“If you don’t measure it, you can’t improve it.” – Peter Drucker
Measuring the success of an accounts payable team requires more than tracking how many invoices are past due.
While paying vendor invoices is the aim of the accounts payable team, there is a whole host of benefits businesses can gain by taking a strategic approach to the way they go about this. Failing to capitalize on these benefits equates to missed opportunities for your business to improve short-term cash flow, build beneficial relationships with you vendors, and drive additional revenue.
Determining if your AP process is as successful as it could be requires monitoring key performance indicators (KPIs), each uniquely weighted to reflect what matters most for your business. Here are three that every accounts payable team should be measuring:
1. Accounts Payable Cost Per Invoice
Understanding this metric is paramount to getting a grip on how much room for improvement your accounts payable process is leaving on the table. The formula to calculate it is a simple one:
Total Accounts Payable Cost / Total Number of Invoices Processed
Costs that go into this metric include:
- Labor costs: Covers personnel involved in accounts payable and the hours they work
- Accounts payable infrastructure costs: Covers accounts payable software / tools used to pay invoices
- Paper check & envelope costs
- Postage fees
Accounts Payable Cost per Invoice is estimated to run as high as $12.44 per invoice. With hundreds of invoices typically processed on a monthly basis, these costs can quickly become extravagant.
While most of the associated accounts payable costs may seem to be static, there is actually potential for a great deal of variation, and an opportunity to quickly cut this cost down. In fact, “top performing” accounts payable teams report an average cost of $3.37 per invoice.
The prime culprit of excessive accounts payable costs? Look no further than the amount of manual intervention required across the end-to-end invoice handling process.
The more time your AP personnel spend on AP-related activities like handing off invoices to department heads for approval, entering invoice data into the accounting system, and postmarking paper checks, the higher your Accounts Payable Cost Per Invoice will rise. Additionally, manual intervention also creates additional opportunity for errors in the process, which can increase in cost tenfold when they are discovered downstream in the process.
2. Average Time to Payment
Average Time to Payment is the metric that is most indicative of Accounts Payable Cost Per Invoice. The formula to calculate this metric is also simple:
Total Time Spent Processing Invoices / Total Number of Invoices Processed
The clock on Total Time Spent Processing Invoices for each invoice starts running as soon as the invoice is received, and continues running until your vendor receives the payment. Average Time to Payment is also a very variable metric, and can run as high as 12.2 days or as low as 3.7 days.
How is this metric linked to Accounts Payable Cost per Invoice? As the amount of time an invoice remains unpaid increases, so do the costs associated with getting that invoice paid – particularly labor costs.
Think of it this way: The faster your AP staff can get invoices off their plates, the less bogged down they will be when new invoices arrive. In the same vein, the more invoices your AP staff is handling, the less capacity they will have to focus on new invoices, and your Average Time to Payment can gradually climb (along with Average Accounts Payable Cost per Invoice).
There is also an opportunity cost associated with this metric: Early-Pay Discounts. Extravagant amounts of time required to process invoices can prevent businesses from capitalizing on Early-Pay Discounts that would otherwise provide a nice boost to the bottom line.
However, the targeted Average Time to Payment may vary from company to company, as some businesses like to hold onto cash longer than others. For this reason, the lowest Average Time to Payment is not always the best. Rather, what’s most important is understanding what Average Time to Payment gives you the command over cash flow that you are looking for.
3. Percent of Spend By Payment Method
This metric is the distribution of all of your vendor payments by payment method. It can be calculated by dividing the total number of payments made with each payment method by the total number of vendor payments made.
In spite of the well-documented fraud risk that accompanies paying vendors with paper checks, over 17% of businesses are using paper checks exclusively for B2B payments. Another 38% of businesses use paper checks for 75% or more of their payments
Businesses should strive to shift as much spend as possible over to electronic methods like ACH transfer and credit cards that are both simpler and more secure. Additionally, credit card payments can earn you cash-back rebates – another helpful boost to your bottom line.
Driving Improvement Across These Accounts Payable KPIs
Owning these KPIs means increased efficiency, decreased fraud risk, and more value-added projects for your team.
When it comes to driving improvement across these AP KPIs, businesses in all industries have been looking to the cloud. Cloud-based automated accounts payable solutions integrate with your bank account and accounting system to streamline the end-to-end accounts payable process, and shift your spend into electronic payments and commercial credit cards.
Many mid-market businesses have seen accounts payable increase by 60% by leveraging accounts payable automation, and have also been repaid for their up front investment within 60 days of implementation.
To learn more about how automated accounts payable can help you drive improvement across KPIs, contact MineralTree for a personalized demo.