A proactive approach to streamlining back-office operations, such as vendor-invoice processing, can free up considerable amounts of cash that finance leaders can reinvest in talent or technology.
Organizations can assess the efficiency of accounts payable by benchmarking the metric “total cost to perform the AP function per $1,000 revenue.” At the American Productivity & Quality Center, we define this as including all AP-related labor, technology, overhead and outsourced services, divided by total revenue, then multiplied by $1,000.
While AP processing might not be a finance leader’s first cost-cutting target, taking steps to improve performance here can generate unexpected savings. According to APQC benchmarking data, top performers spend just $0.38 per $1,000 in revenue on AP, while bottom performers spend $0.92. For a billion-dollar company, that’s a difference of more than $500,000 annually.
How to reduce AP costs
So how do you move the needle on this metric? There are some structural changes that often turn bottom-performing organizations into top performers. If your organization’s AP function is decentralized, with staff or systems operating in various business units or regional offices, consider consolidation through a shared service model. When feasible, this strategy usually reduces costs significantly. Another option is to outsource AP processes, but beware, because outsourcing comes with a loss of control and visibility.
Without making a major transformation or strategic shift, however, you can implement small tactical changes that lead to big efficiency gains. Here are three key strategies:
1. Develop clear policies and procedures. Ensure vendor payment terms, including payment timelines, freight or shipping charges, and taxable status, are clearly documented in initial agreements and covered during a standard vendor onboarding process. This avoids confusion and reduces time spent on resolving issues later.
2. Increase invoice accuracy and controls. Whether payments to vendors are processed manually or through an automated system, having checks and balances in place that prevent duplicate invoice entries reduces the risk of errors and rework. Most modern enterprise resource planning systems are equipped with duplicate detection capabilities. Making electronic payments generally reduces the risk of errors or other issues.
3. Improve vendor communications. Standardize and communicate invoice submission processes, such as whether invoices should be sent by email or through an online portal, to maintain consistency across all vendors and locations. Additionally, identify a specific contact person for each vendor to reach out to in the event of a payment issue. These steps help reduce both the number of potential problems and the time it takes to reach a resolution.
Cash management strategy
Optimizing AP is part of an organization’s overall cash management strategy and goes hand in hand with accounts receivable management. To achieve peak performance, cash inflows should match outflows. In other words, an organization’s days payable outstanding should coincide with its days sales outstanding.
Other supporting metrics to monitor for opportunities to improve AP efficiency include:
- Cost per invoice processed
- Invoice cycle time
- % of electronic vs. paper payments
- AP FTEs per $1B revenue
Improving performance on these measures while balancing DPO and DSO requires careful monitoring and management. The payoff is a better cash position that increases organizational agility and resilience.
