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Five Things Every CFO Should Know About Spend Risk

Updated: Nov 6, 2023

Chief Financial Officers (CFOs) juggle many business responsibilities.

They spend considerable time focusing on maximizing performance and meeting quarterly sales targets compared to the risk of fraud, misuse of resources and general waste affecting their companies’ overall financial health.

However, expert CFOs are not fooled by a false sense of confidence when it comes to the spend risk endemic to our systems: Most organizations could add millions back to the bottom line every year if they better understood where spend risks occur organizationally and what they can do to avoid costly mistakes.

Here are five things every CFO should know about spend risk in their organization:

1. Duplicate payments can soar into the millions annually

There are many factors why duplicate payments happen, but regardless of how they originate, it’s at what rate that’s truly in question. Across enterprise corporations, the world’s most effective Accounts Payable (AP) departments encounter duplicates at a rate of .01 percent, which can still mean more than millions of dollars lost. For less effective AP teams (especially for middle-market and small businesses), the numbers only get worse.

To address duplicate payments more effectively, finance professionals must understand the three most common ways duplicates are issued: high volumes of transactions spread across multiple systems, a lack of vendor master vendor file integrity, and manual invoice processing.

Addressing these factors for duplicate payments can help CFOs save their organization millions annually.

2.Fraud runs at 5 percent of revenue on average

If a fraction of a percent lost to duplicates sounded alarming in raw figures, the possible impact of fraud must also be considered. According to the Report to the Nations: 2020 Global Study on Occupational Fraud and Abuse, as presented by the Association of Certified Fraud Examiners (ACFE), the average organization loses 5 percent of its revenue to fraud each year. In 2020, the Fortune 500 alone logged $14.2T in revenue and lost somewhere north of $700B to fraud.

To reduce fraud in your organization, the first important action to take is to identify the repeat offenders.

3.Repeat offenders are responsible for most of your fraud

In many organizations, a small group of employees are responsible for the majority of fraud, misuse and waste. Based on Oversight’s analysis of annual spend across its 200 enterprise partners, just 5 percent of employees were found to have generated more than 95 percent of all high-risk activity in travel and expense (T&E).

That same 5 percent of employees were found to be the most likely group responsible for fraud elsewhere in the organization. A recent ACFE study found that in 76 percent of cases of expense reimbursement fraud, the same employee was found to be engaged in additional forms of occupational fraud.

4.Remote work isn’t lending risk profiles any favors

With T&E spending down more than 50 percent in the wake of global travel restrictions, it would’ve been a reasonable expectation to plan for a reduction in fraud, waste and misuse. Unfortunately, the data tells a different story.

According to the 2021 Spend Insights Report, enterprises greatly underestimate the risk that remote work introduces to expense violations. In fact, last year, there was a 292 percent increase in T&E spend violation rates compared to the period before the pandemic, and 79 percent of all companies studied saw an increase in overall fraud in 2020.

5.The good news: You can stop the status quo

For most employees, compliance is trainable. Beyond the 5 percent of serially non-compliant employees are a second group; an additional 25 percent of employees engage in waste and misuse, but at far less frequent intervals. They are trainable, and by and large, they represent a group of unintentionally non-compliant employees.

How do the two groups get sorted out? By leveraging the power of patterns. It’s far more impactful to address an employee with a pattern of non-compliance over time than to seek information on any single instance. The resulting behavioral changes among the unintentionally non-compliant, once patterns are brought to their attention, tend to resolve within a matter of months and result in an average 70 percent reduction in T&E policy violations within the first year.

The same pattern-based approach can be used to all but close the book on duplicate payments. Imagine the financial result of a program that reclaimed the 5 percent of revenue lost to fraud and reduced duplicates to a number near zero, coinciding with a reduction in T&E policy violations by 70 percent.

Together, these data points add up to ROI on reducing fraud, misuse and waste. They also showcase an important idea about spend risk: While a significant sum of money is wasted annually in most large organizations, there is a way to significantly reduce it.

If you are a small or middle market business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced part-time CFO to help your company scale effectively, while improving profit margins and cash flows, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.

CFO Growth Advisors (CGA) specializes unique and highly effective growth strategies that are tailored to help companies grow more quickly and efficiently while improving sales & profit growth. Contact us to learn more.

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