Objective:
To increase compliance with agreed-upon payment terms to maintain good supplier relationships
Calculation:
| Number of invoices paid within agreed-contract terms | ||
| x 100% | ||
| Total number of invoices |
Target:
≥ 98% by net invoice date
Background Details
Rationale
Paying suppliers on time generates numerous benefits for hospitals, including cost savings through discounts and rebates, improved overall supplier relationships and an increased likelihood that future contract terms and pricing will be favourable.
Late payment can occur for a variety of reasons, including inefficient processes and manual systems, inaccurate data entry and invoice mismatches, and errors due to outdated contract information in the system. Unfortunately, late payment of supplier invoices is often overlooked as a key metric as many organizations just view this as the supplier’s issue since the negative affects to the organization are not often immediately apparent. However, the longer-term consequence of consistently making late payments is that the supplier base will become discontented and lose trust in the organization. Eventually, suppliers will raise their costs to recoup past losses and defend against future loss.
In addition, hospitals that fail to track payment due dates will miss potential savings from discounts and rebates that can be a significant source of funding and financing of hospital operations. Not taking advantage of these savings increases the overall cost of hospital operations.
Benefits
Financial Stewardship: By reliably complying with contract terms, organizations will be able to negotiate more favourable future contracts with suppliers. In addition, the organization could monitor compliance with early payment discounts, although capturing those discounts may be difficult with hospital constraints.
Process Efficiency: By changing accounts payable policies and implementing electronic commerce processes with suppliers, the organization can speed up the payment cycle, capture efficiencies, and reduce accounts payable workload by:
- Receiving electronic invoices from suppliers directly into accounts payable system for immediate completion of automatic three-way invoice matching;
- Paying suppliers through electronic funds transfer, rather than writing manual cheques, to speed up the payment cycle; and
- Considering options for implementing payment-on-receipt to reduce the need for invoice matching and speed up the payment cycle.
Supplier Relationships: Paying invoices according to negotiated contract terms improves supplier relations and supports potential future preferential contract terms and pricing.
Underlying Leading Practices
RFP Development & Compliance Management: Defining payment processes and terms explicitly in requests for proposals and in the supplier contracts contributes to greater compliance with these payment terms, leading to future preferential contract terms and pricing.
Tight Supply Chain/Accounts Payable Organizational Relationship: Regular communication and a strong working relationship between the supply chain and accounts payable departments supports timely reconciliation of invoices with purchase orders. This allows accounts payable to pay invoices in compliance with contract commitments and capture more early payment discounts.
Rebate/Discount Management: Electronic tracking of payment due dates for invoice supports timely payments to suppliers. It allows the organization to track and capture savings through early payment discounts as well as improving supplier relationships.
“End to End” eSupply Chain: Implementing electronic invoicing and electronic funds transfer will reduce payment cycle times and improve compliance with contracted payment terms. Electronic invoicing allows electronic invoices to be received from suppliers directly into accounts payable system for immediate completion of automatic three-way invoice matching. Electronic funds transfer allows organizations to pay suppliers electronically without cutting and mailing cheques.
Target Considerations
Establishment: The Working Group has limited experience with this measure and few people are currently tracking it. The group recommends setting an initial target of 98 per cent, with a review six to twelve months after implementation.
Impact of Other Metrics: To pay suppliers on schedule, hospitals require access to accurate payment term information and a short payment cycle process. Automated processes such as three-way matching of invoices can increase payment speed, but these processes rely on error-free data to work effectively. Initiatives to improve this metric should be considered in conjunction with metric 3.7 Percentage of Invoice Matches.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 1.1 Percentage of Active Items under Contract 3.6 Percentage of Invoices with Purchase Orders 3.7 Percentage of Invoice Matches |
1.1 Purchasing Policies and Procedures 1.3 Boilerplate Contracts and Key Legal Principles 5.1 Supplier Performance Management Process |
Implementation
Calculation Parameters
Calculation:
| Number of invoices paid within agreed-contract terms | ||
| x 100% | ||
| Total number of invoices |
| Variable | Include | Exclude |
|---|---|---|
| Number of invoices paid within agreedcontract terms | Include PO invoices for which payment is sent to suppliers by the due date for the types of orders and categories below | Do not include invoices with late payments or forthe types of orders or categories below |
| Total number of invoices | Include invoices that are both for the following types of orders:
|
Do not include invoices that are either for the following types of orders:
|
Data Accessibility Rating
CHALLENGING – Data are available but require analysis and custom reporting
Possible Data Sources
Electronic
Procurement and Accounts Payable Modules:
For automated reporting of Invoices paid within agreed-contract terms, information systems must be able to report on the contracted payment terms for every contract purchase order issued. The information systems in many hospitals lack the capability of reporting the contracted versus non-contracted status of items in purchase orders. If this function is unavailable, organizations may wish to establish a default term on all non-contracted POs (for instance, payment within 45 days) to include them in this metric. At a minimum, the accounts payable module must track payments to suppliers issued at or before payment due dates for all contract purchase orders. Custom reporting may be required.
Most financial reporting systems will provide the Total number of invoices received by an organization.
Manual
If electronic reporting is unavailable, the organization could consider using a logging method throughout the month or selecting a representative time period (one day, one week, etc.) to collect a subset of data. Organizations should select the option that balances the cost of collecting the data and the associated accuracy with the benefit of reporting the metric.
Implementation Challenges
Challenges:
- Accounts payable may not see this as an important initiative. The accounts payable department should be encouraged to participate in the improvement initiative. Senior management commitment and support may be required for implementation across existing departmental boundaries.
