Accounts Payable Efficiency (1): Invoice Data Extraction Might Be Slowing You Down
We’ve taken you through the total cost of ownership (TCO) of invoice data extraction. We highlighted the KPIs to track when evaluating your accounts payable (AP) processes, and assessed alternatives to manual data capture.
Now let’s take a closer look at the key driver of TCO: time. After all, time is money; therefore, time wasted equals money wasted. The efficiency of your AP team’s invoice processing method can have a massive impact on operations across your business, ultimately affecting your bottom line. We’ll start our two-part series with an investigation of invoice processing inefficiencies. You’ll learn how to identify their causes and effects, which will help you determine how to streamline your AP operation.
Time management is crucial to AP
If left unchecked, delays and inaccuracies in your AP process will create inefficiencies that ripple through your company, generating cost leakage, frustrating other departments, and straining relationships with vendors.
Generally speaking, there’s potential for time wastage and errors throughout the AP process, including:
- Late or lost invoices
- Incorrectly entered data
- Invoices without required purchase order numbers
- Difficulties retrieving invoice data for reporting
One or more of these factors can take several days for one or more employees to resolve, and could hinder other employees, departments, or even end customers.
Inefficiencies that reduce business transparency can put your company’s reputation at risk or give rise to serious legal issues. A deficient AP process can also make your company more vulnerable to fraud, especially if the issues are easy to find and exploit externally as well as internally. Accountants at Google and Facebook know this all too well: a group of European con artists emailed fake invoices to both companies, fooling the tech giants into sending them more than $100 million over a two-year period.
Perhaps the worst consequence of poor AP time management is its impact on suppliers. Euler Hermes, a trade credit risk insurance company, found that one-quarter of small business insolvencies are the direct result of corporate customers’ failure to pay.
No company wants to be known for late launches and updates, and no company needs the notoriety of bankrupting its vendors. The importance of AP process efficiency cannot be understated: it’s a business-critical matter that you should monitor and improve on a regular basis.
The KPIs of AP efficiency
To determine what improvements need to be made to your AP processes, and how to make those improvements, you’ll need to measure specific KPIs.
First, look at your invoice data capture method. Examine steps that require paper or manual data processing, as they’re error-prone and take the most time and resources to complete. Chances are there’s at least some manual work involved – 58% of invoices are still being entered manually into AP systems in a typical enterprise.
These are among the key KPIs to monitor so you can find out whether any part of your AP process needs fixing:
Invoice exception rate: Data inaccuracies, omissions, and inconsistencies are just a few of the many causes of invoice exceptions, which can slow or shut down your AP processes. Ardent Partners’ 2018 invoice exception rate benchmark is 23.2% across all industries; leading companies have a considerably lower rate of 10.7%.
Average invoice processing time: The longer it takes your AP team to process invoices, the more costs your department and company will incur. A 2017 Ardent Partners report states the average company takes 10.3 days to process one invoice; the report goes on to list all the issues that can arise when the function is drawn out for so long.
TCO: Using a model based on a real use case, we calculated that the TCO of manual invoice data capture comes out to an average of $2.03 per invoice. This figure can fluctuate wildly depending on the TCO methodology used; for example, the 2017 Ardent Report indicates an average TCO of $12 per invoice, with top-performing companies averaging $2.74 per invoice.
Invoices per month per employee: Our aforementioned model also calculated the average number of invoices one employee processes per month. Using manual data capture methods, this average is 3,840 invoices per employee per month.
Days sales outstanding (DSO): The number of days it takes you to pay a supplier after receiving their invoice is another important metric. No vendor wants to be kept waiting too long for payment, especially after they’ve honored their end of the service agreement. Also, you stand to lose early payment discounts. The Euler Hermes report we referred to above says that, globally, the average DSO is 66 days and rising.
Map and monitor what you can’t measure
There are numerous qualitative factors that you should be aware of as you evaluate your AP process. While you can’t measure them directly, all have a quantitative influence on your team’s performance and your business results. Understanding these elements and their effects will reinforce your proposals for improvements to your AP process.
For example, map out your invoice processing operations to gauge their complexity. You can start by listing the fundamental steps of any AP process, then break each step down into its components, such as the step’s owner (manager or department), software used to facilitate or complete the step, and the time it takes to complete each step.
The fundamental steps of the AP process are:
- Invoice receipt and sorting
- Data extraction
- PO matching
- Verification of vendor details
- Invoice approval
- Invoice payment
- Auditing and reporting
As you’re going through your AP team’s workflow, you’ll need to bear several questions in mind, and find the answers to those questions, such as:
- Do you receive both electronic and paper invoices?
- What forms of electronic invoice are you receiving (e.g. doc, pdf, xls, EDIFACT)?
- Are you using more than one invoice delivery channel (e.g. post, email, fax, EDI)?
- Does the same flow apply to all invoice formats, or do you have different flows according to format?
- Do you need to match POs to all invoices, or are you also processing invoices that don’t require POs?
- Are your POs standardized across your company, or do different departments have their own PO systems?
- Are all invoices centralized or stored in various locations throughout your company’s network?
This is just a handful of the queries that will arise as you study your AP team’s invoice processing. At specific steps, you may discover that your invoice data capture method is causing inefficiencies. To remedy this, there are alternative data extraction solutions that can streamline your AP operations.
At the same time, some of these alternatives can end up creating more work for your staff and reducing efficiency. For example, a template-based data capture system requires manual template setup, making this solution highly inefficient for a company with a lot of suppliers that have their own invoice formats. A thorough understanding of your AP processes, along with the right KPIs, will help you choose the invoice data extraction solution that’s right for your company.
Keep moving along your path to AP efficiency improvement
Once you’ve reviewed your AP processes and identified its inefficiencies, you’ll be able to see opportunities for improvement more clearly. One of the most critical steps in invoice processing is data extraction. A touchless solution that teaches itself how to capture information from multiple document formats accurately can boost AP efficiency considerably.
In the second, and final, chapter of this series, you’ll learn how you can keep your AP team from continuously fighting fires and help your operation become a key value driver for your business.
If you want to analyze your own use case, book a call with one of our automation experts here.