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The regulatory environment surrounding sales and use tax is much more complex than most people realize…at least until you consider that there are over 13,000 taxing authorities in the USA, and that they made over 1400 rate changes in 2007. Jurisdictional boundaries are constantly changing, too. Incorporated municipalities regularly annex adjacent tracts of land, regional school districts often add or drop students from neighboring municipalities and so forth. And while a jurisdiction’s sales tax rate may be quoted as 6 percent, the price point at which the next penny of tax is collected can vary from the first dollar to the second and even beyond.
How a product is used can also affect its taxability and multiple layers of taxing authorities create additional variables. The typical fortune 500 corporation will offer over 1000 unique products and services, and will file returns each month with more than 74 different tax jurisdictions. Even if everything you sell is for resale, you still need to validate sales tax exemption certificates. In order to get it right and to then process all the filings requires significant dedicated resources.
Dealing with government auditors is another drain on resources. With state and local jurisdictions strapped for cash, government revenue departments are increasingly turning to audits to boost cash flow. The dollars involved are huge. Thirty-five states rely on sales tax for over 25 percent of revenues. The states also claim that e-commerce reduced sales taxes by a whopping $21.5 billion last year, and they are finding innovative ways to get their piece of that pie. For example, New York State has enacted the so called ‘Amazon Tax,’ which attributes nexus to online stores that merely get customer referrals from other websites based in New York.
As a result, businesses are turning to Tax Compliance Automation (TCA) solutions to address the complexity of their sales and use tax environments. TCA provides a set of technologies that ensure the accurate calculation and timely reporting of sales and use tax. Central to TCA solutions is a tax engine that addresses buyer and seller types, product taxability, order amount, tax jurisdiction identification and tax rates. The technology is supported by managed services that provide continuous rate updates and ‘geo-coding’ to correctly identify buyer and seller nexus. Together, software supported by managed services, enterprises are finding TCA solutions dramatically increase accuracy while reducing overhead.
Credit departments are awash in paper. Consequently, credit analysts and collectors spend an inordinate amount of time filing documents, searching paper files for documents, distributing documents, copying data from documents, waiting for others to send them documents, reprinting invoices and other documents, and on and on and on.Paper is too often used to bridge the gaps in the order-to-cash process: customer to vendor, vendor to customer, bank to vendor…and even between internal systems: service tickets to billing, returned merchandise to accounting, disputed Invoices/payments to the problem owner, Sales Force Automation to AR Automation, between multiple business units with their own unique systems, and so on.Paper creates inefficiencies because it is timely to process, is subject to getting lost, is expensive to store, and can require transcription of its contents which is redundant and subject to errors. In addition, paper is not as secure as electronic archives and paper trails are not as comprehensive as well designed electronic footprints.The good news for credit executives is that technology has finally reached the point where paper can largely be eliminated from the order-to-cash process. Receivables Document Management (RDM) marks the convergence of Enterprise Content Management (ECM) and Receivables and Collection Management (RCM). RDM unites the strategic workflow and automated processing of RCM with the capture, storage, retrieval, and distribution capabilities of ECM. RDM thus helps to provide complete transactional transparency across the entire order-to-cash process.By using RDM technologies, credit departments are not only realizing substantial productivity gains and cost savings, but are also able to focus more of their attention on critical credit and collection issues. Quite simply, the efficiency and visibility that derive from RDM enable credit executives to better mitigate risk, which is job number one in these challenging economic times.
In the two years since we first did an in depth study of Credit and Collection Technology, I have been extremely impressed by the strides the vendors have made in filling out their solutions. B2B credit and collections is a much more complicated process than most people think, and I am including C-level executives in that assessment. With multiple points of interaction between buyer and vendor, any number of things can affect the order-to-cash process. Moreover, if something goes wrong it is bound to turn up during settlement - no wonder collectors sometimes feel all they ever do is clean up after the party. The point is, the Receivables and Collections Management (RCM) vendors have now gotten a very good handle on all the little details and exceptions that impact cash flow.
