Managing your accounts payable KPIs is the only thing keeping you from successfully managing your accounts payable (AP) department vs drowning in numbers and spreadsheets.
The financial health of your organization is critical. From handling vendor invoices to managing invoice approval workflows to ensuring timely payments, your AP department plays a crucial role in maintaining a smooth cash flow to your business. But how do you measure and improve your AP processes’ performance and your company’s payment experience?
That’s where KPIs come in.
In this comprehensive guide, you’re going to learn:
- The power of KPIs for accounts and explain why they are indispensable for any AP department
- Top KPIs your organization should track
- Practical ways to measure your AP KPIs accurately
So whatever your business size is, I will teach you valuable insights, practical tips, and actionable strategies to help you make the most out of your AP KPIs and finally avoid common payment errors.
What Is An Accounts Payable KPI?
An Accounts Payable KPI (Key Performance Indicator) is a measurable metric used to evaluate the efficiency, effectiveness, and performance of your accounts payable process within your organization.
These indicators give your business valuable insights into how well your AP department manages your financial obligations, supplier relationships, and cash flow. Aside from that, it helps you avoid delays in payment and keep track of your payment terms on time.
When you track and analyze your Account’s Payable KPIs, it becomes easier for your business to identify areas for improvement, optimize your processes, reduce costs, manage electronic payments, and pay your suppliers promptly.
Check out some of the most common Accounts Payable KPIs:
- Days Payable Outstanding (DPO)
- Cost To Process Each Invoice
- Payment Process Errors
- Invoices Processed Per Employee
We will discuss the 12 most important KPIs to measure in the next sections of this comprehensive guide, along with the level of automation you need to achieve this.
Take note that measuring these KPIs play a vital role in helping you enhance your financial decision-making and, indeed, drive success in your accounts payable department.
Why Are Accounts Payable KPIs Important?
As mentioned earlier, your Accounts Payable key performance indicators (KPIs) are crucial in tracking and improving your AP department’s productivity, efficiency, and cash flow.
These are the top 3 reasons why you need to track your Account’s Payable KPIs:
1. Understand Valuable Insights: By closely monitoring your payable metrics, your business gains valuable insights into your payable process. Thus, it becomes easier for you to identify areas for improvement.
2. See A Clear View Of Payment Cycle: With a clear view cycle, you enable your business to measure the average time period it takes to process an invoice, the average cost per invoice processed, and the percentage of late and late payment fees. These types of information help your AP department to identify bottlenecks and inefficiencies in your process, allowing your business to implement strategies to help you reduce processing times and costs. Thus, boosting your productivity and your outgoing payments.
3. Identify Payment Errors: KPIs in your accounts payable enables your business to identify and address payment errors such as duplicate payments or invoice exceptions. By monitoring these metrics, your AP teams can proactively rectify issues preventing your business from experiencing financial losses.
Remember that failing to capitalize on the benefits of your accounts payable KPIs can result in your business experiencing missed opportunities. Without accounts payable KPIs, it is most likely for your business to suffer from human errors brought by manual processes leading to increased payment processing times, higher costs, and strained relationships with vendors.
Top 12 KPIs Your Organization Should Track
This section will explore the Accounts Payable Key Performance Indicators that will help you enhance your efficiency and success.
From measuring the effectiveness of payment processes to optimizing supplier relationships, these metrics offer your business invaluable insights for driving improvements within your accounts payable department.
Here’s the table of content of all valuable performance indicator we will cover in this section:
- Days payable outstanding (DPO)
- Cost to process each invoice
- Top payment methods
- Payment errors
- Invoices processed per employee
- E-invoices as a percentage of total invoices
- Percentage of supplier discounts captured
- Average time to approve an invoice
- Accounts payable expense as a percentage of revenue
- Invoices processed per year
- Percentage of invoices processed straight through
- Invoice cycle time
Days Payable Outstanding (DPO):
- What Are Days Payable Outstanding (DPO)?: Days Payable Outstanding (DPO) measures the average number of days it takes for your company to pay its suppliers after receiving outstanding invoices.
