Secrets of World-Class Accounts Payable Departments
What the Best-in-Class AP departments do that make them stand out from their peers
World-class AP departments know something you don’t know, and we’re going to let you in on their secrets.
Ardent Partners conducted an independent research study to gain a comprehensive, industry-wide view of accounts payable (AP). The study draws on the experience of over 200 AP professionals and its findings reveal what the Best-in-Class AP departments are doing that make them stand out from their peers.
In every Ardent Partner’s research effort, respondents are segmented based on performance. The top 20% of performers are considered the Best-in-Class or industry benchmarks. They are differentiated based on how they performed relative to the rest of the field according to the key invoicing benchmark data. In terms of these baseline metrics, they are compared to the rest of their peers, i.e “all others.”
This blog post is all about summarizing the facts of the 2015 study so your company can join the top AP departments in speed, security, and cost-efficiency by setting benchmarking-based goals.
AP Key Indicators
The top-performing AP departments know how to track and measure their AP key performance indicators (KPIs). Many AP Departments still struggle with manual invoice processing and feel the impact of how inefficient a paper-based process can be. If your company is still operating on a paper-based invoice processing system, then it is important to review these four accounts payable metrics to determine your efficiency:
- Average cost per invoice
- Average invoice exception rate
- Average invoices per FTE (per month)
- Average invoice cycle time
By tracking these metrics and then comparing the average to the Best-In-Class benchmark data, your company will have an idea of where you stand and how much money you may be losing on a paper-based system.
As of 2015, seventy percent of inbound invoices are still manually submitted to AP departments. But as we are moving forward in the ever-growing digital age, the manual process grows extinct for good reason. By benchmarking accounts payables metrics, we hope to give your company a vision for growth so you don’t sink on the paper ship.
For more on what metric measures to track in your AP department and how automation solutions can help, read this blog post. Continue reading as we break down how to join the top AP performers with hard numbers from our research and these four KPIs.
Cost Per Invoice and Invoice
One way that the Best-In-Class Accounts Payable Departments set themselves apart is through their significant savings in the cost per invoice metric. According to Ardent Partner’s research, the average cost to process a fully-loaded invoice for those outside of the top 20% Best-In-Class is $17.61 which includes costs related to AP staff time, managerial overhead, facilities, and IT support.
Best-in-Class has a cost per invoice that is 86% less than all other organizations at $2.42 per invoice. This means the top performers can process seven invoices for every one invoice processed by all other companies. Assuming a 1000 invoice sample measure, for every 1000 invoices this works out to a monthly cost of $2420 for the Best-in-Class and $17,610 for all others. Best-in-Class pays, on average, about $15,000 less to process 1000 invoices. That kind of savings adds up quickly and over time puts significant amounts of capital back into the business.
The move from $14.21 to $2.42 per single invoice causes a huge shift in company savings, minimizing losses, and profit gains which is one of the main reasons that smart businesses chose AP automation and throw out the old paper process. AP automation offers cost-savings features like discount opportunities and cashback. Automation software also removes room for human error that results in losses through bad payments, late fees, and duplicate payments.
Average Invoice Exception Rate
The average invoice exception rate is 13.% for all AP departments. Invoice exceptions occur when there is a problem in the invoice process due to faulty or missing data. This is often caused by common human error in data entry through the manual process.
The Best-In-Class set themselves apart with a low 8% invoice exception rate, while all others outside of the top 20% struggle with a high 16.4% exception rate. The top-performing AP departments cut their error rate by more than half with AP automation software that digitally processes invoices.
One of the major challenges that AP Departments face is identified by 44% of respondents citing the delay in receiving matching information which could also mean the lack of the correct data; this results in invoices that cannot be processed right away. Naturally, a delay in matching an invoice to its relevant documents will increase the invoice processing time.
Invoice intelligence software checks for duplicate invoices and incorrect data to increase process performance and keep the exception rates low. The ability to match invoices to two or three other documents, for example, a contract and purchase order (PO) or a contract, PO, and goods receipt note mean that there will be fewer exceptions overall.
Standardizing processes allows for top-performing AP teams to process multiple invoices, in the same way, every time. Generally, the more standardization in the invoice approval workflow, the quicker the process moves along.
Technology simply makes the checking of invoices easier and more accurate while the paper process leaves too much room for errors that will cost your company.
Average Invoice Per FTE Per Month
The average number of invoices per month per full-time employee (FTE) is 2,308. This performance metric may be broken down by year or quarter depending on the volume of invoices that your company handles, but this study tracked the average invoice per FTE by month, which is most common.
AP staffers on Best-in-Class AP teams process 4,814 invoices per month while the greater 80% only process 1,408. This means that the AP departments who take advantage of intelligent automation software process three times more invoices per month than everyone else. Staff productivity rates increase across all departments when AP staff are free to focus on other areas without being bogged down by bottlenecks in the invoicing process.