Two years ago, the RCM vendors were still working on filling out their solutions. Most of them were strong in only two or three of the six prime segments that make up the RCM universe. For example, one vendor would be good at collections, disputes and cash applications while another focused on primarily on risk management and collections.
While the vendors each have a unique approach to RCM, they all now offer expanded solutions that address most, if not all, of the RCM spectrum. That’s good news for trade creditors, who can now implement an end-to-end order-to-cash solution - more straight through processing, better analytics, and fewer process disconnects all translate into dramatically higher productivity and cash flow.
The introduction of Mastercard’s Payment Gateway, coupled with JPMorgan/Xign’s AP Trac into the Accounts Payable and B2b world carries with it a striking promise, the promise of Buyer Initiated Payments (BIP).
In the traditional card transaction, the seller/vendor/supplier end is the initiating event that starts the payment process. In BIP, the transaction is initiated by the Buyer. Some in the industry call this Accounts Payable Purchasing Card or AP P-Card or Buyer Push Card. Let me give an extremely contrived example to illustrate the difference in a buyer initiated payment:
When you’re buying your triple Venti nonfat half-caff soy latte with 1 pump mocha, 1 pump caramel and 1 pump peppermint (if it’s the holiday season), low foam, non-fat whip, steamed milk at 185 degrees, 2 packets of Splenda (shaken, not stirred), 3 drops of half & half and an extra protective sleeve, coffee drink from Starbucks, the moment the gears of payment begin is when you swipe your card. The card company pays Starbucks, and you pay the card company, plus interest, when Starbucks alerts the card company that you have made the purchase.
Buyer Initiated Payments turns the traditional seller initiated transaction workflow on its head - The example being, in a BIP transaction, you could, from home, enter your card info, tell it to send $4.36 to Starbucks, head to your favorite Seattle-inspired bistro, and have your coffee waiting. In the BIP world, once the invoice is approved on the buyers system (after Starbucks Shipped your coffee) the AP accounting system sends the payment directly to the sellers merchant processor.
BIP promises to lower “transit†time of payment. Now, this is obviously contrived - But imagine if you weren’t ordering just one drink, but 10,000, and Starbucks wasn’t going to ship your 10,000 drinks (quick math - 10,000 x $4.36 = $43,600, a considerable chunk of change). Well, if that normal check payment process used to take 6 days, you, the buyer, could either initiate the purchase and payment ahead or pay for the drinks upon reciept to ensure that this check payment delay time is all but eliminated.
Equally (if not more) important, the BIP system should provide a far more automated transaction, visibility towards the remittance details and increased rebates. That is to say, a BIP-based system is the first step towards allowing the buyer to achieve a discount in the form of a rebate from the card issuer.
Challenges
Of course, there are several major issues here. First, this discount came out of the pocket of the seller in the form of a merchant discount fee or “interchangeâ€. Further, unlike a typical card Seller Initiated Transaction, the buyer could in theory pay the invoice 30 days after it was due and still get a “discountâ€. The seller would be very happy about that, eh?
Further both you the buyer and the supplier (e.g. Starbucks) have to be in a system that automatically initiates delivery of goods or services. So both the supplier and the buyer have to be on the system. In the past, these partnerships have been difficult to achieve on a large scale.
Simultaneously, supply chain financing is a major part of this whole operation. What good is the regular usage of BIP if the buyer doesn’t have the funds? Generally, the advantage of vendor/supplier-initiated-payments is that it allows the use of traditional systems of purchasing card including credit-based cards. Payment, in this system, can happen later because billing takes place after financing has taken place. E.g., Starbucks is paid by the card company, and the buyer pays off the card. In the BIP scheme, the financier must be in a position to provide financing at the point of invoice approval.
The technology required to make these payment systems work together is both sophisticated and until now unproven. However, the intersection of tools like AP Trac, Mastercard, and JPMorgan are promising the possibility of increased use of cards, more while the seller gets reduced DSO, level-three data capture, and 6 Sigma analytic tools. Not bad for a day at the coffee shop.
