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Accounts Payable and Receivable: Companies Still Don’t Get it

Over the past three years, CFOs developed a fine taste for productivity gains. And my most recent research shows they are looking for more 1.  Surprisingly, some are turning, once again, to the basic transaction-oriented processes such as accounts receivable (AR) and accounts payable (AP). Why? Haven’t these processes already been made as slick as can be?

APQC’s Open Standards Benchmarking shows that, indeed, there are ample opportunities to reduce costs. Let’s look at AR, for example. Consider Figures 1 and 2 below. These perspectives involve:

  1. the average size of the staff needed to get invoices out to customers over the course of a year and
  2. the relative productivity of the individual full-time equivalent (FTE).

[1] Driscoll, Mary. "Financial Improvement Programs Now Aim at Both Value and Cost." APQC Knowledge Base, 2012.

[2] The top quartile is the performance level above which 25% of all responses occur. The bottom quartile is the performance level above which 75% of all responses occur. The median is the middle value in a set of values that are arranged in ascending or descending order.

The gaps between the top and bottom performers are staggering. How do the top performers do it? The answer, in short, is that the pioneers (who are in the minority at the moment) cut way back on the number of invoices they present to customers using paper. The good news for those who want to move up the maturity curve is that there is plenty of opportunity to reap cost-savings here. Approximately 86 percent of organizations who participated in a third-party survey reported that they submit invoices today in paper form3. Seventy percent report sending invoices via email or fax. Either way, there is a lot of paper handling, envelope stuffing, file uploading, or scanning involved.

With labor costs representing the biggest contributor to the overall cost of financial operations, the answer has to be streamlining and automating core AR workflows.

Beyond cut-backs

Finance organizations that are truly committed to continuous process improvement aim higher than headcount reduction. The end-game is to liberate talented staff from routine, low-value chores and apply them instead to analytical tasks that can make a difference to business performance. One example: liberating AR people so they can better understand the root causes of payment-pattern aberrations. AR aging can tell you when customers are past due, but that exercise won’t explain why payments are sometimes held back. If you can assign people to isolate the root causes of recurring payment halts, you may find that there are things that there are things your organization can do differently to prevent them.

For a closer look at AR process performance, you can download this APQC white paper at no charge: http://tinyurl.com/6qbmxyk


[3]. A survey conducted in January 2012 by OB10, a global e-invoicing network, and The Institute of Financial Operations, a not-for-profit, guidance-setting association for the accounts payable and the accounts receivable profession.

 

Comments

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

Different businesses in different industries are going to have results which are not "apples to apples" with others, and that could go a long way in explaining the gap.

A firm that sends out millions of invoices per month (credit card co., electric co.) is going to have a much higher invoice to FTE ratio than a special order job shop (kitchen remodeler, candy gift-box packager) that needs to send out a customized, itemized invoice to each customer.

AP and AR were a major part of a 7-post blog series on Working Capital if you are interested in the topic -

http://treasurycafe.blogspot.com/search/label/Working%20Capital

All that being said, the more one can standardize processes, eliminate paper, and free up talent to perform higher value added tasks as discussed in the APQC whitepaper the better.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

As David mentioned, customized invoicing does take longer, but if one spends the time to minimize that customization, i.e., bring an order to the chaos by using an accounting system that is built to work in the environment.

Case in point, some accounting software can do kits while other can do kits and features. By using using a feature rich kit system, you can reduce the time and error rate to custom billing as well as reduce many of the bottlenecks that are created when there are errors.

This means that companies need to know that the TCO on inexpensive software can be quite a bit higher then the TCO of a more complex and costly system. A best practices approach to choosing the right software can go a long way to decreasing the FTE ratio as well as TCO.

Patrick Slattery
Title: Managing Director
Company: Canopach
(Managing Director, Canopach) |

It is possible to drive administrative costs to $0 -- just chain all the doors shut and turn the lights out. Tell customers and vendors to please go elsewhere, and there will be no AR or AP to worry about.

Alternatively, invest in growing revenue 0.3% and your AR and AP concerns will not seem anywhere near as bothersome.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Patrick -

One role of the CFO is reduce costs (the other is to increase top line revenues). How does your answer match that mission?

I've had higher and lower FTE in the same industry group (different businesses) and it all depended on standardization and computerization. Those companies that worked smarter, saved on costs.

BTW, some businesses today would love a 0.3% increase in revenue, they'd like a lot more, but that may not be happening for a while...

Daniel Mirabito
Title: Consultant
Company: Finance Transformation
(Consultant, Finance Transformation) |

Trying to drive admin cost down without other metrics simply pushes the cost into other parts of the business.

Too often we see companies “save money” by off-shoring transaction processing, but a closer look shows an increase in work by the business with the not-so-easy transactions.

That is, the process is so ill defined that 10% of the transactions don’t fall within the sweet spot capability of the shared services center. As a result, an R&D manager or inventory manager gets involved in getting an invoice paid by researching, calling, emailing, re-submitting and re-doing. The business manager is in-effect managing the service center, but their salary hits a different area of the company.

R Rogers
Title: VP
Company: The AP Network
(VP, The AP Network) |

Good points here. Process improvement has to look at end-to-end processes so your not just "squeezing the balloon," but improvements in order-to-cash and procure-to-pay processes lead to savings that drop to the bottom line. The value-add from freed up resources, put toward spend analysis, for example, leads to more savings. A dollar added to the bottom line through such operational process improvements is equivalent to four or more dollars of new sales.

W. Michael Hsu
Title: Founder & CEO
Company: DeepSky | Entrepreneur's Accounting Depa..
(Founder & CEO, DeepSky | Entrepreneur's Accounting Department) |

Fantastic write up - especially like the point that you made about how it's not simply about head reduction but rather the improvement of technology and processes to help elevate our team from mundane low value tasks to higher value analytical responsibilities. Plenty of technology out there to help us with this and great processes are just limited by your imagination. Cheers.

Kathleen Willis
Title: Consultant
Company: Self employed
(Consultant, Self employed) |

Companies need to remember that while process improvements are important, bringing the non-financial employees on board with company goals is even more important. I have seen many companies with no credit policies in place, or with policies that are not enforced.Sales people may think that as long as they are meeting revenue goals they are doing fine, but they are not seeing the big picture. Selling to customers who are slow payers or high maintenance, costs the company money. I learned the hard way that some business customers think that if no one is calling them and asking when they are going to pay, they don't need to pay. That is how they manage their business.Knowing and understanding your customers is just as important as how many invoices you are generating per FTE.

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