Unlocking the Secrets of AP Benchmarking: Your Guide to Success

Accounts payable (AP) is a complex function of any business, and it holds the power to simplify the complexities of accounts payable and guide you toward operational excellence through the transformative power of AP benchmarking. By comparing your AP processes to industry norms, you can uncover inefficiencies, set actionable goals, and enhance your performance. This article explores how benchmarking elevates your AP operations and leads to greater success. Be sure to keep reading to the end for valuable bonus content: the top ten metrics you should be tracking today!

Why Benchmarking Matters

Benchmarking is like having GPS for your AP operations. It tells you where you are, shows you where others are, and helps you plot the best route to improve. It allows you to:

• Identify Gaps: Find out where you are lagging compared to industry standards.
• Set Goals: Establish realistic targets based on industry performance.
• Drive Improvement: Continuously enhance your processes by measuring progress over time.
• Gain Insights: Discover best practices and strategies used by top performers.

 

Benchmarking helps you focus on your own progress and improvement, ensuring you are always moving towards a more efficient and cost-effective AP process. Whether you are a small business or a Fortune 500 company, benchmarking reveals hidden inefficiencies, highlights opportunities for cost savings, and ultimately, boosts your bottom line.

Strategies to Get Benchmarking Data

You need to start with solid benchmarking data before you can optimize your AP processes. Here is how to gather the insights you need:

1. Industry Reports: Subscribe to industry reports from organizations like the American Productivity & Quality Center (or the Institute of Finance and Management (IOFM). These reports are widely available online for free, and provide detailed benchmarks for various AP metrics, including processing times, error rates, and costs per invoice.
2. Surveys and Peer Comparisons: Participate in industry surveys or join AP-focused professional networks. Sharing and comparing data with peers can help you benchmark your program.
3. AP Automation Software: Utilize software tools that offer built-in benchmarking and reporting capabilities. With the proper analytical approach, these tools can provide real-time comparisons of your performance over time, helping you identify areas for improvement.
4. Financial Metrics Reports: Look for detailed financial metrics reports from AP industry bodies or financial research firms. These reports offer comprehensive insights into cost structures and operational efficiencies.
5. Internal Audits and Process Mapping: Conduct regular internal audits and detailed process mapping exercises. These practices help to identify internal benchmarks and highlight inefficiencies in your workflow.
6. Supplier Feedback and Collaboration: Work with your suppliers to understand their error rates, discount programs, and processing efficiencies. This collaboration can provide additional benchmarking data and strengthen supplier relationships.

 

Benchmarking in Action

In this section, we explore how an organization can use benchmarking to improve its AP processes and team dynamics. By tracking key metrics such as Invoice Processing Time, Cost Per Invoice, Invoice Error Rate, and Discount Capture Rate, not only can the AP team uncover critical insights that drive substantial improvements, but it also brings a positive impact to their team culture and engagement.

Invoice Processing Time: The organization discovers its average invoice processing time is 20 days, while the industry norm is 7 days. The AP team spends its time reacting to issues and solving the symptoms rather than the root cause, leading to recurring issues. Over time, this delay results in missed early payment discounts, strained supplier relationships, and low morale.

Why It’s Important

Imagine you’re running a marathon. You’re sweating it out, pushing hard, and finally crossing the finish line. But wait, you look around and realize everyone else finished 30 minutes ago. Ouch! That’s what it feels like when your AP processing times lag behind industry norms. Faster processing times mean quicker payments, improved supplier relationships, and the potential for early payment discounts.

Strategies to Improve Processing Times

1. Automate Invoice Processing: Implement AP automation to reduce, or eliminate, manual data entry and accelerate invoice processing. Monitor automated processes and output for accuracy, speed, and process improvements.
2. Streamline Approval Workflows: Use automated approval workflows to speed up the approval process and eliminate bottlenecks. Educate invoice approvers on the process and importance of timely approvals and be prepared to support their questions and concerns.
3. Training and Best Practices: Regularly train your team on best practices and leverage tools to ensure consistency and speed.

 

Cost Per Invoice: The organization’s cost stands at $12 per invoice, double the industry average of $6. This inflated cost points to inefficiencies and excessive manual work. The AP team likely experiences rework, high volume of inquiries and requests, and may struggle to prioritize projects or other important improvements. Lower costs per invoice mean higher efficiency and better resource allocation.

Strategies to Reduce Costs Per Invoice

1. Leverage Automation: Reduce manual intervention by automating each step of invoice processing, from invoice capture, to purchase order matching and approvals, to payment processing and reconciliation.
2. Streamline Invoicing Channels: Work with suppliers to receive all invoices electronically and define required information on each invoice for faster, more efficient processing, such as a purchase order number for matching, or employee or business unit name for approval routing.
3. Standardize Processes: Train your team appropriately to define and support standard processes, wherever possible. Process mapping and documentation are great tools to help teams succeed.

 

Invoice Error Rate: With a 15% error rate compared to the industry average of 3%, the organization faces frequent disputes and rework, leading to further delays and increased costs. The AP team may find themselves with frustrated suppliers and stakeholders, who often experience a negative impact from these blocked invoices. Reducing errors leads to fewer disputes, better supplier relationships, and lower processing costs.

Strategies to Reduce Invoice Errors

1. Implement Automated Validation: Use software to automatically validate invoice data against master data like purchase orders, general ledger coding, and approvers.
2. Standardize Processes: Develop and enforce standardized processes for invoice submission and processing.
3. Continuous Training: Invest in continuous training for your team on common error sources and prevention techniques and encourage frequent communication and collaboration with sourcing and procurement teams to solve purchase order or contract related discrepancies.

