Accounts Payable Performance, Are You Measuring Up?

Recently a discussion was started in LinkedIn about tracking AP performance and what metrics are used to make process improvements. There were some very interesting comments from AP professionals from around the world. Here are some of the ideas shared.

Popular measures;

•    Cost per Invoice. This is calculated by taking the time and cost that goes into processing each invoices divided the total number of invoices processed. The cost should take into account all the AP FTE time, which is obvious, but should also include the all labour time that goes into processing the invoice including all management time on the approvals, and error fixing, duplicates, searching, handling and vendor enquiries etc. The labour portion adds up to around 60-70% of the total cost. The rest is desk costs as well as storage, courier and related costs. The average for a manual process is around $15-$20 per invoice. The electric al=automated process can be south of $5.
•    Number of Invoices processed per FTE. This is productivity measure. To calculate you’re simply looking at the number of AP FTE’s per the monthly amount of invoices processed. You’ll find the average is between 750 – 1250 depending on the nature of the industry and complexity of the process. Automation can push you upwards of 5,000 per FTE.

When driving efficiencies into the process, whether it’s manual, automated, or mixture of both, you need to drill much deeper. This is equivalent to a production line in a manufacturing process, where you’re analysing each minute detail to drive quality and controls into the process.

Higher focussed measures;

•    Speed to process an invoice in days.
•    Late payment and penalty percentages as well as exceptions.
•    The percentage of early pay discounts available and the percentage that are taken.
•    Tracking error rates. Both payment errors and data entry errors. Goes without saying accuracy is an important part of the process.
•    Tracking payment types. This is used to ensure that the most cost effective payment type is used.
•    Total dollar amount of payment runs (EFT vs manual) as well as Foreign payments made.
•    If AP automation and eInvoicing were in place, tracking the volumes of electronic invoices and electronic payments and set a deliberate plan in place to increase those volumes every year and quarter.
•    Aging of invoices, from date received to paid. From invoice date to paid (we could analyze the vendors that send in invoices late and improve processing).
•    Discounts achieved and discounts lost.
•    Days waiting for Approval
•    Date of receipt of invoice (manual or electronic) to date of entry.
•    How many PO invoices, how many non PO invoices.

For those with high volumes, who are well automated and paying electronically, can use these to further enhance your process;

•    First Time Pass percentage (%) in invoice processing.
•    Analysis by Hold Code for the invoices that fail at First Pass. This gives insight into the hold reasons which are creating re-work. One can apply Pareto (80:20) rule to and tackle the major ones.
•    Compare number of FTE's deployed on tasks other than processing activity. Ideal ratio is 1:2
•    Review of debit balances (mainly aged ones) in various Supplier Id's. It is very important to keep an eye on this area as any major aged balances will attract audit comments as well.

One of the participants had this meaningful contribution “All AP metrics should be based on process exceptions that are actionable, meaning weekly/monthly meetings with those responsible for the root causes of the exceptions. The put through metrics are mostly worthless… if you aren't improving the process, you aren't managing the process!”

I turn to a famous quote or dictum “If you can't measure it, you can't manager it”. How many of you are managing and measuring your AP performance? What metrics are you using?

I have posted a link to the LinkedIn discussion at the bottom of the page for reference purposes where you can find all the contributors comments. Group: Account Payable Professionals. http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=25327807&gid=128842&commentID=20261936&trk=view_disc
You can also find useful information regarding metrics from: http://www.ioma.com, http://www.iappnet.org, http://www.tawpi.org, http://www.aberdeen.com, http://paystreamadvisors.com.

Join the Revolution! Reduce Your Invoice Processing Costs

Further to the discussion on Accounts Payable processing costs, we thought you might want to know what gets in the way of automation. Paper AP is the necessary evil in many organizations and change is harder than it seems. 

Some might not trust the digital image concept, others like to "feel it" in their hands and yet others have disbelief around the real costs of their manual system versus automation and the potential savings. It is true that reducing the overall costs from $37 to $4 is quantifiable but are those savings really coming off the bottom line and what needs to happen to achieve that? Yes absolutely, opportunity costs and labour costs are real. 

How can an organization find its way to embrace the future rather than fear it?
 
