When your accounts payable department is running smoothly and efficiently, bills are always paid on time and your company gains a stellar reputation among suppliers and partners for prompt payments. One key element to optimizing your AP department for efficiency and cost is understanding the right accounts payable metrics.
Why measuring accounts payable metrics is critical
While the idea of efficient, well-managed accounts payable is appealing, it can be challenging to know where and how your AP department needs to improve and become more efficient. Accounts payable metrics are key performance indicators (KPIs) that allow you to spot inefficiencies and areas for growth in your accounts payable processes so you can make them more efficient.
For example, writing paper checks for business-to-business transactions has decreased significantly as electronic payment options have become readily available and more suitable for corporate needs. And yet, many companies still use paper checks as they process payments, despite the reality that checks are slower, costlier to process, and more prone to fraud than electronic, ACH-based payments.
By measuring the accounts payable metrics that are relevant for your company, you’ll be able to easily spot ways to make your AP workflows more efficient and less costly. You’ll also improve financial reporting since the data from accounts payable can be used for budgeting, supply chain planning, and other critical types of financial analysis. These are the most important account payable metrics to track.
AP Metric 1: Average processing cost per invoice
The “Number One” AP metric to track is the average processing cost per invoice. By measuring the overall cost of each step needed to process each invoice, you’ll be able to directly determine the impact of inefficiencies (or improvements) on your budget. To calculate the average processing cost for each invoice, you divide the total number of invoices for a specific period by the costs that you incurred to pay them. The resulting figure is your AP cost per invoice.
Some factors that you should consider while calculating the costs of processing invoices are:
- Labor costs: This includes the wages paid to employees for their time spent processing invoices. Calculating this cost requires a thorough knowledge of all employees who are involved throughout an invoice’s journey, then tracking their time spent on invoice processing tasks.
- Software costs: The costs associated with your invoice processing software are the next cost to consider. Divide the cost for each piece of software used for processing invoices and divide it by the appropriate time period.
- Physical goods: This cost includes any fees paid for paper, envelopes, ink, stamp, printer maintenance, and other physical goods used by your accounts payable department to process invoices.
- Transaction fees: In general, ACH transfers, eChecks, credit card payments, and wire transfers all have processing fees associated with them. These fees should be included within your cost-per-invoice calculations.
Calculating your total invoice processing costs can help AP professionals underscore the need to improve AP functions to senior management staff. Knowing the cost of processing invoices will also highlight any savings gained by AP automation in efficiency throughout your accounts payable department.
AP Metric 2: Average payment processing time
The average payment processing time for an invoice can help you understand where your accounts payable staff is spending the most time. Are they spending most of their time on data entry, or are they collaborating with management on strategic activities?
The invoice processing workflow is generally the same in all companies with minor differences that mostly depend on the parties involved. In general, an invoice processing workflow involves the following steps for an accounts payable professional:
- Receiving the invoice for a purchase order (PO)
- Verifying that the PO invoices are legitimate & accurate
- Recording relevant data from the invoice (date, contact info, & purchase details)
- Entering & coding the invoice data into the general ledger
- Submitting PO invoices for approval before processing payment
- Processing invoice payment, once approved, & requesting a copy from vendors
If your staff is spending most of their time on data entry throughout this process, it may be time for you to consider investing in AP automation software to reclaim valuable time for AP staff.
AP Metric 3: Invoices processed per FTE (Full-Time Employee)
Tracking the number of invoices processed by each full-time accounts payable employee is another KPI related to staff productivity. From the time of purchase to the time of payment, the people usually involved in accounts payable processes are the C-suite staff like the CEO or CFO, the accounts payable team, and the suppliers and vendors themselves. Part of improving the number of invoices processed per accounts payable employee includes examining the role of non-AP staff to see how they can help improve invoice turnaround times.
Incorporating an automated system into your accounts payable cycle time will allow for a shorter turnaround for each invoice that each AP employee handles, meaning they’ll be more productive as your processes become more efficient. For example, since the response time on invoice approval requests affects invoice payment times, one way to improve the invoice processing rate is to improve response times from the parties involved in invoice approval.
AP Metric 4: Percentage of exceptions vs. total invoices processed
In accounts payable, exceptions refer to errors found on an invoice as it’s received or being processed. Some common types of invoice exceptions include:
- Invoice data is entered incorrectly
- Invoice data is lost as paper invoices are digitized
- Invoice data doesn’t match the corresponding purchase order
Anyone who’s been around accounts payable for any length of time has encountered exceptions and has seen the ugly impact that erroneous payments can have in terms of costs incurred, invoice processing delays, and other impacts (fiscal and otherwise).
