The competitive landscape remains tough. Over the past five years, retail margins have been shrinking by two to three percentage points per year, or by as much as five to six percentage points for some verticals. Heightened pressure to maintain profitability has forced retail businesses to invest in technology for their front-end bricks and mortar or online stores to keep up with shifting customer behavior and digital innovation. In a McKinsey report, 32% of fashion respondents considered digital the biggest opportunity for the retail industry.
However, investing in front-end technology is often made at the expense of back-end processes, leaving internal controls vulnerable. Although potentially less glamorous than chasing revenue, internal checks and audits ensure efficient operations, compliance to accounting rules for accurate financial reporting, and adherence to applicable laws and regulations. For example, conducting an inventory count and verifying a three-way match between invoices, delivery receipts, and purchase orders are common forms of internal control.
Performed effectively, internal controls add to the bottom line and allow businesses to scale and grow faster. In this article, we’ll explore challenges specific to retail and how to solve accounts payable control and compliance issues.
Control Challenges in Retail
The pandemic highlighted operational challenges that came under more stress, but using legacy systems has been an issue even before COVID-19. Among the key challenges in transforming risk management in retail include the following:
Inventory and Accounting errors
Retailers deal with a high volume of vendors and transactions, potentially for both direct and indirect spend. The rise of surcharges added to invoices further complicates the invoices issued to retailers, obscuring the true cost of goods. Ensuing confusion could lead to missed invoices, errors, or duplications.
Keeping track of costs has always been a challenge given the vast amount of inputs. In 2019, apparel retailer Superdry reported a £3.9m error in inventory accounting due to an overly complex process for assigning freight, duties, transportation, and other costs to distribution centers.
Retailers are constantly at risk for accounting-related errors. In fact, 50% of retailers report being overbilled over the past year. Most retailers see value leakage in third-party billing as a growing concern.
Limited Resources
About 44% of retailers struggle with limited compliance staff, and given the current tight labor market, increasing staff can be costly. Talent issues and employee turnover are significant threats to any business. Retaining staff can be difficult if they are burdened with manual tasks that automation can solve.
According to one survey, only 25% of companies use software solutions to prepare for audits and assessments — a primary challenge is tedious and manual evidence collection. Retailers who rely solely on manual documentation require additional resources and potentially find more issues.
Third-Party Risks
Enterprises face a serious challenge in mitigating third-party risks, with 71% surveyed reporting significant supply chain disruption, monetary loss, or reputational damage during a third-party incident in the last 3 years. Constant shifts in supply chains expose retailers to risks when internal controls can’t keep up with rapid change. Some of these risks have grown because retailers have had to shift supply chains to new geographies or accelerate vendor onboarding.
Making sure that vendors bill accurately and are compliant with industry certifications or other required policies can be a struggle. As vendor networks continue to grow in size and complexity, ongoing assessment and monitoring also become critical.
How to Improve Compliance in Retail
Aligning internal controls with business goals leads to higher efficiency, improved performance, greater agility, and lower control costs. Here are some ways to enable synergies and improve compliance in retail.
Eliminate Redundant Controls
More manual controls don’t necessarily reduce risks – not only do they require additional resources, but such “over-controlled environments” can often be counterproductive and still have risk gaps, according to Ernst and Young. They suggest the automate, centralize, and eliminate approach for internal controls to reduce the burden on process owners, align controls with business risks, and control compliance costs. In a case study for an international specialty retailer, this approach reduced control burdens by 27%, driving cost savings while tightening safeguards against risks.
The accounting error that Superdry faced highlights how reliance on several, but ineffective controls like manual reconciliation can be insufficient. As a result, the company initiated a digital transformation by adding built-in controls along with increasing automation and standardization. To achieve a sustainable control environment, Superdry has implemented SoftCo’s automated procure-to-pay system.
With procure-to-pay automation, retailers can properly account for the true cost of goods, including freight, custom dues, and other costs for moving inventory – reducing the chance for significant errors to slip through controls.
Gain Complete Visibility and Control
Mapping out weaknesses in procure-to-pay processes and identifying issues early allows companies to mitigate risks while still achieving business goals. An automation solution with a comprehensive view of the P2P process enables real-time monitoring and control of financial risks. In addition, dramatically streamlining existing procure-to-pay workflows can speed up payments while reducing the potential for error or fraud. In the process, real-time data insights offer advanced reporting capabilities that improve decision-making.
Collaborate Firm-wide
Addressing internal control risks requires a coordinated, enterprise-wide approach. Having a cloud-based automated procure-to-pay solution creates a sustainable platform for data that integrates with accounting and ERP systems. This offers complete spend transparency, full audit trails, and tighter cash flow control.
Streamline Vendor Management
A single automated system for purchase orders from procurement and invoice submissions from vendors, improves vendor management. High volumes of invoices can be auto-matched rapidly without significant manual intervention. With swift reconciliation, discrepancies are addressed quickly, resulting in faster payments to vendors. AP automation can result in 70% fewer vendor queries. A strong vendor management process also supports faster onboarding and ongoing monitoring of compliance obligations.
Designing Next-Generation Controls for Retail
The business case for automation aided by artificial intelligence is clear. Apparel companies that embed artificial intelligence in business models could see a 118% increase in cash flow by 2030, while those that lag behind could see a 23% relevant decline.
Thriving in a hypercompetitive global market requires using intelligent automation to boost compliance and risk management. Built-in internal controls are an essential pillar of the tech foundation for companies primed for growth.
The retail industry has little room for expensive, time-consuming, error-prone, and obsolete manual processes. Effective risk management in the retail industry hinges on two critical aspects – people and technology. As retailers go digital, so should finance teams and their internal controls.
