The term “benchmarking” in itself is broad, and in a business context can pretty much be applied to any quantifiable process or operation. It’s typically an ongoing practice that companies can use for continuous improvement purposes.
Financial benchmarking involves running analyses of financial performances and comparing the results. It’s a sure-shot way for assessing a company's overall competitiveness, efficiency and productivity, which is especially useful if you’re operating a dog-eat-dog industry. One area where benchmarking yields truly powerful and actionable insights is Accounts Payable.
AP benchmarking is a powerful means of understanding how well you’re performing financially. Compared to their peers, the AP processes within best-in-class organizations cost less, are more accurate, take less time, provide better visibility, and result in fewer inquiries from suppliers.
Benchmarking answers the most fundamental of questions: Where is your AP process now? How is your AP performance? For all you know, your invoices per FTE, error rate, and invoice cycle times are well within tolerable ranges. Then again, there could be considerable room for improvement.
It works like this – companies evaluate the various aspects of their AP processes and compare them to the processes of “best practice” companies. Most often these “best practice” companies are from within the same field or industry. From there the information allows new and better strategies to be formulated, which all works towards making improvements or adopting new best practices.
Example?
Let’s take a look at the below. What we’re seeing here is a graph showing the average number of days specific industries in the US take to complete their Accounts Payable invoice cycle:
Source: SSON Analytics
Let’s say you’re the Head of Finance & Accounting for a top-dog utilities organisation in North America, and your average AP Invoice cycle time is 16 days.
Though you might consider yourself to be a key player in the industry and be confident in your service delivery, straight away you can deduce that you’re falling below average in terms of your AP operations! It really ia as simple as that, and ultimately means there’s improvements that must be made.
Some other useful AP benchmarks include:
- Invoice exception rate
- Single invoice cost (all-inclusive)
- Percentage of invoices processed “straight-through”
- Percentage of suppliers who submit invoices electronically
- Percentage of invoices linked to a Purchase Order (PO)
Why is it so important to know where you stand?
Short answer? So you know where you stand.
Longer answer? With benchmarking-based goals, you take away the possibility of setting targets that are too high or too low. When you perform AP benchmarking against your competitors, you can measure their performance using specific metrics, and this allows you to devise robust strategies and set realistic goals.
Financial Benchmarking on a more general scale not only serves as a performance metric, but it also shines a light into those dark corners and magnifies small issues that need correcting before they start snowballing.
For example, the most typical measures of business success are revenue and profitability, but the stories they both tell can be so drastically different. For example, you and a competitor could bring in the same revenue, and since revenue is arguably the leading indicator of business success you might think that you’re are on a level playing field. But when you look at your gross profit margins, you realise that your gross profit margin is 3% less.
For every $1 million in revenue, they have a $30,000 advantage. That's a number not to be ignored.
Once you discover discrepancies, you can better understand your strengths and weaknesses, as well as those of your competitors. You will be positioned to identify opportunities for change.
What’s more, the business processes and systems within your finance function are inextricably linked with other enterprise functions. Process improvements in one area may have a ripple effect on others; for example, improved IT controls may result in more reliable data for decision-making in finance. That’s something you can thank your trusty tech team for.
Conclusion
Accounts payable departments today must strive towards best-in-class status or risk being left behind in today’s competitive global business environment. To reach higher ground, enterprises must not only be committed to transforming their AP functions into true centers of excellence, they must follow the paths blazed by best-in-class organizations in the greater pursuit of AP perfection.