accounts payable

Lean Wednesday Tip: Accounts Payable Performance

 

“By encouraging your A/P team to report and make critical department KPI metrics visual, such as, process cycle time, activity lead times, and cost per invoice with industry and competitor comparisons you realize the opportunity to reduce costs, increase productivity and streamline processes.”

How to stop Freight Charges from eating away at profits

The shipping and delivery cycle time race amongst valuable brands like Amazon and Walmart is a fierce one. Many parcel companies like UPS and FedEx may offer discounted rates for delivering on time but the real question is, “Are they actually delivering on time?”

By implementing effective visual internal controls, your company’s accounts payable team may be able to identify delivery discrepancies per regular parcel audits and if they are found you are not required to pay them.

Other things to look for while auditing would be:

  • Duplicate Invoices: Parcel vendor may generate duplicate invoices with different purchase order numbers, tracking numbers, invoice numbers, et cetera.
  • Discount Rate Verification: Thorough analysis of the invoice is critical for the purpose of ensuring that the proper discount rate was included.
  • Improper Billings: Sometimes there are multiple parties involved and you could be billed for the shipment when your contract specifically stated that “Vendor XX” was responsible for payment. You should integrate freight audit software into your accounts payable process to mitigate this risk.
  • Rate Verification: Essentially, your accounts payable team should be ensuring that the rate base, math, mileage, product classification and weight all match your purchase order and contract agreement, otherwise you are overpaying.
  • Fuel surcharges: It is important that this charge matches what is in your contract and not the current market rate.

Auditing offers the opportunity to gather critical data, such as, shipping spend by origin, destinations, general ledger codes, customers, fuel charges, vendors and carriers. This data can be used to improve your financial planning and analysis, and offer opportunities to streamline processes and realize cost innovations.

Reduce A/P and A/R Errors with Standardized Work

Per my previous article, “Taking a Visual Management Approach to Accounts Payable”, I touched upon a Lean Six Sigma technique, called, Standardized Work.

“Standardized work is often referred as standard operating procedures to refer to the activities that must happen in order to complete a process. Essentially, everyone doing the job does it exactly the same way.” There should be no difference as to how your Sr. Accounts Payable Manager enters and processes bills versus your Junior Accounts Payable Coordinator. There would also be no difference between the 10th time they did the work or the 7,000th time they performed the work.

These standards and process procedures should include visual checklists, setup procedures, an integrated preventative plan, or other process steps. They should be written in terms of expected behavior or actions, and must be auditable.

Why do visual process controls make sense? It is known that people gain 80% of their information from their vision, 18% from their hearing and 2% from other senses. By implementing visual standard operating procedures for Accounts Receivable and Accounts Payable you aid in the reduction of transaction errors and process cycle time; and improve overall productivity, and client and vendor relations.

Critical departmental information, such as, KPI metrics (cost of A/P and A/R invoice, current process cycle time, on time delivery rate, et cetera) compared with industry and competitor data should also be visual as this will prompt your team to look for opportunities to improve.

A Visual Management Approach to Accounts Payable

Purchase order approval audit trails and visual bill entry controls can be an effective way to reduce the time it takes to resolve Accounts Payable errors and keep your vendors happy.

Visual management allows for standardized visual controls that are visible to all Accounts Payable (and also accounting team) on how approvals should be obtained for a purchase order, how to document these approvals, and how to enter bills into the accounting software. Visual controls are effective because the accounting team will see them everyday and there should be a constant review of them and essentially they should all be processing Accounts Payable the same way.

Visual controls are like visual checklists for your Accounts Payable team. These controls should be placed in high traffic areas where your accounts payable team will see them. A copy should be placed by each members desk as well and update them of course accordingly to business changes.

For recurring fixed bills, automation is a given. For example, lets say company HBN gets billed from Microsoft $17.95 for a productivity application every month a recurring transaction can be created in Quickbooks that will automatically create the bill every month. This significantly reduces manual entries and overall cycle time.

To reduce manual entries of non-fixed expenses you can create templates in Quickbooks (or other accounting software) in which they can be duplicated and make the changes needed per your company’s data entry controls and new bill specifications (purchase order, invoice #, et cetera).

Critical KPI metrics that your company should be tracking and analyzing in regards to Accounts Payable are the following:

  • Total Cost of an AP invoice
  • Overall time to complete the AP process
  • Overall time to resolve an AP error
  • Percentage of manually entered invoices
  • Number of full-time employees that perform the AP process, per 1 million (billion) in revenue
  • Percentage cost to perform the AP process as a percentage of total process cost

You should periodically compare these metrics with industry and competitor data to see where you stand and where you need to improve.

In conclusion, standardized visual controls for Accounts Payable is a great way to ensure the AP process is done the same way by all AP personnel.