Have you noticed that the U.S. is a nation of contradictions? This country came up with electricity, the silicon chip, the personal computer, Amazon.com, the iPod, Google, and reality TV (OK, so that’s a bad example). We have very active capital markets. We launch businesses and have active venture capital to fund them. We have entrepreneurs everywhere.
And yet when it comes to financial transactions, we are in the dark ages. Take, for example, the use of debit cards. They are just starting to be prominent in the U.S. But I’ve spent a fair amount of time in Europe, and the dominance of debit cards and “smart cards” that keep account details on the card and ensure authentication - they’re everywhere! In fact, they were everywhere 5 years ago.
For B2B transactions, well, the situation is even worse than with B2C transactions. Depending on what numbers you believe, there are something like 70% to 80% of both the invoices and checks sent using paper through the postal mail in the U.S. today. Almost all of these invoices are being generated from a computer program and being sent to another business that re-types them into another computer program, which then leads accounts payables teams through a matching and approval process. From there, paper checks are generated, which again are manually entered into the vendor’s originating accounting system. Obviously, this cycle is ugly and expensive.
Let’s contrast this with Europe: in preparing for the launch of the Euro, the banks and the Enterprise Resource Planning (ERP) system vendors got together and said “let’s agree on some sample file formats to exchange invoices and payments.” Guess what - it works. Something like 70%+ of invoices in Europe go electronic - either as data or at least by email with a PDF attachment. Also, most invoices in Europe contain payment details, so the buyer can pay an invoice with the equivalent of an ACH payment. And unlike the U.S. banks, European banks can carry remittance data with the payment, to the vendor can apply the electronic cash.
There are many firms trying to fix this problem, including the company I co-founded, Transcepta (www.transcepta.com). Part of the burden is on companies like ours to help make it easier for U.S. businesses to come into the modern age with regard to A/R and A/P processes. But it’s also important that those businesses out there, most of which are both vendors and suppliers, get behind a go-electronic initiative. It makes business sense. It saves trees. And it’s the right thing to do!
Editor’s note | The following article was submitted to us by Abe WalkingBear, and can be viewed in full here. It comes from our previous discussion on Buyer Initiated Payments.
Phoenix, AZ:
It happened again.
Following my delivery of an after lunch presentation titled “What Top Business Managers Don’t Know About Credit and How It Hurts Their Company” several people approached me and said that they had planned to eat and then skip out on my presentation, but they were sure glad they hadn’t.
This group of distribution and manufacturing executives were no different than many other top business managers who still equate Credit with accounting and with risk management.
They learned a different way…and went away with their thinking changed.
In his book, The Structure of Scientific Revolutions, first published in 1962..Thomas Kuhn defines a paradigm as an accepted set of givens which provide a model problem and a successful solution that works for that time. And as things change the old paradigm becomes incompatible with the new reality. New knowledge in time brings about a shift, a Paradigm Shift.
The Old Credit Paradigm
The folks in Phoenix., like many other business executives, were caught up in thinking about credit in much the same way as their fathers and grandfathers did in the 1950s…but today’s world is very different and the old risk management/accounting thinking must give way to a new understanding if modern companies are to utilize their credit area to its fullest profit potential.
The 1950’s were very much defined by W.W.II which preceded the 50s. It was a time of pent up demand and growing demand for goods and services, it was a time of Americans having money in the bank or in war bonds, it was a time of great social change worldwide and a time of limited competition .
In a seller’s market, with people standing in line to buy things, credit was seen as a privilege, as a favor to some and not others. In such a business environment the focus was rightly placed on avoiding the risk of customers failing to pay, of incurring bad debt losses. DSO, average turntime on the A/R, and % bad debt were appropriate performance measurements when the goal was risk management .
Credit In Today’s World
The shortages of the 50s are long gone.
In today’s world of rapid change, of mergers, of huge international companies and of increasing local small businesses, of big box stores and of cyber competition the old risk management paradigm is a handicap.
Last year my colleague Declan Flood , Executive Director of the IICM http://www.iicm.ie/ , visited America for the first time. Prior to coming to America I said to him that like Ireland, it is a land filled with mini-storage warehouses, of basements, attics, garages and storage sheds crammed full of stuff…only more so. The shortages of the 50s are long gone, along with people having savings. Monkeys? We didn’t evolve from monkeys…but from pack rats.
