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[Editor’s Note: With the publication of our AP Metrics that Matter in 2020 eBook (click to get download) we thought we would look back at some of our previous articles covering the key operational and performance metrics for AP and finance professionals.]
Building a business case for accounts payable (“AP”) automation is a critical part of transforming the invoice management process. Without a detailed business case that can convince stakeholders to invest in automating the AP function, the unit will remain beholden to time-intensive manual processes that drain enterprise resources. Understanding current AP performance is crucial to understanding the potential value that can be achieved by leveraging automation. There are several distinct performance metrics that AP can gather and measure, depending on department-level goals and objectives as well as those of the enterprise. Ardent Partners has identified five “metrics that matter” that are effective indicators of AP performance. They are:
- Cost to process a single invoice. The average cost to process a single invoice typically includes a variety of expenses, such as AP staff wages, materials cost, and any other funds that the enterprise spends to process its invoices. A high cost per invoice indicates that enterprises have an inefficient, and likely manual, invoice approval workflow, while a low cost per invoice is an indicator of an automated workflow that removes manual touchpoints from the process.
- Invoice cycle time, which is the amount of time it takes the organization to process a single invoice, from initial receipt through to payment scheduling. An inflated invoice cycle time can result in a high per-invoice cost, as well as the enterprise missing potential early payment discounts. As the invoice cycle time shrinks, more windows open up to take advantage of those discounts and the process as a whole becomes more streamlined.
- Invoice exception rate. Exceptions are the “bane” of accounts payable, which is designed to function as a well-oiled machine. Every exception slows down this process, and an AP team with a high invoice exception rate needs to examine multiple angles, including issues with its supplier base and the invoice approval process, to try to uncover the root causes. Exceptions result from missing or incorrect information, such as a missing/incorrect vendor number in the invoice header or a price that does not match up with the contracted amounted. Exceptions create problems because they require the AP team to find/correct the information required to process the invoice and slow down the invoice approval process significantly. As the percentage of exceptions is reduced, more invoices can pass through the approval process—thus opening the door for an increase in straight-through or “touchless” processing.
- Percentage of invoices processed “straight through.” Straight-through, or “touchless,” processing is defined as an invoice being received, approved, and payment scheduled without any manual intervention on the part of the AP team. There is enormous value in this process: straight-through processing is significantly cheaper and faster than any other invoice-approval workflow, resulting in huge efficiencies from an approval standpoint. Straight-through processing also results in greater visibility into invoice and payment data, as well as increased accountability for the AP process. This is because the automated invoice approval system “talks” to the relevant databases for POs, contracts, etc., and can process a vastly higher number of invoices than even the fastest AP professional. Increasing the percentage of invoices that are processed straight-through also means that exceptions can be handled quicker because of the detailed record keeping and increased data visibility that are hallmarks of highly automated AP processes.
- Percentage of invoices linked to a purchase order. Linking an invoice to a purchase order (“PO”) helps with the necessary matching and validation stages of invoice processing. This matching and validation is critical for record keeping, as well as visibility into spend data. Linking invoices to purchase orders creates a “paper trail” that can be followed for compliance and spend management purposes, in addition to allowing for budgeting and forecasting. Having a PO linked to an invoice thus ensures that the AP team is paying a valid expense—where having a PO is appropriate—and allows better control over and visibility into spend.
These five “metrics that matter” represent a window into the performance of accounts payable operations. Individual enterprises may be interested in other key performance indicators, such as amount of discounts captured, number of invoices processed per full-time employee, or timeliness of payments, but one fact remains no matter the metric: knowing how well AP performs is a critical first step in building a business case for automation.
This article originally published on 06/23/2016.
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