A review of case studies found that early pay discounts could amount to approximately U.S. $2.2 million per U.S. $1B spend.
14th November 2013
Companies are experiencing increased pressure across their international supply networks. They’re often involved in complex customer and supplier relationships and must be able to handle the complex transactions that take place. At the same time, in many areas, the challenge remains to streamline and standardise, creating an efficient process that is scalable.
When it comes to purchase to pay improvement in this environment, it can often be difficult to find a starting point and identify where potential areas for optimisation lie.
Here we’ll share 7 KPIs which play a special role, help you analyse current processes and uncover the areas which require attention. They’ll focus your mind on some of the simple, but most relevant processes, which contribute to the customer-supplier relationship.
# 1: Volume of electronic and paper invoices
The benefits of e-invoicing are well known and more companies are making the transition to electronic and ridding themselves of the burden of paper. If you are making the switch to e-invoicing then measuring the rate of change, adhering to targets and tracking this measure with your e-invoicing partner, are essential to porject success.
In using this KPI, it is important to note the difference between invoices that are received electronically and invoices that arrive on paper and are converted to an electronic invoice. The larger the volume of electronic invoices received, the better the data quality and the faster invoices can be processed. Ensure you measure this accurately in line with your targets and goals in relation to supplier conversion.
# 2 Percentage of invoices automatically matched
Matching invoices to purchase orders and payment plans provides full accounts payable automation (touch-free processing) when the invoice accurately reflects the order or plan.
High levels of matching are readily achievable and monitoring this KPI provides insight into the potential areas of improvement – the need to work with certain suppliers more closely or assess the need for tolerances. Automatic matching can significantly reduce the time for approval, and payment, and the demands on AP resource.
# 3 Percentage of payments on time
Late payments can undermine your supplier relationships, increase purchase costs and potentially put your projects at risk. All companies should work to pay their invoices to the terms agreed. If the percentage of invoices paid on time is low then this will undoubtedly have an impact on profitability and relationships. As more scrutiny is being placed on late payers, reputation in this area is becoming increasing important.
# 4 Invoice processing time
This metric is most closely aligned to efficiency and productivity and determines how efficient accounts payable is overall. It can also be looked at on a per account basis to identify supplier invoices which may take more time than others. The high error rate in manual operations can contribute to long invoice cycle times but understanding how long the process takes can help identify areas for attention.
# 5 Time per activity & Exceptions
This KPI is closely linked with #4 above: In many companies, invoice processing through lengthy and repeated review and approval is delayed tremendously. Organisations should therefore focus on streamlining their approval processes. Again if exceptions are higher for particular suppliers, then actions can be taken to make sure they are providing the information necessary to facilitate better matching.
# 6 Contract compliance
To create efficiency in finance we have to look beyond invoice processing and encompass all purchase to pay and focus on procurement. Companies should monitor spend that lies outside the corporate strategy and established providers. Ad-hoc or maverick buying without negotiating prices and gaining economies of scale results in higher costs and undermines relationships with established providers. It often reduces the capability for automated matching too and uses up valuable resources as new accounts are created for minimal use.
# 7 DPO – Days Payable Outstanding
Delays in the financial supply chain impact the buyer’s days payable outstanding (DPO). Buyers with higher DPO are missing discount opportunities, which today can represent an annualized return of more than 37% using common payment terms. A review of case studies found that early pay discounts could amount to approximately U.S. $2.2 million per U.S. $1B spend. Contrary to popular belief, squeezing customers for early payment while delaying payment to suppliers isn’t always the best way to optimize cash flow, nor a good way to achieve an efficient supply chain. Both supplier and buyer must benefit from a transaction for the financial supply chain to be successful and efficient.
Purchase-to-pay analysis as part of a global business intelligence strategy
Feature rich analysis tools for procurement and accounting processes should support finance, purchasing and all business departments in achieving their own and their organisation’s strategic goals. These seven KPIs help companies identify weaknesses in their own processes and determine how much progress has been made. Only when procurement and accounts payable are striving for continuous improvement through the use of analytics across the purchase to pay process, can they truly understand their current position and align their efforts towards achieving their goals.