The best-performing organizations use an AP automation solution to automatically route invoices for approval meaning that their invoices go through processing stages more efficiently than invoices that cannot be automatically routed. This is critical because automated routing is a key differentiator and can make the difference between an invoice languishing on someone’s desk for days or an invoice getting approval quickly and the organization capturing an early payment discount.
Average Invoice Cycle
On average it takes 12.4 business days to process invoices through the entire invoice cycle. The invoicing cycle includes all of the steps from receiving the invoice to processing it to paying the vendor.
Best-In-Class reduces the invoice cycle with an average of only 3.7 days while all others take an average of 17.1 days to process an invoice. Benchmarks for accounts payable teams process invoices in a 78% shorter time frame. In other words, top performers process four invoices in the time it takes everyone else to process just one while also putting three times more invoices through the process in any given month as revealed in the invoice per FTE AP performance metric.
A top challenge for AP departments is cited to be frustration with the invoice and payment approvals taking too long, according to 43% of respondents. This is a result of paper-based processes having AP staffers physically moving an invoice through the approval chain. If someone in that chain is out of the office for any reason at all, all invoices stagnate and the overall approval process is delayed.
The top-performing businesses can set such high benchmarks for efficiency with the help of AP automation solutions. Automating all or part of the AP process can significantly shorten the invoice approval workflows. Imagine no longer needing to physically carry a paper invoice to an approver’s desk or having to email an invoice only to have it languish in an inbox while the approver is away on vacation.
Another benefit of this shortened invoice processing time frame is the ability to capture more early payment discounts across the entire spectrum of accounts payable which ties in with the cost per invoice metric. Early payment discounts can offer significant financial benefits for an organization and capturing more of them means better cash flow.
Secrets of Best-in-Class
Overall, the Best-in-Class have differentiated themselves from all others with superior performance across all key invoicing benchmarks.
There are four key characteristics that Best-in-Class organizations share:
Secret 1: Standardized processes and strong P2P linkage
Standardized processes with a strong linkage throughout the procure-to-pay (P2P) process can result in an invoice moving more quickly through the approval workflow as well as increased visibility into enterprise and AP metrics.
Invoice cycle times decrease with standardized processes and businesses can accurately predict when payments will reach their vendors.
Secret 2: Visibility to track the “metrics that matter”
Most top performers measure key accounts payable metrics. Identifying and measuring metrics is critical to understanding how the organization performs and how to improve performance. Increased visibility into enterprise and AP metrics allow leadership to look more accurately for efficiencies in operations and the enterprise’s financial situation.
Paper processes have a distinct lack of visibility. Without visibility, AP staffers are not able to provide the status of an invoice to a supplier who might ask when payment could be expected thus frustrating internal and external stakeholders.
Relationships with suppliers can vastly improve as a result of the visibility that automation offers into the invoice process. More accurate information can result in more accurate answers for the inevitable vendor status calls as well as empower AP staffers with greater insight.
Secret 3: Superior levels of automation
Best-in-Class invests heavily in AP automation technology including document imaging or scanning and automated routing and workflow.
AP automation solutions automatically route invoices for approval meaning that their invoices go through processing stages more efficiently than invoices that cannot be automatically routed. This is critical because automated routing is a key differentiator and can make the difference between an invoice languishing on someone’s desk for days or an invoice getting approval quickly and the organization capturing an early payment discount.
Secret 4: Strong process capabilities
Best-in-Class also invests heavily in strong process capabilities such as two and three-way matching and straight-through invoice processing. These technologies clean up common errors that cost your company money and increase your invoice exception rates.
Collectively, these characteristics drive the Best-in-Class to high levels of performance that allow AP teams to set industry benchmarks while they turn from cost centers into profit centers.
Why Make the Change?
“If it ain’t broke, don’t fix it” does not apply to invoice workflow. There are significant reasons for a transition to automated accounts payable. AP automation offers a significant opportunity to directly address the challenges of accounts payable across all of the industry’s verticals.
What is most intriguing is that these technologies are not new or cutting-edge. This means that enterprises have little reason to fear these systems outside of organizational inertia. So, seriously considering one; otherwise, it may be putting the organization at a huge disadvantage versus the competition.
Making the change to automate accounts payable does not only benefit the AP team. AP Automation touches nearly every piece of internal business operations. Other automation benefits include:
- The finance and treasury teams gain increased financial data which can simplify their cash management work as well as provide greater insight into payment schedules.
- Procurement gains a better workflow into spend data and improved supplier performance information which can improve supplier relationships.
- The line of business has a more cost-effective AP process which allows for more efficient operations.
- IT can improve financial data security in addition to having tighter integration between systems.
- The potential for increased visibility can turn suppliers into better partners.
The paper processing ship is sinking while technological advances in AP automation take business to a more efficient future.
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