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Measuring the efficiency of a payment system in dollars and customer service.

An indexing system for accounts payable devised by staff of the City of Lubbock, Texas, provides benchmarks that are used to measure the efficiency of the, payment system in quantifiable terms and to identify problem areas.

Several years ago, the manager of working capital and cash systems for Occidental Petroleum Corporation wrote about the accounting theory behind indexing disbursements from the firm's accounts payable system to identify weaknesses and improve cash flow. A system so streamlined and effective produced envy among the City of Lubbock's accounting staff, who were struggling with a variety of payment system problems that kept the department in a daily reaction mode to seemingly endless issues.

In Lubbock, the problems ranged from slow citywide receiving procedures and inefficient software to hundreds of invoices needing to be entered daily. At times, the task seemed overwhelming for everyone associated with accounts payable. To alleviate the problems, the staff was determined to find ways to measure not only their internal performance, but the effectiveness of the overall payment system and its contribution, or lack thereof, to cash flow and cash management.

The Challenge to Change

The city had rarely been current with its expanding $136 milion accounts payable workload. A seasoned staff of three people was not able to get the accounts payable backlog under control and stay consistently current. Receiving scores of shipments on a cumbersome mainframe system with decentralized procedures was difficult and frustrating. Keeping up with thousands of invoices monthly and paying them timely was a challenge.

The largest problem seemed to be isolating a starting point in the midst of confusion. Over the years staff had grown accustomed to the stress of their workloads and had simply accepted the difficulties as necessary. Accounts payable data entry staff turnover was high and there was a strong resistance to change, for fear that change would result in more work and more stress. But management believed that answers could be found by resolving the underlying problems resulting in the loss of efficiency. The basic question became: how can the government, utilizing efficiency measurement, maximize current available resources to solve the underlying problems that adversely intrude on the ways the government does business?

Through a multiyear study of the City of Lubbock accounts payable, several issues had become apparent. First, working conditions and attitudes needed to improve. Second, the job assignments should be more equitable. It was clear, through analysis and team input from the accounts payable staff, that the major problems related to the management of resources rather than a lack of personnel.

The City of Lubbock is committed to be tough on costs, adopting an approach that says: the solution to any problem must come through efficiency improvements rather than additional personnel. Change is seen as an opportunity to expand creative talents.

Accounts payable staff members proved their willingness to change by rolling up their sleeves to establish order over procedures. Extensive time was spent in rethinking how an efficient accounts payable department would function in the perfect governmental environment. The first agenda item was to establish direct supervision over daily staff functions and customer service issues. One member of the team was promoted to a supervisory level based on her understanding and resolve to work with the issues. The new supervisor was charged with the responsibility of 1) assigning equitable workloads, 2) learning how to "tweak" every facet of the system to improve productivity, 3) identifying system and procedural weaknesses through intensive study of the day-to-day paper flow and 4) resolving customer service problems.

Another aspect of the rethinking effort involved staff in working with vendors to identify common frustrations from the viewpoint of all parties and to isolate breakdown points for customer service problems. With an increased emphasis placed on available discounts and payments within the stated payment terms, vendors were able to identify problems and notify city staff promptly. As a result, more quality work was accomplished and customer service problems became, for the most part, solvable issues.

From a time-management viewpoint, the previous system revealed duplication of efforts among staff. Fractured by confusion, staff had been reacting to problems rather than taking a proactive approach of accomplishing the data entry necessary to stay current. For example, when vendors would call with unpaid invoices, staff would proceed to locate the invoices and cut a check for payment.

One result of the disorganization was that problems were rarely solved permanently. The remedies were found to be day-to-day, band-aid fixes rather than long-term procedural solutions, and new problems resulting from old underlying issues seemed to surface continually.

Reeducation for Customer Service

One of the underlying issues needing resolution immediately involved the reeducation of departments on 1) terms codes and 2) the length of time invoices are held in their departments. Once the accounts payable supervisor dedicated her efforts to the basic problems, they began to decline rapidly and vendors began to receive their checks timely in most cases. The center of the solution became the education of vendors and city departments on procedural changes that affect vendor relationships.

To be effective for all vendors, the city must be able to handle payments in a standardized manner, while providing efficient remittance data. Often staff could not effect solutions with vendors on a clerk-to-clerk level. The chief accountant would intervene when necessary to initiate discussions with the corporate financial officer on a relationship basis rather than from a clerical workload viewpoint. The intent was to educate vendor management that the city wanted to pay invoices on the due date, within customary and allowable term codes, and in the most efficient manner for all concerned. To the vendor's clerk, the issue was not so much the timeliness of payments but rather providing data in a format to make the account allocation task easier.

On a clerical level, vendors may place the burden for their system inefficiencies on customers through requests for special handling or service. For example, staff found instances of vendors requesting extra research or special handling because their receivable systems could not capture needed information. The city's remittance advice gives more than adequate information for payment allocation, however, and given the choice of timely payments or additional research, corporate management would elect to improve its cash flow. This viewpoint was often at odds with that of the firm's own clerical employees, but once mutual communications were established, resolutions were generally the outcome.

Controlling Workloads

Realignment of workloads took about a year and was a painful trial-and-error process. The entire accounts payable team provided input, and all suggestions were applied. Initially, it was threatening to staff to be assigned more accounts than before, but at the same time, it was a relief to have direction and to give up the duplication of efforts.