In 2007 things are very different from the way they were in the 50s.
In order to compete modern companies must have quality in their products and services and quality in the way they carry out business functions. A lack of quality in a business will lead to increased cost of doing business for everyone involved in a transaction and in time to the failure of a company to survive, much less turn a profit.
The Profit System of B2B Credit
While the following explanation of the Profit System of B2B Credit addresses the purpose, the policies and lightly touches on people requirements and performance measurements of commercial or B2B credit; the same concepts apply to B2C or consumer credit.
However, a major difference between extending credit to consumers and to businesses is that there are many more consumers than there are businesses. And while, almost across the board, consumer customer service levels continue to hit all time lows; companies can and will stop buying from a supplier/vendor who abuses them, who drives up their cost of doing business…as will the next generation of managers. Long after the memory of failure fades the bitter taste lingers on.
Purpose:
The only reason for a business to incur the additional costs that go with extending credit to their customers is to get a profitable sale that would otherwise be lost.
If business customers have the ability and wiliness to pay up front extending credit should not be considered. If they can cut a check with the order… grab it.
Credit is a lubricant of commerce and allows for the expanded movement of products and services.
Policies:
Every business function can be broken down to its major components…every business function.
Understandable and thereby achievable goals can then be established for each of the major components. Policies are goal driven guidelines.
The major components for the credit function are credit approval, past due A/R management (Not Collections) and internal communications.
If credit is extended to get profitable sales that would otherwise be lost then it follows that the goal of credit approval should be to find a way to say yes to profitable sales while remaining confident of payment.
The vast majority of past due customers are not out to avoid payment. Past due A/R Management is not collections, the enforcement of payment, it is the process of completing the sale.
The goal of past due A/R Management is to keep customers current …and buying. The most profitable sales are often repeat sales to the same customers.
In the course of approving new credit customers and in resolving the many things that can and do go wrong in B2B commerce, the credit function interfaces with customers, vendors, and with many different internal departments.
This places the credit function in an ideal position to identify and communicate areas of opportunity for improvement which in turn leads to the constant improvement of how things are done. And that leads to controlling the cost of doing business for everyone involved.
People Requirements and Performance Measurements:
First and foremost the people carrying out the credit function must be able to communicate. Before you ask for a resume ask for a ten minute telephone interview.
Measure the performance of credit approval based on the % of applied for dollars successfully approved…or even exceeded.
Measure the performance of past due A/R Management based on % current to 30 days past due..and remember this is a general guideline and there are always possibilities for profitable exceptions.
Measure the performance of Internal Communications based on the number of improvements identified.
Summary
Whatever we focus on and we give energy to, grows.
Business executives who continue to think of their credit function as a negative, as a cost center, as a necessary evil and as the ugly step-child of accounting …do so at their own risk.
And they may hurry through lunch and miss out on the desert.
Abe WalkingBear Sanchez is an International Speaker / Trainer / Consultant on the subject of cash flow / sales enhancement and business knowledge organization and use. Founder and President of www.armg-usa.com , WalkingBear has authored hundreds of business articles, has worked with numerous companies in a wide range of industries since 1982 and has spoken at many venues including the Shakespeare Globe Theater in London. A hard hitting and fast paced speaker, he brings life and energy to a critical business function whose true potential has yet to be realized by most businesses.
Atradius, Irish Institute of Credit Management, Cimex Training, Export Development Canada, Vistage, CU, CSU, Texas A&M, National Association of Credit Management - Midwest, HTDA, BCFM, Poli Hi Solidur, Skinner Nurseries, Deardens, Rain Bird, STAFDA, IBM, University of Industrial Distribution, are but a few of the groups, schools, companies and associations for whom WalkingBear has conducted programs.
WalkingBear can be reached through:
A/R Management Group, Inc.
