The accounts receivables process is extremely long and excruciating, and while the accounts receivables are the most significant assets on the business financial statements, opportunities always exist to manage them more effectively and reduce the risks of any possible frauds – all the while generating higher profits.
Initially, the AR processes were designed to keep the bill collection process as organized as possible. However, as the B2B supply chains have become more complex, it has become a challenge to manage these processes effectively.
The chances of getting it wrong are increasing with the increased complexity of the supply chains today – poor management of invoice to cash collection process leads to the piling up of overdue invoices, which in turn, leads to cash flow problems. And, subsequently, as the control over the operating cash reduces, businesses need to rely heavily on expensive bank credit. When credit is available, this challenge can be managed to a certain extent. But, today, the access to bank credit can’t be taken for granted either. Also, let’s not forget that the time taken to turn AR into cash is directly connected to the financial health of the organization.
The complexities of the AR processes also expose it to the risk of many frauds. Ideally, organizations can adopt either of the three strategies to ensure better outcomes:
- Mandating payment terms across the supply chain. This can only be attempted when there is a significant imbalance in power between the supplier and the company. For instance, if a large retailer has a significant market share, it can dictate payment terms.
- Turning the AR processes into a core competency. This involves using a combination of top professionals backed by incredible procedures and processes.
- Using technology. Artificial Intelligence and machine learning to the rescue!
While a handful of companies may be in a position to implement the first strategy, most of them are part of others’ supply chains and hence are far away from executing it. The ongoing shortage and war for talented professionals imply that relying on the second strategy might not be a success, either.
How does technology help?
The first step towards reducing DSO involves sending out invoices in time. Then comes providing various payment options including cash, cheque, and electronic. While much focus is placed on digital today, a 2016 Electronic Payments Survey revealed that 44% of businesses still receive payments through cheque.
Not only do manual payments create time delays, but they also increase costs and security issues and hence increase the risk of fraud. In a recent survey, it was revealed that 71% of corporate respondents have experienced actual or attempted cheque fraud.
In such situations, using an ERP solution can help streamline transaction processing and manage DSOs better, but it falls short of the organization’s overall objective of increasing straight-through processing and improving productivity. While these solutions do automate a significant part of the O2C cycle, they don’t approach working capital management as a strategic discipline.
Automation of the AR process is essential to ensure overall working capital optimization.
This includes timely collection of dues from buyers, ensuring strong logistics management, and building correspondent bank relationships for rapid processing of receivables. The solution used to automate the account receivables processes would provide efficiency and productivity gains not only concerning realizing collections and reducing DSOs but also in enhancing supplier and dealer relationships.
Many of these benefits are typically attributed to non-AI powered solutions, so how can artificial intelligence help?
For starters, it can remove the risk of fraud and ensure higher collections by identifying when the client needs to be prodded about an overdue invoice and highlight the most effective way in which they should be contacted. It can also help in finding the payment method preferable to the client through analysis of their behavior data. This can largely eliminate the risks of fraudulent client transactions.
Let’s look at some of the most common accounts receivables frauds and how automation can help eliminate those:
1. Skimming Sales
Skimming refers to the theft of money before it has been officially recorded as received. Floating sales is as straightforward as stealing a receipt before it is registered. This leaves absolutely no trail of the transaction and therefore no scope of any suspicion. Further, the employees that perform this fraudulent activity have access to the official records, and hence, concealing their movement isn’t a task for them.
Automation will reduce the need for these human employees for recording the transactions. An automated AI-based system to take care of all the incoming deals will ensure that none of the payment is pocketed. The tracking of all the received invoices will also be more comfortable because these automated tools are capable of seamlessly handling tonnes of data.
2. Old Or Closed Accounts
Old or closed accounts are often not monitored as strictly as the active accounts. More often than not, these are the accounts where the customers tend to pay slowly. When the funds are received, the employee can simply pocket the money due to the lack of proper monitoring of these types of accounts.
In such a situation, if an automated system is brought into place, it can be set to keep a close watch on old/closed/inactive accounts. Further, it can also be automated to remind the clients for payment. The chances of the theft of payments received from any of the inactive client accounts will, therefore, be reduced drastically.
3. Fictitious Sales
Accounts receivable isn’t actual money in the bank. An employee can easily fabricate invoices to inflate the AR. But, who might this benefit? Afterall, an inflated invoice after payment is done doesn’t really mean anything.
However, this benefits salespeople who work on a commission, because an increase in AR will show an increase in sales. To make this scheme work, someone in control of ARs will have to be on the fraud. Red flags for this type of fraud are the invoices to fake customers or invoices that do not match the kind of business generated by a customer.
Automated systems can come in extremely handy to prevent this type of fraud from occurring. Every stage of the AR process will be automated – from invoicing to receiving the payments, and hence, there’ll be no question of inflated invoices. The automated ERP system would keep track of all the invoices without much human intervention.
4. Delays in Deposits
A person in the position of a financial controller is well aware of the payment collections and knows the checks and balances to commit fraud without getting caught. Delays in payment deposits can be a clear sign of potential fraud. If the employee goes ahead and receives the payments directly from customers, it can be easily hidden by writing a receipt of payment and creating a deposit ticket. This type of fraud means that the controller has to allow some of the payments to make it into the accounts. Otherwise, there will be a gap between what is in the bank account and what the bookkeeping states.
If an automated system is made to control the AR process, it will ensure that the employees are updating the system as and when they’re collecting any payment. The AI-based tool will help reduce the lag between the time of payment collection, and the time when the records are updated; thereby drastically reducing (if not eliminating) the frauds caused due to delays in deposits.
The bottom line…
The rapid advancements in AI and related technologies can have provided us with a lot of sophisticated tools. These tools offer a host of benefits, and fraud detection and prevention is just one of those benefits. Automation will increasingly pace up the whole AR process and reduce the turnaround time taken by the client to make the payment – by reminding them automatically, after a set interval of time. All in all, automation will help prevent the accounts receivables fraud and ensure a smoother working of the organization.