When your company makes a payment mistake, the organizational cost extends well beyond the duplicate payment or the time it takes to correct the error.
Late or incorrect disbursements can affect relationships with vendors, customers and regulating entities, ultimately putting the organization’s reputation at risk. They also undermine efforts to establish a workplace culture in which tasks are done right the first time.
Particularly in B2C environments with broad customer bases, the financial cost of frequent disbursement errors can be significant. Tracking and managing data related to disbursement accuracy provides a good indicator of the maturity of an organization’s accounts payable processes. For organizations that need to improve in this area, there are several straightforward ways to identify and address errors, resulting in improved productivity and cost savings.
Cross-industry benchmarking data from the American Productivity and Quality Center (APQC) shows that 98% of disbursements are error-free the first time at top-performing organizations (75th percentile). Bottom performers (25th percentile) report only 88%, meaning 12 out of every 100 disbursements are late or otherwise incorrect (with each error potentially representing many thousands of dollars). At middle-of-the-road organizations, 95% of disbursements are error-free the first time.
Mistakes happen for myriad reasons, including duplicate invoices (often seen as invoices sent both electronically and in hard copy), phased projects with milestone payments, data entry errors, errors in the master vendor file, pricing errors and lack of proper invoice review. Internal changes, such as software upgrades or mergers, can also affect disbursement accuracy. Fraud is also associated with payment duplication and other disbursement distortions.
In addition, recent APQC research shows that more organizations are delaying payments to vendors and seeking longer payment terms to maintain higher levels of cash on hand. This trend could potentially affect late payment and error rates.
Identifying and correcting errors
In general, organizations have three options for finding and rectifying erroneous payments: an internal AP audit, an external audit by a third party or self-audit tools that continuously monitor and track AP processes. Self-audit tools can automatically find invoices with numbers that closely match, identify invoice and payment outliers, flag out-of-sequence invoice entries and highlight inefficient vendor practices.
Implementing a single enterprise resource planning (ERP) system to streamline business processes also improves both disbursement accuracy and the ability to find and fix errors. Even small organizations can access affordable software solutions that facilitate automating and tracking AP activities.
Other strategies for mitigating erroneous payments include instituting regular maintenance of the master vendor file, implementing strict data entry standards and establishing consistent payment methods for each supplier.
To help avoid accounting errors, finance leaders, while maintaining high expectations for accuracy, should create an environment in which staff feel comfortable talking about and learning from errors, to avoid repeating them in the future. Communicating the importance of identifying and addressing errors to safeguard the organization’s reputation aids in solidifying a sense of responsibility among AP department staff.