 

Discount Capture Rate: Initially, the organization captured only 30% of available early payment discounts, while the industry norm is 70%. This missed opportunity represents a significant savings loss. Improving your discount capture rate will give a significant boost to your bottom line.

Strategies to Improve Discount Capture Rate:

1. Automate Payment Scheduling: Use automation to schedule payments and ensure on-time processing to capture discounts.
2. Monitor Cash Flow: Maintain a healthy cash flow to take advantage of early payment discounts without impacting operations.
3. Supplier Relationships: Foster strong relationships with suppliers to negotiate better discount terms and improve discount capture rates.

 

By tracking key metrics such as Invoice Processing Time, Cost Per Invoice, Invoice Error Rate, and Discount Capture Rate, this organization uncovers critical insights that drive substantial improvements. From discovering how their invoice processing time lags behind industry norms to realizing the financial impact of missed early payment discounts, benchmarking reveals the gaps and opportunities that can elevate their AP performance.

The benefits do not stop at improved financial and operational outcomes. Tracking these metrics helps the AP team foster a culture of continuous improvement, where employees feel valued for their contributions and motivated by the visible progress in their performance. Benchmarking reveals gaps and opportunities, setting a new standard for success and enhancing both operational efficiency and team satisfaction.

Bonus: Top 10 Accounts Payable Metrics to Track

Tracking and benchmarking key performance indicators (KPIs) is crucial for any department striving for excellence. If you are curious about which AP metrics can help your team stay on top of efficiency and drive continuous improvement, here are ten essential AP metrics to start tracking today.

1. Invoice Processing Time
   • Definition: The average time taken to process an invoice from receipt to ready-to-pay.
   • Calculation: Total Processing Time = Date of Invoice Posting – Date of Invoice Receipt (include weekends).
   • Significance: Shorter processing times indicate efficiency, leading to improved supplier relationships, potential early payment discounts, and fewer late payment penalties. A higher invoice processing time could indicate bottlenecks in your process.
2. Cost Per Invoice
   • Definition: The total cost incurred to process a single invoice.
   • Calculation: Cost Per Invoice = Total AP Department Costs / Number of Invoices Processed
   • Significance: Lower costs per invoice indicate higher efficiency and better resource allocation.
3. Invoice Error Rate
   • Definition: The percentage of invoices with errors.
   • Calculation: Error Rate = (Number of Invoices with Errors / Total Number of Invoices) x 100
   • Significance: Reducing error rates decreases disputes and rework, improving overall efficiency.
4. Discount Capture Rate
   • Definition: The percentage of available early payment discounts captured.
   • Calculation: Discount Capture Rate = (Value of Discounts Captured / Total Potential Discounts) x 100
   • Significance: Higher discount capture rates lead to significant cost savings.
5. Approval Cycle Time
   • Definition: The average time taken to approve an invoice.
   • Calculation: Approval Cycle Time = Date Invoice Received – Date Invoice Approved
   • Significance: Faster approval times reduce overall processing time and improve payment efficiency.
6. Days Payable Outstanding (DPO) or Payment Cycle Time
   • Definition: The average number of days a company takes to pay its invoices once approved and ready-to-pay.
   • Calculation:
     1. DPO = (Accounts Payable / Cost of Goods Sold) x Number of Days
     2. Payment Cycle Time = Date of Payment – Date of Invoice Approval/Posting
   • Significance: A higher DPO indicates better cash flow management but must be balanced with supplier relationships to avoid dissatisfaction and potential credit issues. A short payment cycle indicates timely payments, avoiding late fees and the potential for capturing early pay discounts.
7. Number of Invoices Processed Per FTE
   • Definition: The average number of invoices processed by a full-time equivalent (FTE) employee.
   • Calculation: Number of Invoices Processed Per FTE = Total Number of Invoices Processed / Number of FTEs
   • Significance: Higher numbers indicate greater efficiency and productivity.
8. Percentage of Invoices Paid on Time
   • Definition: The percentage of invoices paid within the agreed-upon terms.
   • Calculation: Percentage of Invoices Paid on Time = (Number of Invoices Paid on Time / Total Number of Invoices) x 100
   • Significance: Ensures good supplier relationships and avoids late payment penalties.
9. Supplier Inquiry Rate
   • Definition: The percentage of invoices that result in supplier inquiries.
   • Calculation: Supplier Inquiry Rate = (Number of Supplier Inquiries / Total Number of Invoices) x 100
   • Significance: Lower inquiry rates indicate better invoice accuracy and supplier satisfaction.
10. Electronic Invoicing Rate
    • Definition: The percentage of invoices received electronically.
    • Calculation: Electronic Invoicing Rate = (Number of Electronic Invoices / Total Number of Invoices) x 100
    • Significance: Higher rates lead to reduced processing times and costs.

 

Benchmarking your AP processes is not just about comparison, it is about striving for continuous improvement and operational excellence. By understanding where you stand, setting realistic goals, and tracking the right metrics, you can streamline processes, cut costs, and boost efficiency. So, next time someone mentions benchmarking, don’t roll your eyes – get excited! It is your ticket to a smoother, faster, and more cost-effective AP operation.

At Symbeo, we are here to help you harness the power of automation and benchmarking to elevate your AP game to new heights. Stay tuned for more tips and insights and keep those invoices rolling and benchmarks soaring!

Ready to take your AP processes to the next level? Discover how Symbeo’s AP automation solutions can help you benchmark and optimize your operations today!