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. With that said, it is clear that the performance of AP professionals definitely affects the working capital of the business and is important to optimize. There are some specific Accounts Payable metrics which are important to measure to ensure that the department is running at prime efficiency.
The Accounts Payable team is responsible for saving money in the procure-to-pay cycle and developing relationships with suppliers. We have sifted through financial reports and spoken to members of the C-suite to find these seven key performance indicators that will pique your CEO’s attention and allow them to easily visualize how AP impacts the organization as a whole.
Accounts Payable Metrics:
Invoice Processing Time
Processing invoices fast is one of the most important KPIs to be reviewed. In fact, AP managers have reported ‘reducing invoice-processing costs’ as their number one priority. According to Ardent Partner’s ‘The State of ePayables 2018’ report, the average processing time for invoices is 10 – 11 days with highly efficient teams taking only 3 days to process a single invoice.
Certainly, the size of the organization and how it is set up has an effect on processing time for invoices. Providing remote access (like mobile accessibility) to employees who need to approve invoices before payment will almost definitely speed up the process and expedite payments to suppliers, as well as allowing the department to take advantage of any offered discounts. After all, saving money on operational expenses actually adds more to the company coffers than the same amount of revenue.
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. The cost to process an invoice can be as high as $14.38. Imagine optimizing this process and reducing this cost to $2.52, in turn recouping over $11 for every invoice paid within a month. How much would that windfall affect the profitability of the organization?
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.
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 the average AP department invoice exception rate is 23.3%. 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.
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 from suppliers are used by them 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 Accounts Payable automation system that notifies AP in advance of the expiration of discount windows helps to trigger timely payments.
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. This allows for a reduction in duplicate invoices and erroneous payments.
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.
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 AP often lags in automation, companies that do digitize their systems often find lots of cost savings in this department. Customizable dashboards and reports are great for improving the visibility and transparency of costs and problems. Measuring these accounts payable metrics makes it easier to adjust your processes to accommodate issues that slow down the AP function and improve cash flow and operating costs.