Account Payable Metrics: KPIs for Account Payable

Accounts payable metrics are standards of measure that depict the efficiency and effectiveness of the accounts payable process, whether it is working towards the goals and objectives of the company. Further, these metrics can also be used to-

• Improve overall quality of work of the employees
• Enhance Individual performances
• Lower costs related to accounts payables, such as reducing the number of duplicate invoice payments and reducing redundant workflow processes.

Categories of Accounts Payable Metrics

There are three categories of accounts payable metrics-

• Operational metrics

This includes the aspects with regard to the day-to-day operations that are under your control fully, including employees, workflow processes and departments.

• Financial metrics

Financial metrics are based on a particular department’s actual transactions, including payments, discounts, fees, etc.

• Supplier metrics

The metrics here are regarding your suppliers, the way they fit into the AP workflow process, and the integration of their systems with the ones you have in place.

Different Accounts Payable Benchmarks and Metrics

• Average cost per invoice type

Invoices are created differently for different purposes. The cost taken to process a single invoice on an average form the base for various calculations such as labour, stationery, accounts payable infrastructure, etc. Identification of all such overheads will help cut down unnecessary and avoidable costs.

• Average invoice processing time

The time taken to process an invoice is a very important metric. The longer it takes to process an invoice, the longer valuable resources are blocked from performing menial tasks. This also translates to an increase in labour costs. The average cost per invoice metric must be studied closely along with this metric to ensure improvements overall.

• Late payments and penalties

Slow and laboured payment processes will result in delayed payments, which, in turn, subject the business to penalties and interest charges with regard to those delays. The higher the number of delayed payment transactions, the higher the penalties paid by the business. In other words, the business will be bleeding cash on charges that could otherwise be avoided.

• Number of supplier enquiries, discrepancies and disputes

Automation of e-invoices will reduce the need for interaction with suppliers. While occasional interactions are encouraged, constant interactions will tie down resources and personnel that could otherwise be contributing to overall business efficiency. Automation also reduces the occurrence of human error. Understandably, the lower the number of enquiries, discrepancies and disputes, the better the efficiency of the business overall.

KPI for Accounts Payable

Key Performance Indicators (KPI) for accounts payable helps the organisation assess the level of efficiency of the accounts payable processes. A close monitoring of these KPIs will allow the team to improve the AP performance. Read on further sections to learn some of the examples of Accounts Payable KPIs.

Accounts Payable KPI benchmark

The team can follow benchmark KPIs in AP prevalent in the industry and use best practices to achieve the optimal levels of efficiency in AP process. Some instances include the total cost to accounts payable per invoice processed, and first-time error free disbursement percentage.

Accounts Payable KPI Examples

Some of the popular examples of Accounts Payable KPIs include-

1. Days payable outstanding (DPO)- It stands for the average number of days that a company takes to clear its accounts payable. DPO is calculated as the average Accounts Payable divided by the Cost of Goods Sold, the whole multiplied by the number of Accounting Period days. One must note that the average accounts payable is equal to Accounts Payable at the beginning of the period – Accounts Payable at the end of the period, the whole divided by two.

2. Invoices processed per year- The number of invoices processed each year is crucial for calculating several other KPIs, such as the invoices processed per Full-Time Equivalent (FTE) and the cost per invoice. It is a starting indicator to see if a company must automate the process even more. 

3. Invoice cycle time- Invoice cycle time or lead time refers to the time involved for the company to receive the invoice from a vendor until the payment disbursement. One must aim to shorten the invoice cycle time cycle to boost relationships with vendors. Longer invoice cycle time could hurt vendor relationships and indicates issues in productivity and work quality inside the AP process.

4. Average time to approve an invoice- One of the most challenging tasks in AP process is to get invoice approvals and payment approvals. The company must monitor and aim to optimise this metric.

How to Apply Accounts Payable Metrics to Forecast

Tracking your key performance indicators (KPIs) may result in a huge uptick in the efficiency levels of the accounts payables system.

• Accounts payable expenses
  • Calculating the total expenses related to accounts payables as a percentage of monthly revenue enables the user to understand how much it costs to run the accounts payable department of the company. 
  • The costs associated with each vendor are calculated and then compared to see what the cost-benefit analysis is with regard to each vendor. Vendors with relatively higher charges can also be let go, thus saving costs.
  • The average cost taken to process an invoice must be measured to see if that cost can be reduced and if any further trims can be made.
• Duplicate invoice payments
  • Duplicate invoice payments are a common occurrence. Measuring the number of duplicate payments made by the business helps the business stay alert to matters like double-billing done by a vendor, manipulation of invoice data, etc.

Automation of Accounts Payable Metrics

Tracking KPIs is possible once the accounts payables system is automated. In addition to reducing AP costs, automation can improve processing time and accuracy. Metrics such as process bottlenecks, time taken for approvals, data entry done manually, etc., are tracked easily and efficiently with the help of the accounts payable metrics system in place. The more metrics set in place for tracking, the better the data. This enables smarter and more informed business decisions.

• Quality of input

Scanning invoices improves verification since the invoices scanned can be verified against the work orders. This ensures that verification accuracy is maintained and any discrepancies found may be corrected at the earliest, thus enhancing the quality of inputs.

• Timeliness of inputs

Automation of the receipt and filing of invoices ensures that they are fed into the system instantly. This, in turn, speeds up the process and ensures that the inputs are recorded on time.

• Speed and quality of processes

AP Automation enables automatic approval from recognised parties, thus cutting process time and improving efficiency. Bottlenecks in the process are reduced drastically, speeding up the quality and accuracy of the entire process. Through automation, processes are streamlined in a manner wherein payments are made on time.

• Quality of output

Tracking the KPIs regularly allows the user to identify bottlenecks and stalls in the process, where the problem lies and how quick a resolution for that problem has to be cooked up. Response time is cut down through automation, and information is relayed more quickly.