- Why is Tracking Accounts Payable Metrics Important?
- The Top Accounts Payable Metrics to Track
- Accounts Payable Metrics for Invoicing
- Accounts Payable Metrics for Processing
- Accounts Payable Metrics for Discounts
- Accounts Payable Metrics for Vendor Management
- Accounts Payable Metrics for Costs and Returns
- Is Automation the Answer?
Why is it so hard to keep track of the things we need the most?
Accounts payable is not always seen as a process that can be easily quantified or optimized. Yet, it’s an important component of your company’s operations.
As such, AP should be treated in the same way as any other department; with a continued focus on measuring benchmarks that identify opportunities for improvement.
In this aspect, tracking accounts payable metrics and KPIs are an important consideration. Optimizing processes with automation leads to greater efficiency, improved supplier relationships, and increased profitability.
So, what are some of the top metrics for accounts payable and how do you track them? Here we’ll look at the best accounts payable metrics to measure and why this process is important.
Why is Tracking Accounts Payable Metrics Important?
Analyzing AP benchmarks gives you a 360-degree view of operations and greater insight for decision-making. Tracking metrics is easier for daily monitoring (rather than deep analyses) and allows you to focus on certain aspects of the AP workflow. Specifically, ones that are underperforming.
Improvements to the AP department also make a significant difference in profitability. The closer you can monitor KPIs (key performance indicators), the easier it is to drive automation and study fluctuations over time. This helps to provide clarity over where additional efforts or resources are needed for greater efficiency.
Accounts payable metrics are a reliable and consistent way to track performance and facilitate supply chain planning. It’s also a great way to improve budgeting and better understand your overall processes.
The Top Accounts Payable Metrics to Track
When it comes to tracking accounts payable activities, there are many different ways to do so. Here, we have broken up the most important metrics into a few top categories:
- Vendor Management
- Costs and Returns
Accounts Payable Metrics for Invoicing
Number of Invoices Received
One of the most basic and important accounts payable metrics to track is the number of invoices you receive in a certain period (like monthly or quarterly). This enables you to put all the other accounts payable metrics into context to better understand invoice processing and AP performance.
Percentage of Digital Invoices
KPIs should also delineate the total number of invoices received that are digital. Counting electronic invoices will give a business a clearer idea of any opportunity to improve the efficiency of accounts payable.
This invoice data also helps to further examine AP functions and determine the need for automation tools.
Percentage of Straight-through Invoices
Straight-through invoices make it through the system without invoice exceptions or delays. This reduces both the time and cost of the accounts payable process.
A business should track and measure the percentage of invoices that move straight through the system vs. the total amount of invoices processed. This is also good for building better buyer relationships, maintaining a company’s creditworthiness, and reducing processing costs.
Accounts Payable Metrics for Processing
Average Payment Processing Time
Also referred to as the cycle time, this is the average amount of time it takes for AP to efficiently process the average invoice. The higher this number, the more bottlenecks you will find in your system.
When calculating this time, you should start with receiving the vendor invoice. The process ends when you request a receipt for invoice payment and update the books. Benchmark the results against industry norms to get a feel for any inefficiencies and to identify areas for cost savings.
If the workflow is moving slowly, that may be a prime indication you need more invoice automation in your life. In other words, the AP department is handling too many manual processes that automation software can easily take over.
Invoices Processed per Employee
Calculating this accounts payable metric starts by looking at how many employees handle accounts payable, and the number of invoices processed per employee. When the system is manual, and you are dealing with paper invoices, this number will be a lot lower in real-time.
If you are running an automated system and there is underperformance in invoice processing times, work on improving the response time for the people in charge of key processes, like invoice approvals and timely payments.
Exceptions vs. Total Invoices Processed
How many invoices are being kicked out of the system vs. moving straight through? The verification and matching process of accounts payable is essential to preventing fraud. It also ensures goods are received exactly as ordered and invoiced.
However, there may be exceptions when the documents do not match. This is typically caused by data entry errors, but can also happen when a document is lost, misplaced, or mismatched. Exceptions will cause delays and may hurt your supplier relationships.
