In my book The Argument to Automate I write about processes being bad, and how when processes are bad everyone seems to know. The problem with processes is when they are mediocre. Processes that are so-so don’t normally get the attention of bad processes.
Sound The Alarm
As I wrote in my introduction when processes are bad everyone seem to know it. With Accounts Payable when your process is bad you lose invoices, invoices a paid slowly and you get late fees. You can also tell that your process is bad when people are working overtime and people don’t know where invoices should go to be approved, or the steps that need to be satisfied before the invoice is entered into the accounting system.
The problem with mediocrity is people can become comfortable with it. It is almost like things not being “so” bad they can be lived with. Mediocrity will lull your company’s leadership to sleep and it is very difficult to wake them up. What happens is once they are asleep or used to the process other competing processes or events or projects will take priority.
If you are good then your process will tell you. There are three things to look for to know your Accounts Payable process is good.
- Cycle Time – this is the amount of time that it takes you to approve invoices. From the moment your invoices are received (that takes out the Post Office for the equation) to the time the invoices are entered into the accounting system to be paid. The important part of this measurement will show you how efficient your approval process is. Appropriate paper levels of this process are 15 days and under. The clients I work with however that are automated average 3 days.
- DPO – Days Payables Outstanding. At first this metrics seem the same as cycle time, but what DPO measures is the average day it takes to pay a supplier. Meaning the entire process which start from the time the time the invoice is mailed or sent electronically by the vendor until the time the check or electronic payment is cleared through your bank. This number is normally calculated on a quarterly or annual basis. The number to strive for is 25 – 30. You don’t want the number to be to low because you want to keep your money as long as possible and you don’t want your number to be too big because it means you are paying a lot of suppliers late.
- Cycle Time and DPO – All together now, the difference of these two numbers creates a pretty interesting story of good process. Using the best case scenario I have ever been a part of, the cycle time is 3 days and the DPO is 30 the difference (I should make up a name for this… let’s call it – Payables Productivity Rate – PPR) or the PPR is 27. 27 is an excellent PPR. If the number is above 20 or below 30 you are able to “aggressively” capture discounts and “proactively” manage your check runs or payments. This is a wonderful place for an accounting professional to be.
I bet, for those of you that read my articles consistently, you know where I am going with this… AP Automation will greatly improve your numbers and give you much better visibility to what invoices and payments are doing as well as give you number like cycle time and PDO to know if your processes are excellent or just plain ok.
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