In the last 35 years, computers changed accounting dramatically, gone was the way of the hand written ledger and its manual posting. If any accountant heard of a company NOT using computerized accounting software today, they would assume their clients were in the dark ages! But how did that change occur? To trust the DOS based systems of those early days, must have been very difficult for many. Nevertheless, they adopted and adapted to the faster easier way. Let machines do the repeated work that is mindless.
 
Mo Kelly, from Rockwall Computers says it well in his blog; http://www.accountingsoftware411.com/Press/PressDocView.aspx?docid=11038

"The big changes in accounting seemed to happen when we changed platforms. Major changes happened when we went from paper to computer. Another major change was from mainframe computers to PC's. Then the next big change was from text based user interfaces to graphic user interfaces. Everyone says that someday we will no longer have software to load on our computers. We will only have browsers and servers. That will be a major platform change.

The motivating factor for changing platforms has been to take advantage of new ways to integrate software. The one concept that is responsible for 90% of the time saved with computers? - Integration.

I honestly believe that we are seeing the final revolution in accounting software. Now accounting packages can grow endlessly and never be obsolete. Object oriented software allows us to reuse software for other applications. Development takes less time. There will never again be a need to create new software because of a platform change. Web based software can be integrated with any process anywhere in the world. How can any new concept compete, especially since it is free?

What does this revolution mean to you? If your company is not ready to get rid of an old, obsolete, client-server, proprietary software package, you may experience similar problems to those in the 80's that claimed they did not need a computer in their business. That is what happens in a revolution."

Well, this holds true for automation of AP workflow too. We have entered a new century with a new way to do this work with much less effort and the mindless tasks and delays that go with paper should be gone. The same things that must have interfered with the adoption of modern accounting software (sadly, I am old enough to say I used the one-write system!) are effecting AP automation adoption today. Innovative thinking controllers will lead the way and then the rest will fall or follow.
 
Accounting went relatively unchanged from the time of the Egyptians until the invention of the computer and its realistic application in the 1970's. Now software applications are moving to the web.

The ability (or inability) to implement change is a company's best asset or worse enemy. Early adopters of technology will be the pack to the pot of gold. This is true for AP automation. Money is wasted every day on the paper way. Organizations need to go back in time to remember what was like before computers, and how much time was wasted on manual systems.

Where's Your Payables Pain?

It's been my experience in working with our clients and prospects that there is a recurring and common theme in discussions regarding AP and invoice processing activities .... Pain. More specifically, it's how can an AP operation refine their workflow through automation? "There has to be a better way" is a common refrain. Well, as pain relief we are helping to alleviate it, to streamline it and to help prevent it from coming back.

When we are asked to help automate the AP and workflow process, we advise by asking clients to identify their "pain points" or more commonly, "where does it hurt?" The responses are overwhelming ... and it usually leads into a self-diagnosis of specific areas where problems and inefficiencies continue to plague an AP workflow operation.

To continue the "triage" theme, we help clients to identify their pain points, to think in terms of their major areas of workflow and invoice processing ... these are common themes:

• Inbound Vendor Invoices by snail mail, fax and e-mail; we know cold and flu season is upon us but it seems the pain always starts here ...

• Data Entry; we know our mothers always told us to eat slowly but sometimes, we have so many invoices to consume and not enough time or resources to help with the volume ... indigestion, etc, the most painful of all ...

• Approvals and Routing; we know that if we are waiting on others and we don't get our invoices paid on time, we miss out on early payment incentives ... yes, you guessed it, more pain ...

• Payment and Inquiries on Payment; it seems that this pain comes back to visit us? The when and where is it pain ....

  Archiving, Reporting & Document Management; How do we make sure that this pain doesn't come back? Do we have to dig through cabinets for audit reports?

Guess what ... We have been able to identify causes. For example, are increasing volumes of monthly invoices starting to overwhelm your AP data entry staff?

Have you calculated the cost of "pain" per invoice for each physically handled piece of paper? Are your approvers, project managers, budgetary advisors and distant office locations holding up the approval process? We have a cure ... workflow automation, improves processes and web based technology would be a step towards better AP workflow health. It can also help with vendors inquiring on approval and payments.

After all that is said and done, we have been successful in determining our clients sources of pain. We have advised on a path to better health and we can safely say, the "patient" is well on their way to full "pain" relief.

Does it really cost $37 to process a vendor invoice?

