AP Process Cost: A Critical Metric of F and A

Oliver Lee
August 3, 2022
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4
 Mins Read

Improving AP Productivity is Critical for CFOs:

A successful business function requires that effective management of working capital is enabled so that the ratio of working assets-current liabilities is maintained positively. This is done by careful planning of investments such as short-term payments for short-term needs and long-term payments for long-term needs, appropriately. This helps to ensure that risks and costs are kept at a minimal level.  The AP is critical in this. The productivity and efficiency of the AP process in organizations will definitely affect financial management. Enhancing productivity requires that the AP processes be streamlined, monitored, and tweaked to ensure they perform at their peak level.

How can a company monitor its AP process productivity? The use of key critical metrics can help in determining the efficiency of your AP process. These metrics can help you to benchmark your AP performance against others and will provide you with valuable information on current AP processes. The results of these monitoring procedures can provide valuable information on where you are experiencing a shortfall in operational standards and would help you to take appropriate corrective measures. An experienced Finance and Accounting BPO outsourcing service provider would provide you guidance on how to manage your AP processes.

The AP Process Cost:

One of the key metrics that helps you to evaluate the quality and productivity of your AP Process is the AP Process Cost. This metric is used to measure the cost per invoice processed. It is calculated as follows:

A/P Process Cost = Direct monthly cost of accounts payable operation (excluding corporate overhead)/ number of invoices processed per month.

The AP Process Cost metric is a basic yet extremely important metric but presents certain challenges. It is difficult to assess usually as one needs to measure the cost of all the process steps involved in the AP processing. The process steps that are taken into account for estimating this cost includes routing, mail room activities, copying, and follow-up. However, the value of AP Process Cost is a reflection of business efficiency. A high AP Process Cost indicates inefficiency and hampered productivity. Hence, this must be carefully monitored and measures have to be taken to keep this low.

Research by Pay stream advisors has shown that one of the biggest problems nagging AP process productivity is an excessive dependence on people and paper-based invoice processing. The costs of invoicing increased because of the use of paper, usage of inefficient routing strategies, misplacement of paper, inaccuracies, and mistakes on invoices. Automating AP processes can benefit organizations because of decreased processing costs, increasing visibility of outstanding invoices, and quicker processing times. An APQC survey on AP Process productivity has shown that by investing in electronic invoice presenting, processing, and payment methods, organizations can help keep AP Process cost metric low; keeping this metric low ensures higher AP process productivity.

A corroboration of this idea is shown by industry best practice research that shows that top-performing organizations ensure that their process cost per invoice is kept to as low as $2.06 while other organizations which do not have productive AP processes have costs in the range of $5.54. Another research carried out also shows that the cost to process a vendor payment ranges from $5 to $26 an invoice, while another study cited the cost ranging from $4 to $14 an invoice. The median cost is $6.

Process Cost per Invoice

AP Process Cost: Benefits

The benefits of AP metrics such as AP Process cost benchmarking include reduction in processing costs, identifying inefficient and poor quality business processes, working on enhancing efficiencies, and tightening cash flow management through appropriate controls and regulations. All these would help to improve the management of working capital, lead to a reduction in business risks, and reduce finance costs.

Hence, it is important that CFOs/Controllers must focus on ensuring maximum productivity and minimize costs in the primary F and A functions of carrying out Order-2-Cash, Procure-2-Pay, and Record-2-Report. Outsourcing these functions to an experienced F and A,  Accounts Payable/Procure to Pay/Source to pay services provider would assuredly help them focus on their core business goals while mitigating risk.

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Article by
Oliver Lee

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