- Why Is It Important?: DPO is crucial as it indicates how effectively your company manages its payables. A higher DPO means that your company takes longer to pay its suppliers, which can improve cash flow. However, excessively high DPO may strain supplier relationships.
- How Do You Track Days Payable Outstanding (DPO)?: To calculate DPO, divide the total accounts payable by the cost of goods sold (COGS) and multiply the result by the number of days in the period.
Cost To Process Each Invoice:
- What Is Cost To Process Each Invoice?: The Cost to Process Each Invoice represents the total operating expenses incurred by your AP department to process a single invoice, including labor, software, and other additional costs.
- Why Is It Important?: Tracking this metric helps your business identify inefficiencies and cost-saving opportunities in the AP process. Lowering the cost per invoice can lead to significant savings over a period of time.
- How Do You Track Cost To Process Each Invoice?: Divide the total cost of processing of invoices (e.g., labor, software solutions, overhead) by the number of invoices processed within the same period.
Top Payment Methods:
- What Are Top Payments Methods?: This metric identifies the most frequently used payment methods for settling volume of invoices, such as checks, electronic funds transfers (EFT), credit cards, etc.
- Why Is It Important?: Understanding your company’s most commonly used payment methods helps optimize payment processes, improve cash flow, and cater to suppliers’ preferences in reference to your contracts with suppliers.
- How Do You Track Top Payments Methods?: Record each payment method you use for settling invoices and determine the percentage of total invoices processed with each method.
Payment Errors:
- What Are Payment Errors?: Payment Errors measure the number or percentage of invoices in your business that contain errors during invoice processing time or payment, such as incorrect amounts, duplicate payment rates, or late payments. Thus, causing process inefficiencies.
- Why Is It Important?: Tracking payment errors is critical for your business so you can continue maintaining accurate financial accessible records, avoiding costly mistakes, and prevent supplier disputes.
- How Do You Track Payment Errors?: Record the number of invoices with errors and divide it by the total number of invoices processed to calculate the percentage of payment errors.
Invoices Processed Per Employee:
- What Is Invoices Processed Per Employee?: This metric calculates the average number of invoices your AP department employee processed over a specific period.
- Why Is It Important?: Monitoring this KPI provides insights into the productivity and workload of AP staff. It helps identify staffing needs and potential process bottlenecks.
- How Do You Track Invoices Processed Per Employee?: Divide the total number of invoices processed by your AP department by the number of full-time equivalent (FTE) employees in the department during the same period.
E-invoices as a Percentage of Total Invoices:
- What Is E-invoices As A Percentage Of Total Invoices?: E-invoices as a Percentage of Total Invoices measures the proportion of electronic invoices received compared to all invoices processed within your company.
- Why Is This Important?: Tracking this KPI highlights your organization’s progress in digitizing AP processes, which can lead to cost savings, efficiency gains, and reduced environmental impact.
- How Do You Track E-invoices As A Percentage Of Total Invoices?: Divide the number of e-invoices processed by the total number of invoices processed and multiply by 100 to obtain the percentage.
Percentage of Supplier Discounts Captured:
- What is The Percentage Of Supplier Discounts Captured?: This metric represents the percentage of discounts captured by paying invoices early or in a timely fashion.
- Why Is It Important?: Tracking this KPI helps your business identify how well your company leverages discount opportunities, leading to potential cost savings.
- How Do You Track E-invoices As A Percentage Of Total Invoices?: Divide the number of invoices with captured discounts by the total number of discount-eligible invoices, then multiply by 100 to get the percentage.
Average Time to Approve an Invoice:
- What Is Average Time To Approve An Invoice?: Average Time to Approve an Invoice measures the average time taken to review and approve an invoice within your organization.
- Why Is It Important?: This KPI highlights process efficiency, and reducing the approval time can lead to faster payments and better supplier relationships for your company.
- How Do You Track Average Time To Approve An Invoice?: Calculate the time taken to approve each invoice and then find the average across all invoices processed in the period.
