Metric of the Month: Hurricane-Proof Accounts Receivable

Solid AR practices and automated processing can help an organization weather any storm.
Michael HinsonOctober 9, 2017
Metric of the Month: Hurricane-Proof Accounts Receivable

Delays in accounts receivable (AR) equal less working capital and liquidity, making AR one area where improving efficiency can pay off exponentially. One measure of an efficient process is the number of people it takes to get the work done: The fewer the people it takes to do the job, the more likely it is that the team is doing the work the right way.

For this Metric of the Month, we how many full-time equivalent employees organizations need to complete the AR process, noting that the past year has evidenced a growing trend toward increased efficiency in this area.

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APQC’s most recent data show that the best-performing organizations — defined as the top quartile of performance or those who need the least labor to process AR — have 2.4 full-time equivalents (FTEs) or fewer perform the job for every $1 billion in revenue. The organizations that are least efficient in this area, or the bottom performers, require 7.4 FTEs — three times as many people — to process the same dollar amount of receivables.

What’s really interesting, though, is that last year, only one of these groups had significantly different performance. When APQC reported the same metric in 2016, the top performers needed 2.4 FTEs to process AR, just like this year. The median performers were close to the same level, at 4.9 FTEs. But as APQC continued to gather data, the bottom performer benchmark made a pretty big efficiency leap, dropping from 10.1 FTEs to 7.4 FTEs to process AR.

What changed? APQC’s Open Standards Benchmarking™ data show that organizations with fewer FTEs processing AR receive a larger percentage of receipts electronically.

Over the 2016-2017 period, the percentage of receipts received electronically or automatically improved across the board. For bottom performers, this measure grew from 64% electronic receipts to 92%. Top performers now receive nearly 95% of their receipts electronically or automatically, but they were already at 93% last year. The bottom performers had much more room for improvement, and when they made the shift, it made a big difference.

AR_aqpcAutomated AR processing also eliminates many of the risks that come with having paper-laden processes, such as potential loss due to human error or natural disasters.

The latter is a situation with which I’m all too familiar, as my own Houston-based office recently filled with several feet of floodwater during Hurricane Harvey. Speaking from experience, there are far fewer envelopes moving around when an entire city’s services get interrupted for days or weeks. If those envelopes at the bottom of the bayou contain checks you need to cash, at a bank you can’t get to, you have a big problem. Solid AR practices and remotely secured electronic finance processing can help an organization weather any storm, literally and figuratively.

Since the top performers’ FTE number has plateaued, it’s possible that when it comes to processing AR, these leaders have no more fat to trim. Does this mean that those organizations can relax, sit back, and revel in the knowledge that they have finally achieved accounting nirvana? I doubt any of us would agree that we will ever have that luxury. As the old saying goes, “There’s always room for improvement.”

If your organization is one of the top performers that only needs a couple of employees to process a billion dollars worth of receipts, pat yourself on the back, and then look upstream and downstream in the organization’s order-to-cash process and see what other bottlenecks and redundancies can be removed. If you look carefully and continuously, you will find that there are always more efficiencies to be gained.

Even if you have AR down to a science, you can still hunt down constraints in your upstream practices in, say, sales order management or service delivery, which often cause problems for finance. Dig into trouble spots, and sort out the assumptions and logic behind process steps. Take a close look at the organizational structure: who does what, where, and when.

If the accounting team is spread across multiple offices, are they all using the same definitions and processes? It’s natural for separate, autonomous accounting groups to develop their own unique or quirky ways of doing things, but when it all rolls up to the corporate level, those rogue accounting processes create complications that can often be resolved only through manual labor.

The bottom performers’ movement away from heavy dependence on manual AR processing labor is a positive sign, but many of these organizations still have a long way to go. With technology solutions getting smarter, the trend of fewer transactional AR FTEs will continue. It’s time to repurpose those prized human resources to drive ever-increasing stakeholder value, as efficiently as possible.

Michael Hinson is CFO of APQC, a nonprofit benchmarking organization based in Houston.