When procurement managers complain about problems in accounts payable (AP), it’s often a good idea to spark a conversation about symptoms versus causes—and the true cost of ignoring the whole thing.
Late payments, duplicates, and fouled-up accounts may be just the tip of trouble to come. On the supplier side, the accounts receivable department surely wants quick resolution of the current slew of errors. But the big picture may need a close look. Nothing destroys relationships with critical vendors like payment delays. When a key vendor isn’t happy, your organization’s 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.
If your organization takes seven days or more to fix an invoice error – and if such errors happen regularly – chances are you’ve got 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. For an in-depth discussion of purchase-to-pay process management, listen to the recent APQC Webinar: Improving Procure-to-Pay May be Easier than You Realize.
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.
If you have too many invoices that need manual intervention, you’re likely also plagued with slow processes and high AP labor costs. When APQC looked at how many FTEs 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.
With more than 40 years of experience, APQC remains the world’s leader in transforming organizations. Visit us at www.apqc.org, and learn how you can make best practices your practices.