Accounts Payable Expense as a Percentage of Revenue:
- What Is Accounts Payable Expense As A Percentage Of Revenue?: Accounts Payable Expenses shows the proportion of total revenue spent on accounts payable expenses (e.g., vendor payments, processing costs).
- Why Is It Important?: Tracking this metric helps evaluate the efficiency of AP operations and its impact on your company’s overall financial processes and performance.
- How Do You Track Accounts Payable Expense As A Percentage Of Revenue?: Divide the total accounts payable expenses by the revenue generated during the same period and multiply by 100 to get the percentage.
Invoices Processed per Year:
- What Are Invoices Processed Per Year?: Invoices Processed per Year represent the total number of invoices your AP department processes annually.
- Why Is It Important?: Tracking this KPI provides an overview of your AP department’s workload and the scale of financial transactions within the organization.
- How Do You Track Invoices Processed Per Year?: Count the total number of invoices your company has processed throughout the year.
Percentage of Invoices Processed Straight Through:
- What Is Percentage Of Invoices Processed Straight Through?: This metric measures the percentage of invoices your company processes without requiring manual intervention or invoice exception rate handling.
- Why Is It Important?: A high percentage of straight-through processing indicates your company has an efficient and streamlined AP process, reducing the potential for manual entry errors and saving time and effort.
- How Do You Track Percentage Of Invoices Processed Straight Through?: Divide the number of invoices processed by the total number of invoices processed, then multiply by 100 to get the percentage.
Invoice Cycle Time:
- What Is Invoice Cycle Time?: Invoice Cycle Time measures the average time an invoice takes to move through the entire AP process within your company, invoice from receipt to payment.
- Why Is It Important?: Tracking this KPI helps identify process bottlenecks and optimize the entire accounts payable workflow for faster and more efficient processing.
- How Do You Track Invoice Cycle Time?: Calculate the time taken at each stage of the AP process (e.g., receipt, invoice approval, payment) for individual invoices, and then find the average across all invoices processed in a given period.
Always remember that by tracking and analyzing your accounts payable KPIs, your business can gain valuable insights, optimize your payment processes, improve your cash flow management, and enhance your overall financial performance.
How Can AP Automation Solutions Improve Your KPIs?
Undoubtedly, AP Automation can significantly help your business improve its key performance indicators (KPIs) by increasing efficiency, reducing payable costs, and enhancing the accuracy of your accounts payable process.
Your organization can significantly improve your financial operations by automating manual tasks and processes.
Here are some of the common ways payable automation can help you improve your KPIs
- Efficiency Boost: AP automation significantly increases efficiency in your organization by automating time-consuming tasks like invoice data entry. Automation software can extract data from your invoices accurately and quickly, speeding up processing and saving valuable time and resources.
- Faster Approvals, Reduced DPO: Automation streamlines the approval process within your organization by digitally routing your invoices, resulting in quicker approvals and payments. This reduces your Days Payable Outstanding (DPO), enabling early payment discounts and avoiding late payment penalties.
- Cost Savings and Improved Productivity: With AP automation handling repetitive tasks, employees in your company can focus on more value-added activities. This results in improved productivity, cost savings, and the ability to process more invoices with fewer employees.
- Enhanced Accuracy and Fraud Prevention: AP automation minimizes the risk of human errors and eliminates fraud within your organization. An Automation Software follows predefined rules and validations to process your invoices accurately, reducing duplicate payments and payment errors. It also enforces compliance with regulatory requirements and business functions & rules.
- Insights and Improved Vendor Relationships: By automating your AP process, your organization gains valuable glance insights into your financial operations. AP automation offers your business cost savings, improved relationships with your vendors, and the potential for better financial performance over time.
What Are The Challenges In Analyzing Accounts Payable KPIs
Analyzing your company’s accounts payable key performance indicators is important to manage your financial operations effectively. KPIs provide valuable insights into different aspects of your accounts payable process, from your average cost of payments to the timeliness of your payments.