Calculating exceptions vs. total invoices processed will give a business greater insight into the efficiency and accuracy of your AP department. The more exceptions present, the more indications of duplicate invoices, erroneous payments, and other discrepancies that can influence your AP process and seriously affect your bottom line.
Number of Payment Errors
Payment errors are the most costly mistakes in the accounts payable process. This includes duplicate payments, overpayments, and late payments. Payment errors can have an adverse effect on supplier relationships and indicate your AP workflow is disorganized.
As such, your KPIs should include a stat for the number of payment errors made in a given time period. This will help to reduce errors in the future and strengthen business relationships.
Accounts Payable Metrics for Discounts
Percentage of Discounts Captured
This figure looks at the number of early payment discounts your business receives in a specific time period. Taking advantage of discounts is a great way to increase profitability and represents an attractive return on a company’s cash.
By measuring the percentage of discounts captured (vs. the amount being offered), management has a better understanding of the scale of opportunities being missed. How many other invoices could you be saving money on?
Money Saved by Captured Discounts
Expanding on the percentage of discounts captured above, it’s also helpful to look at the total amount of money you are saving. Examine the monetary value of the early payment discounts being captured. This provides greater insight into AP’s profitability.
Accounts Payable Metrics for Vendor Management
Number of Late Payments
Late payments can result in additional costs and strained vendor relationships, so they’re also important to track. This helps to identify areas of improvement and protect your company’s creditworthiness.
If you find late payments are occurring more often in a certain time period, it may be time to automate some processes. This allows for quicker processing, better visualization, and clearer reporting on due dates to ensure payments are sent out on time.
Number of Vendor Disputes
This is a critical accounts payable metric to track because it directly relates to your vendor relationships. Even after AP has been processed and payment issued, there can still be problems from the supplier side.
Common vendor disputes include:
- Payment is the wrong value
- Records have been misplaced
- Payment issued against the wrong purchase order or invoice
- Clerical errors during the AP process
The fewer supplier disputes, the more efficient your AP process. KPIs should not only track the number of disputes being raised, but the most common problems as well. That way, a business can categorize issues by the reason, to better understand trending and areas of improvement for payable teams.
Accounts Payable Metrics for Costs and Returns
Average Cost per Invoice
Another core AP metric is the average cost to process each single invoice. Once this stat is measured and tracked, it can be compared to industry benchmarks to rate your payable performance over time.
The average cost per invoice is calculated by dividing the total costs of operating the accounts payable department, by the number of invoices processed in a specific time period. While this may sound simple enough, it’s important to factor in everything that can be considered an AP cost, such as:
- Software fees
- Staff salaries
- Supply costs
- Late payment interest
- Transaction fees
Armed with the knowledge of how much each invoice costs, you are better positioned to reduce that cost, thereby improving profitability.
Return on Investment
One of the most important metrics in business is your ROI (return on investment). Without understanding how much money you’re getting out of your efforts, it’s hard to gauge if your company is a success.
Measuring your accounts payable ROI can provide valuable information on performance, particularly if you are rolling out an AP automation solution. However, unlike many other metrics on this list, it’s tough to measure unless you are using software and is best left to dedicated analytics platforms and tools.
Is Automation the Answer?
If you’re looking to streamline the AP process, improve metrics, strengthen supplier relationships, and save money, then the clear answer is YES.
Every step of the accounts payable process can be automated in one form or another. Today’s tools mean a virtually touchless AP workflow should you so desire.
Choose an accounts payable software that is flexible to accommodate any of your unique business needs. Tipalti is a great option. Powered by a multi-entity cloud architecture, the platform is built to support AP across your entire business.
The system provides granular control over payables and payment operations to protect your organization from fraud while augmenting internal processes. They offer various payment methods in 120 currencies in 196 countries, so you can streamline supplier payments.
AP metrics are a reliable measure of the health of your accounts payable department. In a manual system, calculating these stats takes a lot of time and effort. The more you rely on automation, the easier collecting this data becomes, and the faster you can make more informed decisions.