Invoice Processing Metrics

Let's begin with what we call the Big Five Metrics of Invoice Processing

Core Metric 1:

Cost per Invoice – At StylusAP we talk to many organizations (corporations and public sector) about AP automation. A very small fraction of these companies have a good handle of what they are paying to process each invoice.

There are two ways to calculate the cost per invoice. First is to take the total departmental spend (including allocated overhead amounts) and divide by the number of invoices processed.

For example, if your total departmental spend is $20,000 per month and you are processing 2500 invoices per month, the cost per invoice is $8.00.

Sometimes, the total number is not readily available so you have to calculate the amount from the bottom-up. In this case you must find every expense related to invoice processing (including exception management and vendor inquiries) and divide the total by the number of invoices processed.

Here are the costs you should look for:

• Labor, including managers, supervisors and approvers (allocated if necessary)
• Technology, including amortized costs for the software, hardware, network, maintenance, training, customization, integration services, etc.
• Telephone, paper, postage, fax, shipping services
• Paper and computer storage costs (for in-process and completed transactions)
• Overhead expenses
• Bank processing charges

Core Metric 2:

The time-to-process statistic refers to the average time from when an invoice is received until it is scheduled for payment — not necessarily paid, as this is dependent on your particular payment policies.

There is one exception where the cost per invoice and time to process invoice metrics could send you down the wrong path.

Noted AP expert Nat Goodman pointed out in a recent Web event that when he ran a large AP operation he was able to consolidate 1000 invoices from Federal Express into one monthly invoice. In this instance, the cost and time to process that invoice went up but the total spending on invoice processing went down.

This example proves the adage that for every rule there is an exception.

Core Metric 3:

Paid Within Terms – the percentage of invoices that are paid within specified terms. Note: this can be supplier-based terms or internal metrics, but either way, the ability to perform within the specified parameters is a hallmark of efficient accounts payable operations.

The idea is that you are not a victim of outside circumstances, but rather fully in control of your own destiny (at least as it applies to invoice processing).

Core Metric 4:

Early Pay Discounts – the percentage of invoices where you are able to pay less than the total invoice amount.

Some organizations are very aggressive about taking these early pay discounts, adding a profit component to the AP Department. These organizations tend to have a short Days Payables Outstanding (DPO) number.

Others purposefully neglect to take early pay discounts and instead choose to pay suppliers on-time or even late, in order to preserve precious cash balances. These companies tend to have higher DPO numbers.

The important thing to note is that one strategy is not necessarily better than the other, but rather that your AP department is able to produce the desired outcome by executing (and measuring) against that strategy.

Core Metric 5:

Percentage of Duplicate or Erroneous Payments – Overpayments and duplicate payments are such a problem in accounts payable than an entire industry — AP audit recovery specialists — has been created to deal with this issue.

Duplicate vendor records, blanket purchase orders, invoice copies, expired vendors and inconsistent invoice numbering procedures all contribute to the problem, and for some companies, this can be a significant cash drain.

We have seen companies more than recoup the entire cost of AP automation through reduction in duplicate and erroneous payments.

Here are a few best practices concerning AP Automation metrics:

1. Measure, but don’t take it to an extreme. Establishing a few basic measurements that are easy to capture and monitor are better than dozens that are difficult and time consuming to compile.
2. Make sure that your measurements are actionable. In other words, don’t measure things that you cannot take action upon.
3. Let your staff know what you are measuring. Don’t make your metrics a secret and use them to catch people doing the wrong thing.The numbers should be seen as motivational and not designed for retribution. By using positive increases in the benchmark numbers as targets to be hit, you can use the power of peer pressure to drive improved performance.
4. Don’t expect to hit your final targets right away, even with automation. Rather, strive to achieve constant incremental improvement.

How seriously do some organizations take their AP performance metrics? For a good example, the link below will take you to a chart that can be found on the University of Pennsylvania Website.

It is obvious that Penn not only believes in creating processing efficiencies, but is willing to hold its collective feet to the fire by publishing its performance.

There you can read about organizations like Chocolateria San Churro, a retailer of specialty chocolates that is one of the fastest growing companies in Australia. Using the AP Automation solution from StylusAP, Chocolateria San Churro was able to automate every part of its invoice processing function and achieve immediate operational efficiency gains of over 80 percent. You can also read about Nexcap, whose Director of Operations Heather Mislak, stated "SpringCM got our AP solution off the ground very quickly. The Professional Services team’s willingness to understand and improve our processes exceeded everyone’s expectations. Our StylusAP solution has reduced invoice-processing time by 25 percent and we’re now equipped to double or triple our invoice-processing capacity."

Similarly, a case study published by a business process outsource provider (BPO) shows a productivity increase of 70 percent for their audit recovery client after automating their AP processes. Specific areas of improvement reported in the study include:

As they say, "your mileage may vary" but these and other case studies are good indicators of the type of results you can achieve with your own automation upgrade.