Costly Mistakes
by Howard R. Freedman, CPP - President of Financial Aid Consulting
Payroll is and always will be a service provider striving to accommodate those in need of money and information. The attempt to achieve the ideal in this exercise, however, will always be blocked by such real-world obstacles as inadvertent omissions, inaccuracies, and missing paperwork, which combine to render even the most efficient check-generating system imperfect. While companies strive to manage costs and quality, producing manual checks is expensive and forces payroll departments to operate in a fire-fighting mode, cutting manual checks to correct errors, omissions, and unknown problems discovered after the payroll run.
Manual checks can never be eliminated altogether. They will always be necessary for on-the-spot terminations, for example, and for stop payments and emergency advances. The challenge, rather, is to reduce the number of manual checks that must be cut and the expense associated with this activity to the absolute minimum.
Costs of a Payroll Check
The cost of system-generated payroll checks will vary depending on the size of the payroll, internal and external operating costs, software, and frequency and complexity of the payroll, among other factors. The final determinant of costs, however, is volume. Economies of scale allow the reduction in per-unit cost of large-volume check runs. Manual checks, by contrast, are a customized product involving dedicated research and labor and thus a much higher unit cost than their mass-produced counterparts.
The actual cost of a manual check depends on a number of variables, including the complexity of the problem requiring customization and the consequent effort and time required to research and resolve the issue. Let's look at an example.
Assume that an employee worked 25 hours of overtime in addition to his normal 40 hours during a weekly payroll period. The employee's timesheet was sent to payroll after his supervisor approved it on Monday. Since the payroll cutoff date was the preceding Friday, the overtime information did not make it into the system in time for the overtime hours to be reflected in the employee's next check. The employee notices the shortage and contacts his supervisor who in turn contacts payroll. Sound familiar? Now let's list the steps involved in remediating the situation and issuing a new check and assign a time value to each:
Employee discovers error (2 minutes); he and supervisor meet (8 minutes). Supervisor calls payroll (5 minutes), which researches the problem and documents its cause (10 minutes). Payroll then explains to the supervisor that the timesheet was received late; supervisor disagrees and demands check be reissued (10 minutes). Payroll requires a written manager request and approval for new check (10 minutes). Department supervisor prepares request for manager approval (10 minutes). Payroll receives approved request, prepares back-up for manual check (10 minutes), calculates pay and taxes (10 minutes), and records and logs information in payroll control logs (6 minutes). Payroll supervisor reviews and approves process (3 minutes). Payroll prints the check and gives it to the signer (2 minutes), then notifies the department supervisor (5 minutes). Employee signs for the check (10 minutes) and makes a special trip to the bank to deposit it (20 minutes). Payroll updates the payroll system (5 minutes) and audits the updates (2 minutes), then sends them to treasury (5 minutes). Payroll then reconciles its deposits (5 minutes) and batches and files the input (5 minutes). Finance reconciles the account (5 minutes).
So far, time spent is 148 minutes. Assuming that the average compensation (salary and benefits) of the nonmanagerial employees involved is $16.00 an hour and of the managers $28.00 an hour, the cost so far is $48.71. There could be additional costs as well associated with stop payments or reversals (say 10 minutes), Code Sec. 401(k) problems (20 minutes), direct deposit problems (15 minutes), tax deposit ACH (20 minutes), and general ledger accruals (20 minutes). These new charges would add another $22.95 to the cost of reissuing the check, bringing the total to $71.66, based on almost four full person-hours (233 minutes). This is for one reissued check and does not include any bank charges that might be involved (stop payment, for example). Multiply this by the hundreds of custom checks you write each year — because of mail problems, misplaced paperwork, late increases, unreviewed internal edits, termination, new-hire problems, and the countless other causes — and the scope of the problem becomes clear.
What Can Be Done About It?
Use the model I've given you to quantify your check costs, so you can make clear to the organization at large — and particularly to senior management — the importance of the problem. Once the scope of the problem is generally understood, develop cross-functional teams to address the issue and offer solutions, including educational efforts. As possible actions, you might suggest that offenses be recorded for supervisory evaluations and that offending departments be charged back for costs; ongoing statistics should be maintained of repeat offenders. You should also develop flexible deadlines and select user-friendly systems to deal with exceptions. You should certainly ensure that you have adequate policies in place regarding manual checks, turnaround time, and assigning financial responsibility for errors.
© 2008 Thomson/RIA. All rights reserved.
