10 Must-have Accounts Payable Metrics
While most organisations use metrics to monitor and manage performance, some get so caught up in collecting and presenting the numbers that they lose sight of the purpose. Before attempting to develop and use metrics, it is critical to set some ground rules to ensure that an organisation’s performance is enhanced. The purpose of each metric should be clearly identified, clearly defined, and effectively communicated to all affected parties. Disagreements are often due to different interpretations of what is being measured and reported.
Effective metrics have the following attributes:
There are seven pitfalls should be avoided:
There are many approaches and tools that are used to design, develop, implement, use, interpret and take action to improve key performance indicators. Learning from these approaches and tools has led to the development of a simple, easy-to-understand framework for the rapid development of useful and user-friendly metrics.
The seven steps of the framework are:
The first step is to identify and define what is being measured. While the definition may need to be updated after making a first pass through the subsequent steps, it is important to document and obtain agreement by all parties affected by the metric.
The metric’s purpose should be specified. The description should focus on the problems, issues and/or reasons for monitoring. It is also useful to articulate what decisions can be made or affected based on outcomes.
There are several factors for consideration. There may be contractual or regulatory constraints. There are costs and effort that should be taken into account. For some metrics, accuracy is critical; for others, less precision is sufficient. For some, it is necessary to have a baseline of historical information for future measurements to be interpreted properly.
Cost and effort should be taken into account. When possible, measurement should be the automated by-product of the transaction processing or workflow system. This is the case with a robust accounts payable (A/P) process automation solution. If not, manual capture of relevant information can be used, which is more costly and susceptible to errors.
Sampling is a technique that can dramatically lower the measurement cost and effort and is useful in situations where there is limited A/P automation. Instead of capturing 100% of activities, a sample can provide sufficient information at lower cost.
For metrics where information is collected infrequently, paper-based or online surveys can be used. Surveys require clarity and questions that are not open to interpretation.
Metrics for process measurement and the effectiveness of process changes should collect data to develop a baseline against which future data can be compared.
Missing data or inconsistent samples may distort results. When data is collected, particularly when it is collected manually, there may be errors. Small errors may not be significant, but understanding the accuracy and possible sources of inaccuracies can improve the reliability and utility of a metric.
Just as there are many ways to collect data, there are many ways to report results. Several factors affect how measurements should be reported, including whether or not the information is needed in real time to control a process, and whether the party receiving the information has particular needs or preferences. Cost and effort associated with reporting as well as timeliness are also factors.
The main ways measurements should be used are:
Measurements should not be used to place blame or to ‘game the system’.
For each metric, these seven steps should be documented and reviewed by the parties involved in and/or affected by each step. It is often necessary to revise based on their inputs. At times, several related metrics are identified and the review process should include an analysis of all of them. The seven steps should be completed relatively quickly; a long drawn out process is typically not effective and may involve a lot of finger-pointing. It is better to develop a metric, start using it and decide that is no longer needed than it is to spend a lot of time arguing about its merits.
Based on experience and interviews with hundreds of organisations of all sizes, in diverse industries, every A/P organisation should consider these metrics:
One of the most important things to measure is the quality of inputs (purchase orders, invoices, vendor masters, etc) received by A/P. This is something that A/P often cannot control but significantly impacts A/P’s productivity and perceptions of A/P’s performance.
Invoices requiring exception processing typically account for less than 20% of A/P’s transaction volume but more than 50% of A/P’s effort. Automated best-practice workflows that include exception handling can dramatically enhance the productivity of an A/P organisation and facilitate tracking input quality.
When A/P does not receive invoices in a timely fashion, it may not be possible to process and pay them within terms. As a result, discounts may be lost and the impact may be significant. For example, paying within 10 days and taking the standard 2% discount rather than paying in 30 days earns a return on cash greater than 36%.
In addition to missed discounts, if invoices do not get to A/P promptly, the risk of a late payment increases, resulting in increased inquiries about payment status, the suspension of future deliveries, or send additional requests resulting in possible duplicate payments. Some vendors impose late or finance charges when payments are not received by the due dates.
Every AP organisation wants process transactions correctly. Errors are costly and understanding their causes should lead to improvement. Even if the number of errors that are not caught before money goes out the door is low, the impact on a company’s bottom line can be significant.
A/P is often asked: “How long will it take to process my expense report or invoice?” or “Why hasn’t my expense report or invoice been processed?” The perception is often that transactions are sitting around in A/P just waiting to be processed. Measuring and monitoring A/P processing timeliness is key to understanding what’s going on, setting standards and expectations. Here again, an end-to-end A/P automation solution speeds – and standardises – invoice processing.
When cheques are stopped, voided, reissued, returned as undeliverable or never cashed, it is often due to a transaction processing problem in A/P or a problem with information in the vendor master file. These problems cause extra work for A/P and adversely affect the perception of A/P work quality. While there are other types of outputs from A/P, these five all involve money that either might have or did ‘go out the door’ improperly.
Erroneous payments can adversely affect a company’s bottom line. Despite efforts to avoid errors, it’s estimated that a significant percentage of erroneous payments are never caught. In addition to finding and recovering erroneous payments, companies should track their sources and causes. A typical company catches less than 10% of its erroneous payments. A comprehensive programme can result in recovering as much as 2% of total expenditures.
A/P typically has one or more initiatives in place to enhance its operations, improve productivity or lower costs. When a new programme is put in place, it’s important to measure how well the initiative is performing and whether it is accomplishing its intended goals. Based on surveys of A/P organisations, one of the most frequently mentioned initiatives is receiving and processing of invoices electronically with little or no human intervention. Electronic invoice receipt and processing can dramatically reduce costs and reduce or eliminate errors.
As a rule of thumb, the cost of paying a vendor via an automated clearing house (ACH) transaction is approximately one-tenth of the cost of paying via cheque and approximately 1% of the cost of paying via a wire transfer. Many more companies and individuals are now paying via ACH; banking systems report that cheque transaction volumes are now lower than ACH transaction volumes. Tracking payment costs and types of payments will show whether there has been progress on an initiative to move more vendors to ACH payments.
Few A/P organisations actually ask their internal customers or their vendors to let them know whether they are satisfied. Perceptions are often more important than reality so it is critical to reach out periodically and determine what internal customers and vendors think. Customer and vendor satisfaction report cards can be used to quickly get valuable feedback on how A/P is viewed by outsiders and can also be used to collect suggestions for the enhancement of the existing processes.
A/P is involved in performing the day-to-day work and in projects that deal with special situations and to enhance future performance. The key resources needed to make things happen are the people within A/P. Motivated employees are typically more satisfied and more productive.
Getting feedback from employees as well as giving feedback to them can enhance their effectiveness and value to the organisation. In addition, it is important to set goals, improve existing skills and develop new skills.
There is no perfect set of metrics that can or should be used by all A/P organisations. The framework introduced earlier can be used to develop metrics to deal with each company’s unique goals, challenges and pressures and to help manage A/P’s relationships.
Just as there is no perfect set of metrics, needs change over time. On a regular basis, review all of the metrics that are being used. Determine which are no longer needed and stop using them. Decide which need to be changed and make appropriate changes to them. Continue to look for new things that need to be managed and use the framework to develop and use appropriate metrics.