However, there are several challenges that your business might face when analyzing your KPIs. Here are some of the common challenges:
Reducing Errors Due to Manual Data Entry
Manual data entry is prone to human errors, leading to inaccuracies in the accounts payable database. These errors can skew your KPI calculations and compromise the overall integrity of financial reports.
Monitoring Invoice Collection from Various Channels
Your invoices may be received through email, mail, or electronic portals. Keeping track of your invoices from multiple sources can be challenging, potentially causing delays and overlooking critical payment deadlines.
Matching Invoice Data with Purchase Orders, Contract Values, and Goods-or-Services-Received Notes
Ensuring matching invoice data with purchase orders, contract values, and goods-or-services-received notes is vital for your company to do accurate invoice processing and understand your invoice processing costs. Failure to match these elements correctly can lead to payment discrepancies and hinder financial analysis.
Identifying AP Fraudulent Transactions
Detecting and preventing accounts payable fraud is a significant challenge. Fraudulent transactions, such as fictitious invoices or duplicate payments, can distort your digital records and other financial records that negatively impact your organization’s KPIs.
Improving the Efficiency of Multiple Accounts Payable Channels
Your organization often deals with multiple accounts payable channels, each with its processes and requirements. Achieving consistent efficiency across these channels can be demanding and may result in varied performance metrics for your business.
Achieve Your AP Automation For Your KPIs With ProcureDesk
Your organization needs to overcome the challenges brought by analyzing Accounts Payable KPIs.
You can leverage technology solutions such as AP automation software. With AP Automation software, you can streamline your data entry, centralize your invoice collection, automate matching processes, implement fraud detection measures, and create standardized workflows for your business
By adopting an AP solution, your business can enhance your:
- Accounts Payable KPIs’ accuracy
- Efficiency and analysis
- Financial decision making
- Overall performance
FAQs
How can measuring KPIs help in building better relationships with vendors?
Measuring KPIs can help you in building better relationships with your vendors in a few ways:
- It can help to identify areas where the relationship can be improved. For example, if your company consistently pays its invoices late, this could be a sign that the relationship with the vendor is not as strong as it could be. Your company can identify this issue by tracking KPIs and taking steps to improve the relationship.
- It can help to build trust with your vendors. When your company is transparent about its KPIs and how you use them to improve your AP processes, it can build trust with your vendors. Your vendors are likelier to work with your company if you are open and honest about your operations.
- It can help you to identify opportunities for improvement and collaboration. By tracking KPIs, your can identify areas where you can collaborate with vendors to improve your AP processes.
How do you use KPIs to address problems in your accounts payable process?
Here are some ways your KPIs can help you address problems in your accounts payable process:
- They can help you to identify the root cause of the problem. By tracking KPIs, you can identify which areas of your AP process are causing problems. This information can help you formulate a solution.
- They can help you to measure the effectiveness of your solutions. Once you have implemented a solution to a problem, you can track KPIs to measure their effectiveness.
- They can help you to track your progress over time. Tracking KPIs over time lets you see how your AP process is improving. This information can motivate your team and keep them focused on continuous improvement.
How do you use KPIs to benchmark your accounts payable performance with other companies?
There are several industry standards and benchmarks available that you can use to compare your KPIs. This information can give you a good idea of how your AP process performs compared to other companies in your industry.
If you know the KPIs of your competitors, you can use industry benchmark to improve your performance. This information can help you to identify areas where you need to improve your AP process to prevent any extensive damage to your business and even problematic workflow processing practices.
The Bottomline
Mastering your company’s Accounts Payable (AP) department is important in today’s evolving financial management landscape. Aside from that, it helps you understand how to process invoices better and make accurate time payments.
We understand it’s easy to feel overwhelmed by the sea of numbers, as seen in your company’s data. However, it’s important to understand that your company’s KPIs can lead you toward financial clarity and success. Taking your metric seriously will also prevent your company from experiencing reputational damage considering you analyze the important metrics to make better financial decisions.
Don’t hesitate to empower your AP department with the right tools and software so you can begin to embark on your journey of financial excellence and improve your organization’s bottom line to keep your stakeholders, finance professionals, finance leaders, and ardent partners impressed!
