations. You never want to underpay or overpay; you just want to pay what is right according to the state regulations. If you’ve been overcharged by whatever percentage, you simply request a reissued invoice.
Kate: That makes sense. Moving on, why is it best to ask the vendor to issue a corrected invoice rather than paying the overcharged tax amount?
Claudia Mejia: Well, you never want to overpay tax, right? It also creates a lot of administrative burden when trying to get a refund from the state or cleaning up those transactions. The cleaner way is to have accurate books on both sides, ensuring there’s no unnecessary cash flow leaving the company. It’s just important to have accurate records and follow regulations.
Kate: I completely agree with you on this. So, if the vendor is unable or unwilling to issue a corrected invoice, what options does the company have?
Claudia Mejia: The company can pay the invoice and then file a refund or credit with the state tax authority. Obviously, that’s not ideal. It involves administrative work and a lot of follow-ups to get the credit. You can get a refund if the state permits, but it’s a process you’d ideally want to avoid.
Kate: Understood. Coming to the next question, could you explain why overcharged sales tax might require state-level intervention if the vendor doesn’t correct the invoice?
Claudia Mejia: The state has the authority to issue a response. If the vendor doesn’t issue a new invoice, the buyer can request a refund directly from the state. The state can also intervene and respond to the vendor if needed. For the state to process refunds, documentation must be very well-presented, showing evidence of the overcharge.
Kate: That was very insightful. So, Claudia, why is it important to keep records of communication with the vendor and any refund requests made to the state?
Claudia Mejia: Well, as we’ve discussed before, it’s crucial to maintain clean records and transactions for audit and compliance purposes. Ideally, you’re proactive about addressing overcharges or undercharges. Documentation is key to making a case with the state if the issue isn’t resolved through the vendor. Having thorough records makes it much easier during audits, showing that you’ve been proactive in handling these processes.
Kate: I understand. We’ve reached almost the end of our discussion today. The last question is: What is the best long-term approach if overcharging becomes a recurring issue with a vendor?
Claudia Mejia: You always want to maintain a good relationship with your vendors. Communication is key. If a vendor has overcharged you multiple times, you need to understand what’s happening. Are their tax rates not updated in their systems? What controls do they have in place? You can have an honest and constructive conversation to address the issue. However, if the problem persists and solutions aren’t forthcoming, as a buyer, you may need to consider switching vendors. Recurring issues create administrative burdens, so it’s essential that vendors follow tax regulations and compliance requirements.
Kate: That’s a very interesting point. I agree with you on that. Thank you so much, Claudia, for joining us and sharing your insights, and a big thanks to all our listeners. I’ll see you soon. Have a great day ahead.
Claudia Mejia: Thank you, Kate. Nice to see you.
Kate: Nice to see you.
Moderated by Sherry, Digital Transformation Consultant at Hyperbots
Sherry: Hello and welcome to all of our viewers on CFO Insights. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have Shaun Walker here with me, who is a seasoned internal audit leader, with a wealth of experience in driving risk management, compliance, and governance initiatives across diverse industries. Thank you so much for joining us today, Shaun. We’re going to discuss some important aspects of closing purchase orders and how organizations can improve this process. Now let’s dive right in. Before we talk about the best practices, I wanted to first start by asking you about some of the most common challenges you encounter when closing purchase orders.
Shaun Walker: Sure. So in my experience, some of the main things would be invoices not being matched, there being partial deliveries, items being returned, sometimes discrepancies between goods not received, purchase orders, and often there may be difficult workflows. Depending on the amount or the dollar value of the invoice, there may be several different people that have to approve before getting to the final.
Sherry: Adding on to this challenge, how do unmatched invoices contribute to POs remaining open for extended periods, and what strategies can be used to address this issue?
Shaun Walker: One thing is being able to automatically match those invoices. Having a system implemented that does it where it’s not a manual process and speeds it up. Also, performing regular audits or reconciliations will also make the process more efficient.
Sherry: As we are already talking about strategies, what best practices can be adopted to manage blanket POs and ensure they do not remain open longer than necessary?
Shaun Walker: Being able to track receipts is one thing. Also, having clear end dates for blanket POs would be really good for closing them out in a timely manner.
Sherry: One of the most commonly faced problems in the industry is regarding service POs, which often face challenges in the receipt process. How can organizations effectively manage and close service POs?
Shaun Walker: One thing they can do is integrate a service receipt process within their ERP system. Depending on the company, they’ll have different ERP systems and functionality. However aligning those systems will allow for PO closure, and that will help with the process.
Sherry: About yet another obstacle, how can a lack of diligence in PO creation affect the PO closing process, and what steps can be taken to improve this?
Shaun Walker: A couple of examples, there might be difficulties or complications with closing POs, different delivery, and invoice staging. One of the things that we can do is implement standardized templates and have a detailed approval process, and that’ll enhance the accuracy of the POs as they’re being created.
Sherry: Since AI is taking the finance industry by storm, I have to ask, what role does AI play in improving the PO closing process? And what specific AI applications have proven effective?
Shaun Walker: The great thing with AI is it’s able to somehow predict the future. It can look at data and potential issues. With AI, we can optimize workflows, and create automatic matching, and automatic reconciliation as well.
Sherry: From your experience, can you share some examples of how vendor performance issues have impacted the PO closure? And what strategies can mitigate these issues?
Shaun Walker: Sometimes when products are being delivered, they might be delivered in incorrect quantities, or even if it is the right quantity, it might not be delivered at the right time. Having systems in place that track these things for you, creating less likelihood of human error, is the key to improving the invoicing process.
Sherry: Makes sense, Shaun. What recommendations do you have for organizations or our viewers looking to streamline their PO closing processes and reduce the number of open POs?
Shaun Walker: The main thing is looking at their ERP system to see if there are any updates for optimization. Having a system in place that can perform reconciliations, update workflows, and automatically match these invoices will increase the overall efficiency of the system and the invoice processing in an AP department.
Sherry: Thank you so much for such an insightful session, Shaun. Your views on such notable concerns in the industry are invaluable for organizations looking to enhance their PO closing processes.
Shaun Walker: Absolutely. Thank you so much.