Placing paper checks in the mail to vendors places your company at risk if you are placing them in the mail without Positive Pay.
Why don’t you just play Russian roulette with a full chamber or ride a motorcycle without a helmet? That may seem a little over the top, but the paper check is a risky way to submit payments to vendors.
What Can Happen?
A client contacted me recently to help unravel the mystery of the missing payment to one of his vendors. By researching his automated AP system and conferring with his third-party print vendor, we confirmed that the check had been produced and picked up by the post office for delivery. The check was eventually presented to a bank in Chicago for payment. The vendor was in North Carolina.
The bank in Chicago eventually released a photo to the FBI (yes, they had to get involved) of the person trying to cash the check. We had the chance to view the photo to confirm the person was not an employee of my client’s company. Thanks to using Positive Pay, they did not lose out on the amount of the check.
The incidents of check fraud are so frequent that law enforcement officials such as the FBI aren’t that interested in pursuing the “little guys;” they want to go after the big fish. Even though the check my client had cut was over $20,000 – big to him – it wasn’t worth pursuing just that instance to the FBI.
If you thought checks were old news, take a look at these statistics from the 2016 AFP Electronic Payments Fraud and Control Survey:
- Seventy-five percent of organizations that were victims of fraud attempts/attacks in 2016 experienced check fraud, a 4% increase over 2015.
- Positive pay continues to be the method most often used by organizations to guard against check fraud, used by 74 percent of organizations. Other methods include:
- Segregation of accounts (cited by 69 percent of respondents)
- Daily reconciliations and other internal processes (64 percent)
- Payee positive pay (41 percent)
- Lack of positive pay (cited by 23 percent of respondents) and clerical errors (18 percent) were two primary reasons for financial loss due to check fraud.
As the statistics show, checks continue to be the payment method most frequently targeted by those committing or attempting to commit fraud. One method companies use to fight check fraud is converting to electronic payments. In addition to the fraud prevention benefits, ePayments provide benefits such as:
- Ability to quickly process last-minute bill and payroll payments.
- Take advantage of early payment discounts, while paying closer to the due date.
- Improved client-vendor relationships due to rapid, more efficient payments.
- Eliminate the cost of printing and mailing paper checks, which can be as much as $9 per check.
Often implemented as an add-on to your existing financial system, the selection of vendors offering B2B ePayment solutions is huge. Barker Associates has seen the “deer-in-the-headlights” look that clients get when trying to sort through the options to choose the best solution for their company.
In addition, we have compiled an invaluable checklist that will guide you in the transformation of your payment process to select the best vendor for your circumstances.
I have had the opportunity to work with creative, tenacious entrepreneurs who add disruptive technology and new functionality to our world. I understand that as these wonderful people are creating, they do not always think about the best way to maintain the sales and customer infrastructure they need on the back end. A new court ruling could have implications for their business.
To help you all understand how the new sales tax laws could impact your business, I have deconstructed the new rulings to give you the bottom line on the fundamental requirements you must have in place to sleep peacefully, knowing you have the financial clarity to be prepared.
My experience working with the sale of a business, capital raise due diligence and audit prep gives me an understanding of complying with the new out-of-state sales tax requirements. I can see the look on your face when you ask your tax person, “What information do I need to understand my exposure to the new sales tax law, and they say, “It depends…”
Are Your Customers Out-of-State?
The recent ruling of the U.S. Supreme Court in the South Dakota v. Wayfair, Inc. case (June 21, 2018) has garnered lots of attention from business owners and finance professionals alike. The new law in South Dakota – if you sell a minimum of $100,000 in sales OR 200 transactions to South Dakota customers from anywhere in the US, you must collect and remit that sales tax based on South Dakota’s laws. There are thousands of technical tax issues and caveats that follow suit, with legislators expanding states’ legal ability to collect sales tax on sales executed anywhere in the United States; this should be more than enough to make you think it has got to be 5 o’clock somewhere.
Don’t be distracted trying to learn all the technical aspects of what is required; instead, work with tax professionals at a CPA firm or similar services. When you muster the courage to ask how to prepare for an impending sales tax audit, the person you are talking to is going to say – It depends.
Your tax person will ask many difficult questions, which you can’t answer to off the top of your head. I have worked with hundreds of companies going through audits at a national accounting firm, and I have been the CFO of both large and small entities. The wide range of systems and information about sales and customers that I have seen has been lackluster; in my estimate, a mere 15% of companies have the correct data on their customers organized in a way they would be able to answer questions when the tax professional says – It depends.
Be Ready for It Depends…
You can quickly feel overwhelmed just thinking about being subject to a sales tax audit for each state that you ship your product to. I’ve compiled the following list as a comprehensive guide to strength-testing your customer database, to see how it will hold up when this sales tax issue inevitably affects you.
1. Can you produce data that shows sales by customer that will reconcile with that year’s tax return submitted to the IRS? Or are you the type of business that does not consistently keep sales data that matches the corresponding financial data? Companies that are not subject to Sarbanes-Oxley, State regulatory filing requirements, or an annual audit do not keep sales data that matches their summary financial documents. In the case of the sale of the business, this becomes a due diligence issue, as the acquiring firm or investor cannot substantiate and analyze the sales to comfortably know what they are buying.
