Definition
The term transaction error rate refers to a calculation that allows a company to understand how accurately the accounting department is processing routine transactions. The typical transactions examined for this metric include payments to suppliers or invoices issued.
Calculation
Transaction Error Rate = Number of Errors / Transactions Processed
Where:
Number of errors is a count of the transactions requiring a correction after it has been processed.
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.
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 efficiently the accounting department is processing a certain transaction is by calculating a transaction error rate.
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 transactions per FTE, these only tell half the performance story. For example, it's possible to process a large number of transaction, but if the error rate is high, then more time is consumed correcting the original transaction. More importantly, customer satisfaction will suffer if the errors involve bills rendered to customers. Oftentimes errors take more time to correct than they do to process correctly the first time. This is why the overall performance of a team must be assessed using both volumes of transactions as well as accuracy.
Example
The Comptroller of Company ABC wanted to understand how accurately her accounts receivable department was sending invoices. She asked the company's benchmarking team to procure a global benchmark study, so she could understand the performance of the team. The benchmarking group determined top quarter performance was 1.2 errors per 1,000 transactions processed. The information below was found by the team.
| January | February | March | April | May | |
| Invoices Processed | 8,488 | 8,585 | 8,460 | 8,645 | 7,980 |
| Errors | 7 | 6 | 7 | 10 | 12 |
| Errors per 1,000 Transactions | 0.82 | 0.70 | 0.83 | 1.16 | 1.50 |
Based on the above finding, the Comptroller launched an investigation to determine the recent degradation in performance. Earlier in the year, the team's error rate per 1,000 transactions was better than top quartile performance, while the team recently slipped to second quartile.
Related Terms
transactions processed per FTE, purchase discounts missed ratio, aging buckets
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