8 min read
17 Dec 2021
8 min read
17 Dec 2021
Accounts payable metrics and KPIs are an important consideration – helping to make the accounts payable department run more smoothly, efficiently, and profitably. Our guide to tracking the effectiveness of AP activities will help make the process of implementing KPIs easier.
All too often, the activities of a company’s accounts payable (AP) department are not seen as processes that can be readily quantified, tracked or optimized. But in practice, AP is an important component of the company’s business operations. What’s more, by optimizing accounts payable processes, companies can achieve tangible improvements to the bottom line.
As such, AP should be treated in the same way as any other department, with a continuing focus on looking at benchmarks to identify opportunities for improvement, and optimizing processes with greater efficiency and automation. By approaching AP in this way, companies can not only achieve efficiencies, improve supplier relationships and streamline the procurement process – they can also improve the profitability of the business as a whole.
Accounts payable is a department like any other, and improvements to its operations can make a significant difference to its profitability and effectiveness. The good news is that there are many ways that you can improve AP processes and drive greater automation. But to make improvements, you first need to understand how well your accounts payable processes are performing – which means using the right metrics and key performance indicators (KPIs).
Measuring accounts payable KPIs doesn’t just give you insights into AP performance fluctuations over time – it can also illuminate the process as a whole, and provide clarity over where additional resources or effort is needed in order to improve efficiency.
So which KPIs should you be tracking? While different companies will focus on different accounts payable metrics, the following 10 KPIs may prove particularly useful when seeking to measure the performance of your AP department:
First and foremost, you need to know how many invoices your company receives in order to put all your other metrics into context. As such, your KPIs should start with the number of invoices over a period of time – for example on a monthly or quarterly basis.
Another core KPI is the average cost per invoice, which can be compared with industry benchmarks and used to track your own AP department’s performance over time. Invoice processing costs per invoice can be measured by dividing the total costs of operating the AP department by the number of invoices processed in a given period. While this might sound straightforward, it’s important to factor in the many different costs involved in invoice processing, from staff salaries to software fees. Armed with information about the average cost of processing an invoice, you will then be better placed to reduce that cost, thereby improving the profitability of the AP department.
The longer it takes for invoices to be processed, the more likely it is that your AP team is spending too much time on labor-intensive tasks. As such, your KPIs should include the average time taken to process invoices, which you can then benchmark against industry norms in order to identify any bottlenecks or inefficiencies that need to be addressed. In addition, tracking the time taken for invoices to be processed will enable you to identify whether any improvements made to your AP processes, such as implementing AP automation software, have resulted in efficiency gains.
Late payments can result in additional costs in the form of fees or interest payments. It’s important to track how many of your invoices are paid late so that you can identify opportunities for improvement. This, in turn, can help you strengthen supplier relationships and save money for the company.
Handling supplier disputes costs time and money – so the fewer supplier disputes you receive, the more efficient your AP process will be. As such, your KPIs should include the number of supplier disputes being raised. However, it’s also important to understand that disputes can arise for different reasons, including errors and delays – so you should also categorize disputes by reason in order to understand where improvements may be needed.
Payment errors, such as duplicate payments and overpayments, can be some of the most costly AP mistakes, and they can also have an adverse effect on relationships with your suppliers. As such, your KPIs should include the number of payment errors made over a given period of time. Measuring the number of errors – and, crucially, keeping track of the types of error being made – can give you the information you need to reduce errors in the future.
An early payment discount is a discount on the cost of goods that can sometimes be received if an invoice is paid early. Being able to take advantage of early payment discounts is a great way to make AP a more profitable part of the business as it represents an attractive return on the company’s cash. By measuring the percentage of available discounts captured, you can gain a clearer view of the scale of the opportunity being left on the table. This can be calculated by dividing the number of early payments discounted by the number of early payment discounts on offer, multiplied by 100.
Expanding upon the previous metric, it is also useful to measure the monetary value of the early payment discounts being captured. This can provide deeper insights into the profitability of the AP department.
Measuring the total ROI of AP activities is a top-level metric that can provide valuable information about the macro performance of the department – particularly if you are rolling out an invoice automation solution. However, unlike many other KPIs this is a difficult metric to measure manually, and is best handled by dedicated AP analytics platforms.
Finally, receiving invoices digitally makes it easier to automate your AP processes, and therefore generate cost and time savings. Your KPIs should therefore include the percentage of invoices currently being delivered digitally – which will give you a clearer idea of any opportunity to improve the overall efficiency of AP.
With so many KPIs and metrics to keep track of, AP departments make use of technology solutions to both aid and simplify these processes. Taulia’s automated invoice processing solution enables accounts payable teams to streamline invoice data capture, automate accounts payable process, and dramatically reduce processing costs and errors, thereby improving the performance of the department as a whole and boosting KPIs.
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