If your current AP process is utilizing metrics and KPIs in an ineffective way, you’re not alone. In fact, according to the Institute of Finance & Management, only 9% of respondents think that they’re method of measuring AP metrics and KPIs is extremely effective. When asked about their method for monitoring metrics and KPIs, 66% of businesses are still using Excel spreadsheets and 38% are using whiteboards/emails, or nothing at all.
When properly tracked, accounts payable metrics and KPIs can be leveraged to inform strategic decisions, improve operations and processes, gain a greater understanding of suppliers, and take advantage of cost savings. By utilizing an AP automation platform with embedded analytics, AP managers can more easily track key metrics and identify patterns that drive smarter decision making and success across the company.
Here are 9 of the most important AP metrics to track in order to optimize AP efficiency.
1. Total Number of Invoices Received
Your team should be tracking the number of invoices received during a given time period. This time period can be daily, weekly, monthly, or yearly — whatever makes the most sense based on the volume at your organization. By tracking this metric, you can start to plan appropriately. For example, if you know Q4 has a particularly high volume of invoices coming in, you can bring on more staff or automate your process so you’re better equipped to handle the spike.
2. Total Number of Invoices Processed
You also need to count how many invoices your team is able to process in that same time period. If the number is low, this is likely a sign that there are bottlenecks in your AP process that are affecting your level of efficiency and ability to process invoices on time. Consider the ramifications of continuing with a manual invoice approval. It might be time for an AP automation solution to speed up the process.
3. Average Cost per Invoice
Total AP Costs ÷ Number of Invoices Processed = Average Cost per Invoice
Average cost per invoice indicates how much it costs, on average, to process a single invoice. Using insights gained from this calculation can further help organizations determine labor costs (hours worked and the personnel involved), accounts payable infrastructure costs (tools and software used), paper check and envelope costs, and postage fees. AP leaders can choose to cut out any unnecessary costs and adopt virtual card payments to keep this number down.
4. Average Time Taken to Process an Invoice
Time Spent Processing Invoices ÷ Number of Invoices Processed = Average Processing Time per Invoice
This is a metric that tells you how long it takes, on average, to process a given invoice. Understanding your average invoice processing time can help reveal gaps in efficiency. The longer it takes to process a single invoice, the more costly invoice processing becomes due to associated labor costs. This metric should be analyzed alongside average cost-per-invoice to help determine where improvements can be made.
5. Rate of Error as a Percentage of Total Invoices Paid
Number of Incorrect Payments ÷ Number of Invoices Paid = Rate of Error
Rate of error allows your team to identify the number of payment errors they have made in a given time period. This metric is critical to track because erroneous payments, duplicate payments, or overpayments can drain your company’s finances over time. Strive to keep this number as low as possible and identify what could be causing these payment errors.
6. Discounts Captured / Discounts Obtained as a Percentage of Discounts Offered
Number of Discounts Captured ÷ Number of Discounts Offered = Discounts Captured as a Percentage of Discounts Offered
This metric refers to how many early payment discounts your business secured in relation to how many were offered to you. It helps track missed opportunities and the amount of money you could have saved had you been able to make an early payment. You can also identify reasons why your company may be failing to take advantage of these offers, such as a lack of manpower or employee support that could be remedied with an automated solution.
7. Number of Electronic vs. Number of Paper Invoices Captured
The goal of this metric is to understand the percentage of suppliers who are sending your company electronic invoices so that you are equipped to deal with them, whether it’s through the invoice capture capabilities of an AP automation solution or through ERP integration. Electronic invoices are cheaper and quicker to process and encouraging suppliers to send e-invoices helps keep overall costs down.
8. Payables Aging or Days Payable Outstanding
Accounts Payable x Number of Days ÷ Cost of Goods Sold (COGS) = DPO
This is a metric that tells you the average number of days it takes for your company to pay back your suppliers for services rendered. A high Days Payable Outstanding (DPO) can be advantageous to a company’s cash flow because it means extra cash-on-hand for short term activities, but it can also mean that you’re not paying suppliers on time. If suppliers are continuously being paid late, it can cause a strain in your relationship and they may not want to work with you in the future.
9. Payments Mix
How many different payment types is your team collecting or putting out in a given period? Whether it’s through checks, electronic payments, wire transfers, or ACH, it’s important to understand your payments mix. One of the challenges associated with having a high mix of payment types is that you often need a separate system and process for handling each of them, requiring more manpower and time. With an understanding of your payments mix, you can allocate staff and resources appropriately.
If you are finding that your payment mix is causing a headache, it may be worth optimizing your payments mix or considering a virtual card payment option. One like SilverPay allows companies to process all their payments in an automated system that fits into most existing AP workflows, enables you to pay suppliers faster and ensures maximum security. With virtual cards, there is also an opportunity to take advantage of early payment discounts and cash-back rebates which can have a positive impact on cash flow.
How an AP Automation Solution Simplifies KPI Reporting and Analytics
At the end of the day, the more accounts payable metrics you are tracking, the more data and information you have at your fingertips to make smarter business decisions. Take the time to look at your metrics and identify areas of your AP process that might be slowing your business down. Also, take note of the metrics you are not currently tracking, but should. If you’re looking for a simple way to improve business processes, it could be time to consider an AP automation solution with embedded analytics. By utilizing AP analytics, AP managers have access to high-quality data that not only drives better decision making, but enables users to optimize their accounts payable process and improve their KPIs.
Ready to learn more about how to start tracking AP metrics with an automated solution? Request a demo today!