2. Can you dig into your customer data by state and by transaction? Can you determine the number of transactions by state? South Dakota’s new law states that if you have 200 transactions, you are subject to the collection and remittance of sales tax. There is NO dollar limit, or requirement on the 200 transactions. You could make 200 hair bows in your garage then send them to South Dakota, and you will still have to collect and remit sales tax.
3. Do your customer records consistently distinguish between billing and shipping addresses, and how easy is it to report? Is there a clear business rule and process that makes the shipping address distinct from the billing address?
4. If your business model is subscription services, but includes the sale of a product at the beginning of the relationship, can you segment the sale between product and service? For example, if you are a software-as-a-service, (SaaS), company and you sell hardware to run the service at the beginning of each sale, can you produce records that agree with the information in #1, to distinguish between product and service?
5. If your revenue is generated from maintenance and/or installation of items are you able to distinguish customer sales records between the sale of the product and the labor to install? The tax on labor for maintenance and/or labor in each State that charges Sales Tax is different, and you must be able to distinguish the difference between Labor and Parts in your operations, sales, and billing systems. Examples, where this applies, are large long-haul trucks, machinery, or pipelines used in construction, all of which include a sale followed by installation or maintenance.
Be Prepared with a Solid Infrastructure
Strategy discussions with your CPA must include an analysis of how to manage through these new regulations that are inevitably going to make their way through your state’s legislature. Politicians in states other than South Dakota are eager to push similar bills through their system, and it will be a popular but non-controversial pursuit. How exactly will each state implement such sales tax laws? My crystal ball says that only time will tell.
The bottom line is that, once again, I am giving another example of the cost of having the wrong infrastructure in your business. The costs related to sales tax compliance in this new world will be substantial. The good news is, with a solid data capture and reporting infrastructure, you can use the same data for analysis, reporting and audit preparation. Let’s work together to get you running your business with the financial clarity to know where you are headed!
Mindy Barker, CPA
As the CEO or CFO of your organization, when was the last time you looked at the commission payout to your lead sales staff? While you were razor-focused on increasing sales, did you also consider the full impact of the commission dollar in developing and executing the company sales plan?
The difference between an accountant and the strategic CFO (Chief Future Officer) is the accountant will calculate and pay whatever commission they are given, whereas the strategic CFO will help their CEO understand the entire journey of the commission dollar and its impact on the organization.
Before a commission plan is implemented, consider these five impacts:
- Who will have plan accountability and oversight to avoid fraud, abuse and plan obsolescence?
- What metrics will be used to measure/monitor that the plan drives the desired short and long-term results?
- How complicated is the plan to administer? Calculate? Pay out?
- Should there be a commission clawback provision?
- How does the plan fit into the overall compensation structure of the organization
If the journey of the commission dollar begins with a few conjectural quantitative analyses, you may avoid implementing a plan that does not achieve the desired outcome or has unintended effects. You can create a system that is full of opportunities to take advantage of the system and in some cases create fraud. If your idea on how to calculate commission is not fully vetted with several “what if” quantitative analyses, you could find yourself in a situation where you are having to revisit and revise the plan continually until you hit on a formula that works.
Consider the following “real life” scenarios:
The Scenario: The accounting department found they were spending days calculating the commission. The decision-makers who developed the plan were not aware of the mountain of work they created by failing to test the end-to-end process to administer the plan. Get your financial strategist involved to help think through the commission calculation. Test that the calculation will not be unreasonably time-consuming while you are creating the plan and before you communicate it to the sales team.
The Scenario: The commission plan may incent the sales personnel to bring on unprofitable or uncollectible revenue dollars. A commission plan that includes a clawback provision builds in responsibility so the commissioned sales person is a participating party to the business. The clawback items should include account receivable write offs, returns and credits and any other reductions of revenue that may occur with the customer. Without this, the sales person is just interested in getting the business on the books. The recent mortgage crisis is a great example of this, as the mortgage brokers selling the mortgages received the initial commission on the mortgage and had no clawback if the mortgagee defaulted on the mortgage.
The Scenario: The commission amount is so low, not only does it not incent any increased sales, it also wastes accounting infrastructure to administer. I recently learned of a retail establishment that began an incentive program to provide each employee $20 per month if the store met its monthly goal of thousands of dollars of sales for the month. The manager would ask the employees who had worked a 12-hour shift if they would like to stay later so they could make the extra sales to receive their incentive for the month. The exhausted employees laughed about this behind the managers back – the low bonus and high hours to earn it served as a disincentive to meet the sales goals. The store manager and accounting department were exerting energy to calculate a program that was irritating the customer-facing employees. This is not a good investment.
Take the time to evaluate new or changing commission programs by considering the full journey of the commission dollar. Make sure you are actually providing a healthy incentive to your sales professionals without creating an expensive or inadequate process to administer the commission payment.