In many cases, the accounts payable department does not get as much attention from an organization’s CEO as other areas of a business. It’s not often the first area within a company that receives funding for improvement. Despite that, AP teams have a major role to play in the operations of a business and optimizing the levels of working capital available. Amidst the Covid-19 pandemic, the role of the accounts payable teams has further grown in importance as organizations ‘focus on protecting employees, understanding the risks to their business, and managing the supply chain disruptions’, according to Deloitte.
The overall responsibilities of the accounts payable team, such as managing cash flow, reducing costs in the procure-to-pay cycle and managing supply chain relations, require a lot of attention at the moment. With such responsibilities in mind, there are some specific accounts payable metrics that are important to measure to ensure that the department is running at prime efficiency.
7 Accounts Payable Metrics
1. Invoice Processing Time
According to research conducted by Bob Cohen and Matthew York of Ardent Partners, the average processing time for invoices in 2020 is 8.3 days. However, highly efficient teams that leverage the power of automation are able to process invoices three times faster.
Certainly, the size of the organization and how it is set up has an effect on processing time for invoices. Given that invoice approval is one of the biggest hold-ups in the processing of invoices, having an effective automated invoice approval workflow in place will help speed the process up and expedite payments to suppliers, as well as allowing the department to take advantage of any early payment discounts, which are one of the biggest opportunities for reducing costs.
In fact, according to Research Consultant Major Bottoms Jr, at Levvel Research, 64% of organizations named quicker approval of invoices as the top benefit of AP automation.
2. The Cost to Process a Single Invoice
Processing invoices is an expensive procedure, and cutting down on the operational costs is one way to reduce overall costs. According to Perry Wiggins, CFO, Secretary & Treasurer of APQC, “the bottom performers are spending $9 or more each time an invoice goes out. At the median are the organizations spending a little less than $4 to invoice a customer”.
These numbers are inclusive of salaries, copying, follow-up, routing, managerial and IT support. Of course, companies that process invoices manually have higher costs for invoice processing, and centralized and automated systems typically do better. Streamlining the processes cuts down on some of the most time-consuming tasks and lowers costs.
3. Invoice Exception Rate
Managing exceptions is one of the biggest time-wasters when it comes to invoice processing. Every time an AP team member has to stop and track down missing information, like POs or addresses, it slows the entire process down and creates major bottlenecks in the entire department.
Data from experts at Ardent Partners tells us that invoices exceptions continue to be a major problem for the AP department, with the average invoice exception rate standing at 22.6%. Reducing or eliminating exceptions will increase efficiency, reduce the stress on employees and management, delight suppliers and cut overall processing costs. All good reasons to put a solid procedure in place for invoices submitted for payment and ensuring that everyone is on board with the system.
4. Discounts Captured vs Offered
When an organization is running smoothly and an optimal AP system is in place, invoices are processed faster and you can save money by utilizing discounts offered. Early payment discounts are offered by suppliers to keep their accounts receivable flowing, and they can be a source of good savings for the client businesses.
Tracking monetary amounts and numbers of missed discounts enables you to identify missed opportunities. Additionally, the use of reason codes helps to see how the department is falling short and where improvements need to be enacted. Using an automated accounts payable system that notifies the AP team in advance of the expiration of discount windows helps to trigger timely payments.
5. Number of Supplier Enquiries, Discrepancies, and Disputes
Here is another area that can quickly reduce efficiency and processing times. Discrepancies and disputes with suppliers slow down the department and tie up lots of valuable time and resources. Lowering the number of discrepancies definitely will increase efficiency and get suppliers paid faster.
Eliminating human error is impossible, so the next best thing is to automate some of the systems by providing an avenue for electronic document transmission and a portal in which supplier can submit queries. This allows for a reduction in duplicate invoices, erroneous payments, invoices missing information and delivery errors amongst other issues.
6. Working Capital
Measuring accounts payable metrics and effectively managing working capital ensures that organizations are always in a position to meet their short-term liabilities. Working capital is calculated by subtracting current liabilities from current assets, includes assets such as available cash, short-term investments, and accounts receivable.
Take a look at the recent blog post that we wrote outlining five tips for effectively managing working capital.
7. The Rate of Wrong Payments as a Percentage of Total Payment
Erroneous payments not only cost the business money and time for correction, but they make the company look like amateurs. Keeping an eye on the rate of wrong payments as a percentage of total payment can be a good benchmark for identifying and correcting the causes of this type of error, thereby reducing the incidence in the future. Assigning and tracking error codes while also automating systems will reduce the number of errors and the costs involved.
Though accounts payable often lags in automation, companies that do digitize their systems often find lots of cost savings in this department. With the management of working capital and operating costs particularly high priorities at the moment, measuring the accounts payable metrics mentioned will make it easier to adjust your processes to accommodate issues that slow down your accounts payable function.