Measuring the percentage of exceptions vs. the total number of invoices processed lets you track the amount of time your AP staff is spending being productive instead of fixing mistakes and processing errors. You cannot offer a solution until you fully diagnose the problem.
AP Metric 5: Early payment discounts offered vs. captured
It is critical to capture and claim early payment discounts. Repeatedly being late on payments damages goodwill with your suppliers and costs you money that would otherwise be claimed through discounts offered for early payment of bills and invoices. By tracking captured discounts compared to missed ones, you gain insight into both the performance of your AP processes and the areas to improve.
AP Metric 6: Late payments & penalties
It’s important to track early payments, but it’s equally important to track the number of payments that are late, as well as any penalties and late payment fees incurred. While no AP professional is intentionally late on processing payments, a lack of clearly defined accounts payable processes means that it’s harder to determine when bills need to be paid.
Discovering a large number of late payments and penalties can indicate that your AP processes require the help of an automation tool. Using automation and reducing your reliance on paper-based invoices & processing methods will let you manage bill deadlines and avoid paying late fees and penalties.
AP Metric 7: Number of discrepancies & disputes from suppliers & vendors
Up until now, we’ve focused on errors that are usually discovered before invoice payments are processed for vendors and suppliers. But discrepancies can happen after invoice payments are processed, leading to disputes from suppliers and vendors.
Measuring the number of discrepancies and disputes from your partners can help you spot opportunities for verifying invoice accuracy. If invoices are being matched to the wrong purchase order or are being recorded incorrectly, this can eventually impact your supplier relationships and harm your supply chain.
AP Metric 8: Percentage of electronic invoices vs. total invoices received
When it comes to digital invoice processing, it’s easy to make false assumptions on the efficiency of your accounts payable processes. By tracking the percentage of electronic invoices compared with total invoices received, you’ll be able to assess how much your AP workflows rely on outdated, paper-bound processing methods.
After tracking the percentage of electronic invoices versus your total number of invoices, if you discover that you’re still relying too much on paper, it might be time to invest in a suitable accounts payable system.
AP Metric 9: Number of AP operators or officers
Do you know how many people work in your accounts payable department? Many of the key performance indicators I’ve discussed rely on an intimate knowledge of your existing AP setup, including the number of AP employees.
Knowing how many AP officers or employees are working to manage and process bill payments will make sure that any KPI calculations relying on personnel count are accurate so proper improvements can be made.
AP Metric 10: ROI on invoice automation
How much will invoice automation benefit you? It can be hard to track the financial impact of automating your accounts payable processes but it is a metric that is definitely worth watching and tracking.
If you haven’t started automating invoices yet, try measuring your invoice processing times and looking up industry benchmarks for the average procure-to-payment (P2P) times within your industry. Using this data, you can start to track how much time you’re currently spending on processing invoices.
After you’ve incorporated automated invoice processing, you can compare this data with your pre-automation data in real time to see the impact automation has had on your accounts payable efficiency.
With software options like Bill.com, invoice automation is easy and lets you automatically import invoices, automate routing workflows, and generally allows for greater flexibility and visibility into your invoice processing workflow.
By incorporating automation into your accounts payable software, you’ll save your AP staff many hours of manual data entry work so they can efficiently use their skills and abilities to support your company.
AP Metric 11: Percentage of straight-through invoices
Straight-through invoices are invoices that go “straight through”, from purchase to payment, with no errors or discrepancies. Tracking this metric allows you to really understand how many “successful” invoices you really have each month. It’s easy to assume that things are going well if no supplier is complaining, but having no disputes might just mean that your suppliers haven’t caught the discrepancy yet.
On the other hand, if you have been tracking the percentage of straight-through invoices, you’ll be able to spot and correct discrepancies that your vendors haven’t noticed or haven’t brought up.
Improving Accounts Payable Starts With Metrics
Ultimately, improving cost-efficiency and productivity within your accounts payable department isn’t the sole responsibility of your AP team. Instead, those in IT and management should collaborate with accounts payable staff to ensure that AP staff have the resources and tools to spend their time on high-value tasks that drive the company forward. With proper metrics in place, accounts payable success is just around the corner.
Author’s Note: This post was first published on Bill.com. You can view the original article here.