Many small companies today are still pushing paper invoices through for payment and wasting resources in the process. When I first started researching AP costs I was flabbergasted to find out that an average company spends as much as $37 pushing one invoice through their paper system. How can that be? First, bear in mind an average company in this case is one that is not automated and is average in terms of productivity or how many invoices it can process a month. The cost of $37 comes from a recent AP study done in the US. So where is all that money being spent? Most of it is in the data entry.

One company I worked with briefly had the equivalent of one full time AP clerk that cost $42K annually and could only push through 250 invoices a month; that works out to be 38% of the cost right there. The rest is harder to "see" but think about what is required both in time and utilities when handling the invoice; opening and routing the mail, photocopying for back up, stamping, coding, approving, mailing, printing the cheque for payment, filing the invoices, storage costs, answering inquires on missing or unpaid invoices, data entry errors and the cost of duplicate payments, missed discounts etc. and it all adds up.

And what about companies that must re-bill costs to clients like property management or construction companies. There is a lengthy process of standing by the copier and having separate files etc. What is you could do it all with a click of a mouse and in a few seconds email if off?

Automation of your accounts payable system from invoice arrival through to electronic payments can reduce that $37 per invoice to as little as $4. Imagine if your company processes a few as 300 invoices a month that is over $100,000 in savings annually. So why isn't everyone doing it and doing it now?

Stayed tuned........

Bring on the AP Automation for Timberline

We're pleased to announce that beanbills is now fully integrated with Timberline Office. Thanks to our friends at Constructive Solutions who helped implement the solution. Our customers using Timberline can now take advantage of all the benefits of Accounts Payable Automation by exchanging data directly with their Timberline software.

KISS applies to Accounts Payable

Accounts payable is not rocket science. However complexities in the process seem to be common place.  Complexities cost mucho time and effort ultimately taking a big bite out of the bottom-line.

 

Most organizations payables processes grow organically or through acquisition along with the needs of the business. Over time, with added volume and locations, those processes often become cumbersome and unmanageable.  By this time, they review their options and either turn to a pricey accounting system upgrade or live with the current setup.  It’s up for debate on which ultimately costs more, however it’s usually the later as resistance to change is generally the road most travelled.

 

Let’s take another look at these home grown complexities. The belief that each company runs their ap differently “we are unique” is standard fair amongst operations. Sure there is uniqueness to industries, or how business is conducted. But the objective and outcomes are always the same, place an order, receive a bill, code and approve it, and pay it.  Really companies are running the same process in slightly different and mostly manual ways.

 

When the Ford model T was introduced to world through standardized production, it made a huge amount of sense and continues to be a massive factor in everything we serve and produce today.  Are the benefits of standardization not available to the ap process? If the objectives are the same, and the outcome is the same, why are businesses not looking to standardize and take advantage of the same efficiencies and economies.

 

Truth is most are not… yet. Most companies are not in the accounting business, nor should they be. It’s a necessary evil. They don’t have time to focus in on process improvement while running their business.

 

Incorporating accounting best practices right from company inception is ideal but hardly realistic, at least not until recently.  Today, there are solutions that expand the functionality of conventional accounting applications and many of them are web-based and affordable to the small and medium sized businesses.  These solutions offer built-in best practices to help businesses with compliance and efficiency to allow them to concentrating on the core competencies of the business rather than the paperwork involved with running the business.

 

Creating efficiencies on your own, without the expertise and tools is impossible. Standardizing and incorporating best practices right from company inception is ideal but hardly realistic, at least not until recently. Today, there are solutions that expand the functionality of conventional accounting applications. Many of them are web-based and affordable to the small and medium sized businesses. These solutions offer built-in best practices which help standardize processing, boost efficiency, and focus businesses on their core instead of the time consuming paperwork that surrounds their core.

 

Standardization is becoming essential to create efficiencies in business process. As my beloved marketing prof repeatedly broadcasted, "KISS, Keep It Simple Stupid" in other words don't get caught up in the complex when there are proven simple ways to process your ap.

Bean Declares War on Paper-Based Invoices

We've just launched the new version of Beanbills (press release). Plus the new website is up! Exciting times!!

Lots of hard work has gone into this latest version and I wanted to thank the entire team for all their over and above contributions.

You're not supposed to hoot your own horn on blog, but we have something to be proud of and wanted to share this moment. So go check it out! 

The Bean story continues to grow!