Critical to success was the accounts payable supervisor's development of a new filing system for invoices that substantially reduced the time required to manage thousands of pieces of paper. Basically all invoices are now filed on a due-date basis rather than alphabetically. On a daily basis, staff handles and keys those invoices that 1) are to be postmarked within three days, 2) are marked with discounted terms and 3) involve special handling.

The City of Lubbock's mainframe system does not allow for warehousing invoices unless the purchase orders (POs) and receiving documentation have been entered into the system by the various departments. In the past, invoices were entered immediately upon receipt to attempt a match of the invoice, the PO and the receiving document. Staff found, in many cases, that the Pos and receiving documentation had not been entered into the computer and the invoice had to be refiled and reentered at a later date.

By delaying invoice data entry until just prior to payment, the purchasing process is allowed more time for information data entry, and problems are handled on an immediate basis to meet payment deadlines. Staff is now able to monitor the status of invoices with a minimum of paper handling and with less overtime. Better time management over current resources was the positive outcome. Overtime hours for the first six months of the 1991-92 fiscal year were reduced by 43 hours, or 55 percent, from the same prior period. These measures allowed the city accounts payable staff to regain control over individual workloads.

A Focus on Performance

Previously, little time was spent keeping track of performance because the focus of operations was simply keeping invoices paid. The mainframe had the capability to calculate the number of invoices processed by individual staff within a month, but the total number of invoices received during the month had never been counted. By identifying both the number of invoices received and processed, the current/non-current status of work-in-progress (WIP) invoices at month-end could be calculated.

Using this information, the team developed data entry guidelines for staff evaluation and merit raise purposes. The evaluation scale has proved very beneficial: Staff members understand the performance goals and can evaluate their own monthly progress.

The self-evaluation his made a positive impact on staff morale and promoted a strong sense of pride and accomplishment. The success of the accounts payable team has facilitated the desire for better service and efficiency throughout the accounting department. An accounting department customer service task force recently was organized to develop department plans. The entire department meets frequently to openly discuss customer service successes and failures. Higher departmental morale through positive group reinforcement and a sense of team spirit is the result of these meetings.

Developing the Index Report

Armed with new statistical information, the accounts payable staff was in a position to develop measurement data of the current payment system. Through simple indexing, the average number of days to pay invoices could be calculated. It was then possible to isolate those vendors who were paid either late or early and, more importantly, to calculate the amount of cash flow infused or diverted from the monthly investment stream. As was expected, the data showed that paying invoices early decreased the city's investment opportunity on valuable cash flow and paying late created customer service problems not readily forgotten by vendors.

The Occidental Petroleum Index System calculated the average payment index from invoice date to check-paid date. Upon analysis, however, Lubbock staff agreed that indexing or averaging those days allocated for check and mail float was not part of the stated objective of measuring the city.'s payment system. Float is an issue with priorities and reporting needs thilt differ from those in the corporate environment.

The design for Lubbock's indexing system includes only, the average number of days from the invoice date to the date of check generation. This allows the city to target procedures and system applications within a controlled time period without distorting the averages with check and mail float. An average payment-days target of 29 days is used.

Having a target date is significant in that it allows comparison of the actual payment data to targeted calculations. The dollar amount of cash flow added to or decreased from the monthly investment stream as a result of the payment system can be calculated on both a monthly and cumulative basis. Thus, based upon a benchmark, one can calculate the opportunity cost to the governmental entity, of paying its bills efficiently, knowing that there always will be some efficiency, costs associated with any payment system. Exhibit 1 illustrates the organization of the data and the calculations underlying Lubbock's index system for accounts payable. The minimum data required to calculate the index, are the date of the original invoice (shown in column 3), the payment date (column 4) and the amount of the invoice (column 6).


The ease and simplicity of dollar weighting all invoices to develop an average payment factor is the biggest attraction of indexing. Regardles of the platform upon which any payable system runs - be it PC, mini or mainframe - the calculations can be readily generated.

Exhibit 2 demonstrates the types of data available to measure payment system efficiency. For the year ending September 30, 1991, the City of Lubbock paid $136 million in an average of 17.35 days with 11 target benchmark of 29 days. Over the year, the city deferred from its potential investment stream approximately $3.1 million for approximately 140 days.


Using an assumed short-term investment rate of return (ROR), staff can measure opportunity costs associated with the efficiency of the payment system and its related policies and procedures. For example, using an average ROR of 5.5 percent, the City of Lubbock could have earned $66,650 had it been able to slow its average payments to 29 days per month and retained the use of cash flow for an additional 140 days for the year.


Although any payment system will have an inherent cost associated with doing business in the real world, using this index system, Lubbock staff can now identify problem areas and measure efficiency in quantifiable terms.

The in-depth analysis of the current payment system, illustrated in this discussion, identified customer service problems and vendor issues and has provided the means for measuring of the payment system. Many areas for improvement were isolated, and work continues on refining procedures and payment policies.

This effort, coupled with the customer service accomplishments and departmental improvements achieved, has enabled city officials to restructure their thinking about the city's resources, its customers and the way it conducts its business. The goal of the city is to be known to Lubbock citizens as efficient and repsonsive. The city leaders believe that this new evaluation system, by helping to redefine governmental resource management, will enable Lubbock to achieve this goal.

Susan A. Busbice, CPA, is chief accountant for the City of Lubbock, Texas.
COPYRIGHT 1992 Government Finance Officers Association
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Busbice, Susan
Publication:Government Finance Review
Date:Aug 1, 1992
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