The way companies compete today is very different from the way they did a decade ago. Earlier, sales and pricing strategies were used to determine how well a company was able to compete with its industry peers. Today, an organization’s operational prowess, financial dexterity, and supply chain management skills have become vital for a company to obtain that competitive edge needed to nudge ahead of others. As a result, having high-quality Finance and Accounting (F&A) operations in place ensures that the business gets the much-needed support from them for its growth.
In this context, the accounts payable (AP) process has gained tremendous importance in the recent past. The activities involved in the AP function can influence working capital, the cost, and effectiveness of the procure-to-pay process, and relationships with key suppliers. Earlier, AP functions in an organization were mostly inefficient and drove processes using outdated technology and unproductive methodologies such as manual data entry and postal invoice routing.
As is known, these methods dragged down the performance of all AP functions, resulting in high costs, invoice backlogs, irate suppliers, multiple errors, and missed payments. With a number of firms automating their AP department, the whole process has become smoother, quicker, and less error-prone. Another advantage of automation is that it has become easier to measure the performance of the AP process.
Every department in an organization has an objective that needs to be achieved for the company to grow. The objective of the AP department is to serve as a financial support function to meet the company’s goals and objectives. The department’s primary goal is to ensure that suppliers are paid on time in an accurate and efficient manner and that the company’s expenditures recordings are accurate and timely.
In order to determine whether the department is meeting its objectives, it is necessary to measure the same. Only when the performance is measured, the efficiency of the department can be known and changes, if any, can be made to improve its effectiveness.
According to the IOMA Industry Report, more than 30% of all U.S.-based companies, and close to 75% of companies with 5,000 or more employees, have completed steps to benchmark their A/P Department’s operating performance. You could also consider it for improving the performance of your AP department.
In the case of AP, metrics are often used to measure the performance of the process.
AP metrics are divided into three groups: operational, financial, and supplier. Operational metrics are important as they have the ability to add significant value to the whole F&A operations. Financial metrics help improve AP performance by optimizing working capital, resulting in a better bottom line for the firm. Supplier metrics are valuable for improving procurement and sourcing strategies.
There are multiple operational performance metrics that drive the core efficiency improvements in AP. This would ultimately result in lower costs for processing an invoice from receipt to payment. By tracking operational metrics and developing strategies to improve them, AP departments acquire the ability to streamline the process and improve overall performance.
For example, a typical metric is the number of invoices processed per full-time employee (IFTE). If a firm uses manual, paper-based methods for invoice processing, this number would be fairly low due to the high workflow for AP personnel. However, in an automated or semi-automated process, fewer staff would be needed to complete the process, resulting in higher IFTE. Below are the key metrics that AP departments should consider tracking in order to improve efficiency, accuracy, and timeliness.
Time taken to process an invoice is critical to the whole AP process. The lesser time it takes to process invoices, the more time AP staff would have to focus on other important issues such as dispute resolution and payment delays. Total processing time per invoice in high-performing units is said to average less than 3 days while an average company takes 6 days to process an invoice. You could gauge this by asking AP personnel who code or approve for an estimate of how much time they spend per invoice.
The cost to process an invoice is the most basic metric. However, it is one of the most difficult to calculate. Some companies calculate costs for each step. This would include costs for routing, mail room activities, copying, and follow-up. Some others use the pay of AP employees and the time spent by them on AP activities to determine the cost. This is where benchmarking studies can be useful.
You could use an industry benchmark or process to calculate and make comparisons. Several studies have found that the median cost to process an invoice across industries is approximately $6.00. Also, note that there is little correlation between the cost to process an invoice and the size of the company.
You could gauge the efficiency of AP members using this metric. Some might be quick while some others might take their own time processing an invoice. This metric can help identify laggards. However, it is important to check whether members who have quick turnaround times churn out error-proof invoices.
The more the number of these invoices, the more would be the time available to AP staff. Higher percentages under this metric can be achieved only through automation of the AP process.
This percentage needs to be low. The trends of this metric should be compared across time periods to check whether there are any increases. Increases must be checked quickly so that the firm does not lose any more funds.
The higher the percentage, the better for the firm. This would help avoid paying interest and late payment fees to suppliers. Even though achieving a 100% on this is quite tough, the firm should have this as an objective for the AP department.
The lesser the number of exceptions, the better it is for the firm. Exceptions take time and resources. AP staff needs to spend special time and attention on resolving exceptions. It is found that automation can help reduce the number of exceptions.
Though 100% electronic invoices is an ideal situation, some invoices need to be handled manually due to complexity and legal issues. Therefore, firms could ensure that this percentage is as high as possible to free up time for AP staff.
In order to maintain smooth relations with suppliers, supplier metrics should be measured and improved upon. The paid history database available in the AP software is an ideal source for obtaining detailed data on purchases and supplier profiles.
The lesser the number the better. If there are too many inquiries from suppliers, AP staff needs to spend time handling these inquiries resulting in reduced efficiency. Ideally, supplier inquiries should be less and this is possible through automation wherein suppliers clear and easily understand invoices, terms of procurement, and other details.
Obviously, the lesser the number of disputes, the better for the firm. Even though disputes cannot be totally avoided, assigning specific personnel for dispute resolution and constant interaction with suppliers can help reduce this number over time.
The more the number of suppliers enabled for electronic invoicing the better it is for the firm. Manual invoicing takes time, effort, and resources, reducing the efficiency of AP staff. If you enable suppliers for electronic invoicing, it can not only free up time, it would also improve other metrics such as time to process invoices and cost of processing invoices.
The lower this number the better as this would have an impact on your general ledger. Often, companies make an entry to record such goods and forget to reverse the entry when the invoice is received. Therefore, it is important to procure the invoice from the supplier as soon as goods are received.
Days payable outstanding or DPO would tell you how long it takes to pay the invoices received from your trade creditors. It is often calculated using the formula: AP/ COGS per day. The shorter the number of DPO, the more expensive it would be for your firm, because you will not have the cash, and you may have to borrow to pay your bills. Ideally, DPO should be long. This way you would know that you are managing your cash well.
The more discounts that you receive the more you save. Therefore, this number needs to be significant, if not big.
By identifying and recording such metrics, you could drastically improve your AP department. Without tracking business process metrics, it is tough to find out how effective and efficient your AP staff truly is. Tracking these metrics will not only help you improve your processes, but it would also aid in making decisions resulting in greater growth for the firm.
Remember that taking corrective actions after measuring the performance of your AP process is critical to the development of your business. Getting AP management experts to assist you in this area will help you improve the efficiency of your Accounts Payable Process.