Working Capital

Metric of the Month: Accounts Payable Process Performance

Nothing destroys relationships with critical vendors like payment delays.
Mary C. DriscollJuly 11, 2016

The adage “time is money” hits home for managers of payables processing. To make the most of staff time and keep process costs under control, invoice errors must be resolved quickly.

METRICOFTHEMONTHOn the supplier side, your counterparts in accounts receivable appreciate quick resolution of errors, too. Nothing destroys relationships with critical vendors like payment delays. When a key vendor isn’t happy, your procurement staff is in the line of fire — especially when early payment terms have been negotiated. But an even more precarious risk is the possibility that the vendor will withhold shipments until full payment is confirmed, disrupting your business operations.

How much time does it actually take to resolve an invoice error, such as a discrepancy between items in a purchase order and items listed on the eventual invoice? APQC’s Open Standards Benchmarking survey on Accounts Payable and Expense Reimbursement found that lowest-performing companies need at least seven days, including time spent actually performing the resolution process and time spent waiting for other people to weigh in and move things forward. Top performers can clear the issue up in just three days, while median performers need five days. (See graph.)

Chart 1_Cycle Time Resolve Invoice Error

If your organization takes seven days or more to fix an invoice error – and if such errors happen regularly – chances are you have critical suppliers who are losing their patience, and employees spending too much valuable time chasing down invoice discrepancies.

While the errors end up being an AP problem, the root cause often lies within the purchasing process: lack of standardization in purchase orders, mismatched invoice and P.O. numbers, or too many exception items that must be handled outside the usual processes.

Manual data entry also leaves the door open for invoice errors. Yet APQC’s survey found that at the median, 58% of invoices are still manually keyed into the financial system. Top-quartile performers have pushed that percentage down to 42% or fewer, while the lowest performers are at 77% or more. (See graph.)

Chart 2_Percentage Invoices Manually Keyed

If you have too many invoices that need manual intervention, you’re likely also to be plagued with slow processes and high AP labor costs. When APQC looked at how many full-time employees are dedicated to AP at 1,475 companies, we found that the top performers use 6.2 FTEs or fewer for the AP process, per $1 billion in revenue. The bottom performers required 21.6 or more FTEs per $1 billion in revenue. It’s a costly problem that needs to be solved. But where to begin?

A comprehensive approach starts with assessing how well your AP process and its dedicated resources are currently functioning. Establishing key performance indicators that are strategically important to AP functions provides a baseline for measuring improvement. APQC recognizes several KPIs as essential indicators of performance that organizations should use in assessing AP cost effectiveness, staff productivity, process efficiency, and cycle time:

  • Total cost to perform the AP process, per invoice processed.
  • Cycle time, in hours, to enter invoice data into the system.
  • Cycle time, in days, to resolve an invoice error.
  • Number of FTEs that perform the AP process, per $1 billion in revenue.
  • Percentage of invoices that are manually keyed into the financial system.
  • Number of invoice line items processed per AP process FTE.
  • Personnel cost to perform the AP process, as a percentage of total process cost.

These KPIs can help you understand your current position and limitations, and benchmark against peer organizations to discover best practices, new ideas, and methods that boost quality and productivity.

Is it worth your time to dig into the root causes of the invoice errors and put those FTEs to work on other tasks? If the solution is procurement workflow automation or a process overhaul, will it be worth the investment? Is your current rate of invoice errors creating an unsustainable level of risk within your supplier relationships? For organizations concerned with employee productivity and good supplier relationships, the answer to all three questions may be “yes.”

Mary C. Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.