How to: Master AP process efficiency analytics
According to a recent article in PYMNTS.com late supplier payments have grown to be a global issue that is worsening and raising the insolvency risk. The average number of days it takes for companies to pay suppliers has now reached 66 days around the world, according to a report from Euler Hermes.
On the company level, an active accounts payable process is essential for many reasons. First we have the obvious ones, such as avoiding late payment fees and capturing early payment discounts from suppliers. And of course, the time you can save by reducing the manual workload for the AP team. However, the improved predictability and accuracy of financial reporting and forecasting is probably an even more important benefit.
What Cannot Be Measured Cannot Be Met
A data-driven approach will help AP team managers reduce the constant fire-fighting and regain control of the accounts payable process. There are many useful KPIs to track throughout the AP process, and they will differ depending on whether you are dealing with order-based invoices or non-PO or expense invoices where there is no matching against a supporting document, such as a purchase order (PO).
Considering that the focus is a fast accounts payable process, the most apparent KPIs are lead time and automation level, i.e., the percentage of invoices that runs through a fully automated and touchless process with no human touching or looking at the invoice at any time during the AP process.
Define The Most Relevant KPIs
If you are matching invoices against some supporting document, such as a purchase order, contract or goods receipt, it makes sense to monitor these KPIs:
- Automation level – the percentage of your invoices that pass through a fully automated and touchless process.
- Manual connection level – the percentage of your invoices that cannot be automatically matched to orders, thereby causing manual intervention.
- Total lead time – the number of days it takes for an invoice to be processed, from import into the AP system to posting in the ERP.
- Lead time waiting for manual approval – the number of days you are waiting for those invoices that need some manual handling.
When you’re dealing with non-PO invoices there are slightly different metrics to monitor:
- Automated distribution level – the percentage of your invoices that are automatically distributed to the correct approver within the organization by the AP automation solution.
- Total lead time – the number of days it takes for an invoice to be processed, from import into the AP system to posting in the ERP.
- Lead time waiting for approval – the number of days you are waiting for your colleagues to approve their invoices.
If you wish to extend your KPIs to include other metrics you may find inspiration in this infographic from the APP2P Network.
Set Realistic Goals
Once you’ve got your KPIs in place, you need to monitor these to ensure your performance stays on track. It is also wise to use analytics tools and industry benchmarks to ensure your performance is in line with industry standards.
The general definition of a benchmark is “a standard, or a set of standards, used as a point of reference for evaluating performance or level of quality.” Sounds good, right? Well, you need to be careful and make sure you understand the origin of the benchmark numbers – it can range from interviews and surveys to vague estimates based on personal experience. Watch out, or you can end up comparing yourself to something that does not make any sense for your business.
Once you have an understanding of using analytics tools to gauge your current performance levels and industry benchmarks to compare with, you can set realistic goals for your accounts payable process. Then you and the AP team can start implementing improvement tactics based on actual data instead of guesses or hunches.
