As we discussed in part 1, your ability to track metrics quickly and accurately is critical to steering your organization through the short-term challenges presented by COVID. Keeping your processes flowing is critical to success—despite how hard it may be to bring everything together in a disparate workplace.
In that blog, we looked at three of the six key metrics businesses should be tracking throughout the lockdowns and into recovery—uncollectable balances as percentage of revenue, the cost to reward and retain employees, and the time it takes to build out a short-term cash flow forecast. Today, we would like to look at three more metrics discussed by APQC throughout the pandemic.
Three More Metrics to Track in Your Return to Normal
Though you have a variety of things you need to track, certain metrics can point out weaknesses or opportunities. As we look towards the new normal, here are three more things to watch from your organization.
1. Days Sales Outstanding
With a recent survey of finance executives by CFO finding that 50% of organizations are scaling back or delaying investments right now, while 35% are laying off or furloughing workers. Driven by cash flow concerns and fears over the length of lockdowns, finance leadership is working to keep money flowing in.
How Long Does It Take You to Collect?
Similar to the challenges presented by bad debt as a percentage of revenue, you need to get paid for your products or services, and you need to get paid fast. That’s why the Metric of the month for May was sales outstanding (DSO), which measures the average number of days it takes an organization to collect payments from its customers.
Data from APQC’s Open Standards Benchmarking® database shows that top performers on this metric get paid in 30 days or less, while bottom performers take 48 days or longer to collect. Especially when budgets are tight across the board, companies are watching this tick up.
Reducing the Time It Takes to Get Paid
However, there are ways to shorten the path to getting paid, often starting with internal processes designed to provide customers with timely and accurate invoices while streamlining AR.
For example, if your AR processes are resulting in invoice errors — or your employees are spending far too much time on paperwork — automation can make a decisive impact in this area. Added to this, companies can reevaluate payment terms, offer incentives, and more to keep money coming in.
2. Days Payables Outstanding
While you work to speed up the money coming in, you also need to look at ways to extend the days it takes to pay your suppliers. In this, companies need to look at days payable outstanding (DPO), a measure that reflects the average number of days that it takes an organization to pay its creditors. DPO is a metric that directly linked to cash management and liquidity. Organizations track and adjust their DPO to improve their cash flow and working capital while protecting their balance sheet profile.
Buying Time: What’s Your Average DPO?
Data from APQC’s Open Standards Benchmarking® database shows that organizations falling within the 75th percentile for this metric have an average DPO of 53 days, while the median have a DPO of 40. The fastest-paying organizations are those in the 25th percentile, with an average DPO of 30 days (see chart).
These numbers have risen across the board since 2017. In that year, organizations in the 75th percentile paid within 46 days. Firms in the median paid within 30 days, and those in the 25th percentile within 27 days.
How Can You Extend DPO without Damaging Relationships?
While noting that DPO is an incredibly industry- and supplier-relative metric, APQC adds that though there are good reasons to pay early—discounts, for one—they also note that if a buyer can wait longer to pay its bills, it can put any excess cash reserves to work on short-term investment opportunities. And, despite low overall funding costs, large companies have been paying their bills later and later to do just that.
3. Duplicate and Erroneous Payments
Something we’ve discussed in depth recently, duplicate payments—both malicious and accidental—are not only avoidable, they’re costly. A duplicate or erroneous payment takes time to fix, cuts into cash flow, and can set forth a domino effect that leaves other suppliers unpaid. Especially in a time when money is tight, controllers can’t afford to sent twice as much to a supplier at the wrong time when others are calling.
In the Metric of the Month for March, APQC adds that every organization should track, monitor, and benchmark data related to the number of duplicate or erroneous disbursements/payments in AP invoice processing.
How Often Do You Send Out the Wrong Payment?
Data from APQC’s Open Standards Benchmarking® Accounts Payable survey shows that on average, even top performers report that nearly a full percentage point (0.8%) of their annual disbursements are duplicate or erroneous. Bottom performers report more than twice that amount at 2% of total annual disbursements.
Strategies to Avoid Duplicate and Erroneous Payments
There are many warning signs that lead to duplicate payments. Many of the most common causes of such payments, such as data-entry errors, poor-quality data in the master vendor file (MVF), and pricing errors, can all be greatly mitigated through automation.
By removing human intervention from the equation, you not only reduce the potential for error, you reduce the potential for fraud. Learn more about identifying and stopping fraud in our two-part series showing the most common internal fraud and the common traits of a fraudster.
Add up the Numbers—It Pays to Join the Controllers Council
Though these just scratch the surface of the metrics you need to track on a daily basis, there are many more ways to get ahead of the curve. We launched the Controllers Council as a community and forum for controllers across the US to discuss and benchmark against similar companies. With just a small annual investment, you can join the discussion and get a lot more benefits along the way. Ready to learn more? Click here to read all the membership benefits.
