If you’re in the habit of treating Accounts Payable as just a cost center, chances are you’re focusing primarily on processing invoices as fast and as cheaply as possible.
But if that’s all you’re optimizing for, then you’re missing out. As Celonis CFO Guido Torrini puts it, ‘Accounts Payable is a free source of cash, and should be treated as such.’
That means looking beyond cost per invoice to KPIs that can actually impact your strategic objectives, like DPO, on-time payments and cash discount realization. These are the KPIs that can affect your liquidity and your profitability — not to mention your ability to preserve cash during a pandemic.
When you know that companies can improve their cash positions by up to $358B simply by improving their payment behavior, shaving cents off your invoice processing costs starts to look like small fry.
Let’s look at the six most important KPIs every Accounts Payable department should be measuring — and what best-in-class execution looks like for each one.
This is one of the most common metrics for Accounts Payable, which is unsurprising considering it’s also your strategic lever for working capital. It tells you the impact your department is having on the company’s cash conversion cycle — in other words, this is the KPI you need on hand when you’re asking your boss for a pay raise.
DPO is of course hugely industry-dependent, but even a pulse check against other markets is a useful point of reference to determine what’s possible when it comes to renegotiating payment terms and improving daily payment behavior.
According to JP Morgan’s Working Capital Index, the average DPO across S&P 1500 companies in 2018 was 48.7.
Let’s face it though — no one’s payment terms are set to net 48.7. Everyone wants to increase DPO — why tie up working capital unnecessarily, when it could be growing interest in your bank account? But it’s challenging to do across every single invoice you deal with every day.
Companies like Fresenius Kabi are leveraging EMS technology to optimize their DPO. Using the Celonis Execution App for Accounts Payable, they are able to track DPO — amongst other KPIs — and drill down into the root causes affecting performance, like which vendors are having a negative impact, and where payment terms deviate between invoice and PO.
‘With one click, managers can update the payment terms for those vendors, resolving the issue at an invoice level but also on a systemic level — for every future invoice from that vendor,’ notes Jan Fuhr, Process Mining Lead at Fresenius Kabi. By optimizing their payment terms, Fresenius have already reduced their capital costs by more than $550k.
The average AP department we see starts with a paid-on-time rate of 35%. That’s pretty low considering paying on time is kind of the entire point of Accounts Payable — if that's where you are, you can be sure you're not executing at your maximum capacity.
Pay too early, and you’re tying down working capital unnecessarily, as we saw when we looked at DPO. But pay too late, and you might get fined. (France, we’re looking at you.)
We’ve helped hundreds of AP departments maximize their execution capacity when it comes to on-time payments, and one of the most common causes of late payments is actually late invoices. Unfortunately, that’s often outside of your control, like when your vendors invoice you manually even though they’re on EDI. Sometimes however it’s also just because those invoices have been sitting in your mailbox for three weeks.
Either way, with the help of real-time alerts and automated process steps, Deutsche Telekom’s Shared Services organization reached an on-time payment rate of over 90%. That’s a whole 60% above average, and there’s no reason you shouldn’t aim for it too.
It’s imperative to keep an eye on your cash discounts. After all, your sourcing organization has gone to all the trouble of negotiating these, so not taking advantage of them is tantamount to just leaving money on the table. Not to mention you might also be screwing up all of your FP&A planning if those discounts were taken into account when calculating your spend for the year.
Unless you have major strategic imperatives (for instance if you’re focusing on cash preservation and optimizing working capital right now), cash discounts are an easy win to increase your profit margins.
And yet most businesses capture less than 27% of all early-payment discount offers.
Tracking cash discounts doesn’t have to mean manually comparing payment terms, going through emails to find out the most up-to-date agreements, or trawling through metadata to work out whether or not you have in fact capitalized on your offers. It’s something that can be done automatically with the right analytics capabilities.
Don’t be like most businesses. Be like the best businesses — those that according to Zycus and Hackett’s P2P Benchmark Study capture at least 80% of their cash discounts. The very best, like the aforementioned Deutsche Telekom, capture as many as 96%.
‘Before Celonis, we realized only 61% of our cash discounts. Today we are achieving 90%. By combining data, insights, and automation, the AP Operational App makes day-to-day work so much more productive.’ - Jan Furh, Process Mining Lead at Fresenius Kabi.
Obviously nobody wants to pay twice, but do you even know if you’re doing it?
We often see duplicate payment rates in the range of 0.1 to 0.5%, and even as high as 1.5%. It may not sound like much, but multiply it by your total AP spend and it adds up quickly.
Sometimes duplicate payments happen because of fraud; more often, it’s just a simple mistake on the part of the vendor. It can result from issues as basic as your vendor having multiple records for different subsidiaries of your business, and sending an invoice to more than one.
It’s entirely possible to eradicate duplicate payments if you have the capability to automatically identify them across regions and ERP systems. Most ERP matching technology admittedly doesn’t catch the kind of tiny typo that can lead to duplicate payments, but machine learning algorithms can be trained to do it just fine — and if it’s out of the box, so much the better.
‘In a company like ours, which has billions of payments per month, tackling double payments is very important,’ says Peter Tasev, Senior VP of Procure-to-Pay at Deutsche Telekom Services Europe.
By leveraging machine learning to compare all outgoing payments and flag duplicate payments to employees, DTSE has saved $3.2M — and blocked any future duplicate payments too.
Just because cost and speed are not the only KPIs you should care about, doesn’t mean they’re not important.
Touchless invoices have a huge impact on processing costs and processing times, saving your people valuable man hours they can reinvest into higher-value work.
The best AP departments out there have maximized the execution capacity of their AP processes to achieve a 85% touchless invoice rate, thanks to the judicious use of process mining, automation and AI — the technologies at the heart of the EMS. These are helping them overcome common challenges like incorrect invoice fields or missing paperwork.
Not quite there yet? You’re not alone. For us lesser mortals, only 27% of electronic invoices can generally be processed straight-through without human intervention.
Cycle times make a good secondary KPI — it’s less strategic than DPO, cash discounts and on-time payments, but it’s nevertheless a good proxy for how efficiently your organization is running.
According to APQC, the average cycle time from invoice receipt to payment transmission is 15 days. Ardent Partners’ 2019 report on Accounts Payable notes that processing alone (no payment included) still takes 8.6 days.
If your cycle times are above average, it’s usually a good sign that something is off — whether it’s in your scanning, your processing, or elsewhere in your AP workflow.
And not only is it taking longer, it’s undoubtedly putting your other KPIs at risk — so always worth keeping an eye on it.
You don’t need us to tell you these six KPIs are important — chances are you’re already tracking them.
If not, we’ve given you some good ammunition to explain to your team why you should be. Some of these may be fiddlier than others — but the technology is out there to make measuring them a piece of cake, so there’s no excuse.
Ultimately though what’s truly important is that you have the means to not only track how you’re doing across all these fronts — but that you are able to understand what’s preventing you from doing better.
Measuring the right thing is the gateway to improving them. The next step? Being able to pivot your organization to focus on optimizing what you need at any given time, maximizing the execution capacity of your AP processes to deliver the results you want.
Find out more about optimizing for these KPIs with the Celonis Execution App for Accounts Payable.
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