Working Capital

Metric of the Month: Accounts Payable Cost

Manually entering invoices into the general ledger has a negative influence on the total cost of processing accounts payable per invoice.
Perry D. Wiggins and CPAFebruary 5, 2018

For some companies, processing accounts payable is a time-consuming, detail-intensive function. For others, it’s a quick and easy task.

But before jumping to conclusions about your company’s relative process performance, take the time to view data through multiple lenses: intra-company, intra-industry, and cross-industry. Companies that take this holistic view of process benchmarks develop a rich baseline of data to help improve their finance operations.

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METRICOFTHEMONTH2This month’s metric, based on data from APQC’s benchmarking database, considers the total cost to process accounts payable, per invoice processed. The total cost of AP covers processing payments of operating expenses and other supplier charges, including the development of policies and procedures around processing of accounts payable and all operations.

The total cost to process accounts payable includes labor, systems, outsourcing, overhead, and other AP process costs. This metric is calculated by dividing the total cost to process AP by the total number of invoices processed by the business entity.

Of the 1,485 organizations reporting data on this measure to APQC’s database, the bottom 25% are spending $10 or more per invoice processed. (See graph below.) The best performers — those who rank among in the top 25% on this measure — can do the same task at a cost of $2.07 per invoice or less. That’s nearly five times less than the organizations in the bottom quartile. At the median are the organizations spending $5.83 to process an invoice, or a bit more than double what the best-performing organizations spend to perform the same process.

AP Cost per Invoice Feb CFO Metric of Month

Caution: Use This Metric with Care

Many CFOs’ first instinct is to compare their own cost per invoice to the data above, to determine if they make the cut as a top performer. Those who find themselves on the higher end of the cost-per-invoice range might begin to wonder what they’re doing wrong and how they might improve.

The data presented above come from taking a cross-industry view, which is often a great first step in understanding how your company compares to others on this key benchmark. In addition to the cross-industry view, it may also be helpful to benchmark within your own industry, as well as internally within your own organization.

When using cross-industry benchmarks, it’s important to take into account the characteristics of your own industry. Some industries, by nature, process a lot of invoices. A distribution or consumer-products company, for example, has lots of bills to both pay and collect, so it tends to get very good at both.

Many of them invested long ago in technology to automate accounts payable and accounts receivable, reducing the amount of labor required to keep the money flowing in and out. Such industries often feature more mature process approaches, with more advanced use of collaboration and automation. This includes electronic data interchange, automatic shipping routine (such as Kanban systems), and consolidation of vendors.

On the other hand, other industries may be less mature. Some, such as government and pharmaceuticals, are just getting started with AP automation. Less-mature industries may not process as many invoices or deal with a lot of invoice-related requirements. Vendors are still being evaluated, and new ones are still establishing processes, improving quality, and trying to reduce cycle times.

Let’s compare the median AP cost per invoice for three different industries. According to APQC data, the public sector/government median would fall into the third quartile of the cross-industry data distribution, with a total cost to process AP of $9.43 per invoice processed.

The best-performing industry, not surprisingly, is distribution/transportation, which at the median spends $1.14 to process an invoice. The median point for the consumer products/packaged goods industry is $4.58 per invoice processed. Again, for comparison, the cross-industry median is $5.83 per invoice.

Regardless of industry, the lesser the human touch, the faster the process moves, and the fewer errors are likely to work their way in and require fixes later. Our research supports the logical assumption that manually entering invoices into the general ledger has a direct negative influence on the total cost of processing accounts payable per invoice.

A high dollar ratio would suggest that a company has the opportunity to reduce costs through the setup of electronic payment procedures or greater use of batch processing. A low dollar ratio may suggest that an organization is on the right track.

Continuous Improvement

If you do decide to benchmark your cost per invoice either in comparison to your company’s own past performance or against other companies’ performances, remember that context matters, and take your findings with a grain of salt.

But no matter where your finance team’s performance falls on the cost range, remember the Golden Rule of benchmarking: There’s always room for improvement. As APQC’s founder Jack Grayson loved to remind people, “Benchmarking is the practice of being humble enough to admit that others are better at something, and being wise enough to learn to match and even surpass them at it.”

Set a recurring annual goal to get ever more efficient at processing invoices. Break the process down into individual steps. Find out how your competitors perform this process, or better yet, learn from industries outside your own that have it down to a science. Look for opportunities to carve time and labor out of your AP process, and move your needle closer to the lower end of cost spectrum.

Perry D. Wiggins is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.