P.O. Box 457
Canon City, CO 81215
(719) 276-0595
email: abe@armg-usa.com www.armg-usa.com
In a recent PayStream analyst briefing with Frank Davis, Managing Director of Sales & Marketing for PurchasingNet, Frank identified the greatest challenge he’s facing in marketing the new dynamic discounting module, Early Payment Discount Management, for PNet: Poor Cash Flow. Here’s what we uncovered:
Despite the promise that dynamic early-pay discounts hold for dramatic improvements in Supply Chain Finance management , the reality is that many companies struggle to pay their suppliers on-time. Indeed, the idea of moving a payment “forward,” whether in an automated on-line environment such as PNet’s Invoice Management solution, or any AP Automation solution, is not attractive for all buyers.
In our opinion, we don’t think there will be enough demand from corporates to trigger a wide-scale shift in corporate culture until we see more banks and finance companies start to advance funds on behalf of their corporate payers, much the way they do for corporate Purchasing Card purchases. In fact, the sort of adoption rates that will make large-scale adoption of dynamic payables a “best-practice†amongst the mainstream of companies is dependent on the development of the credit conduits to make this possible — likely three or more years off.
Regardless, listening to Mr. Davis and his associate Erinn Tarpey, Marketing Manager of PurchasingNet, two things become quite clear: First, they are passionate about their new PNet features and approach it intelligently and with a sound business strategy — supporting the evolution of thier customers. Second, that they see this sort of dynamic payables relationship along the supply chain as the future of supplier-to-business transactions. And they represent a company that has built the tools to accomplish it over the past 27 years. PNet really knows where this market is headed and is trying to shape the future. PNet has a very impressive team.
Offers suppliers the flexibility of discounting some or all of their receivables, eliminating the need to utilize high-cost financing options like factoring or asset-based lending to obtain cash liquidity and stronger balance sheet positions. It also mitigates the uncertainty surrounding the timing and amount of payments, allowing for superior cash flow forecasting capabilities.
Theoretically, dynamic discounting is a simple and obvious idea: That a supplier can allow its buyers to, in the event of various cash-flow and liquidity needs, elect to change payment timing “dynamically” without negotiation. A predefined algorithm calculates a discount on the supplier’s end as a “fee” for moving the original payment date forward, based on the difference in days from the original date to the new date.
The problem is that buyers and suppliers need new collaborative tools like PNet to make the process efficient and entirely software driven. The lynch-pin of dynamic discounting is that there are no negotiations on a new price, rather a flexible arrangement which allows for a supplier to be paid early based on their current needs.
Mr. Davis and Mss. Tarpey are certainly convinced that they are moving in that direction with their dynamic payables module for PNet, developed in-house in coordination with Liz Claiborne, a client. The module provides a multitude of tools for a supplier’s business partners, including a fully functional web-based environment. We were very impressed with PNet’s vision and aggressiveness in getting deeper into the business of AP Automation.
Until recently, automation efforts in the accounts payable area were focused on invoice and payment management and the operational benefits that technology delivers – cost containment and productivity enhancement. However, all this is changing. Innovative financial managers are now recognizing AP automation as an area that offers significant strategic benefits as well - the ability to accelerate invoice processing to enhance discount capture, strengthen working capital positions and build stronger trading partner relationships.
Over the years, Web invoicing solutions have emerged to facilitate external exchange of transaction-related information and funds between buyers and suppliers. On the other hand, front-end imaging and workflow solutions have evolved to meet organizations’ internal needs around invoice receipt and management. But Web invoicing and front-end imaging solutions both have the same ultimate goal - eliminate paper from transactions. They simply have evolved from different starting points.
It seems fitting that the first post to Paystream Voices is one that identifies the extraordinary importance of automation technologies. A new Paystream Advisors Report has identified an enormous amount of untapped capital stagnating in Fortune 1000 companies, that could be freed up with the implementation of Receivables and Collections Management (RCM) automation solutions. David Schmidt, a contributing author on this blog, and a senior analyst for Paystream Advisors, says that “Companies that don’t automate their financial supply chain and continue to rely on manual quote-to-cash processing will find themselves at a competitive disadvantage. RCM technology provides transformational – not incremental – productivity gains for those organizations.â€