Average Processing Time

Definition

The term average processing time refers to a calculation that allows a company to understand how much time it takes to process a transaction. The typical transactions examined for this metric include payments to suppliers or invoices issued.

Calculation

Average Processing Time = Transactions Processed / Processing Hours

Where:

  • Transactions processed is the total of a repetitive type transaction completed in a given timeframe. For example, the analyst might be interested in the number of transactions processed in a single month. It's desirable to measure transactions that account for a significant number of accounting staff persons.
  • Processing hours is the total time dedicated to processing the transactions in a given timeframe. Typically, this is found by multiplying the FTEs assigned to the transaction times the days working on the transaction times an eight hour day.

Explanation

Accounting and finance metrics allow a company's internal analysts to understand how well its accounting and finance departments are operating. This is usually assessed by examining metrics such as error rates, transactions processed, discounts taken, and turnaround times. Accounting and finance metrics allow the company's management team to identify areas where changes can be made that will improve their key operating metrics. One of the ways to learn how quickly the accounting department is processing a certain transaction is by calculating an average processing time.

A company's accounting department is usually responsible for processing large numbers of transactions. This includes paying invoices, journal entries, and issuing invoices. Unless robotic process automation is deployed to complete these transactions, they will consume a significant amount of relatively expensive resources. While it's of interest to understand metrics like error rates, these only tell half the performance story. For example, it's possible to lower the number of errors when processing a transaction by having more people examine the transaction before it's considered completed. While this process might significantly reduce the number of errors, the average processing time will increase significantly too.

Oftentimes external benchmarks can be obtained for common transactions. Companies are willing to share their average processing times with other companies so they can understand how well their department is functioning. But as just pointed out, lowering average transaction times should not be accomplished at the expense of an unacceptable increase in errors. It's the responsibility of the functional manager to balance these two data point (errors and time to process).

Example

The Comptroller of Company ABC wanted to understand the average time it takes to render an invoice to a customer. She asked the company's benchmarking team to procure a global benchmark study, so she could understand the relative performance of the team. The benchmarking group determined top quarter performance was 0.30 hours per transaction. Company ABC's information below was found by the team.

  January February March April May
Invoices Processed 8,488 8,585 8,460 8,645 7,980
FTE Days x 8 Hours / Day 2,720 2,750 2,540 1,730 1,197
Average Processing Time 0.32 0.32 0.30 0.20 0.15

The Comptroller was not surprised at the above findings. She recently noticed a significant increase in the number of errors per 1,000 transactions and the sharp decrease in processing time indicates the team may be sacrificing quality for quantity. Based on these findings, she launched a continuous improvement to find the right balance of quality and quantity.

Related Terms

best possible DSOaged receivables, bad debt percentage