Measuring the success of your accounts payable (AP) team can help optimize efficiency, improve cash flow management, and maintain positive vendor relationships for your business.
By tracking key performance indicators (KPIs) in accounts payable, you can gain valuable insights and make informed decisions to drive AP success. Let's explore the essential KPIs every AP team should be tracking in 2024.
What are KPIs in accounts payable?
KPIs in accounts payable are measurable metrics that provide insights into the financial health, efficiency, and effectiveness of the AP department. These indicators help businesses track performance, identify areas for improvement, and set benchmarks for success.
Why are accounts payable KPIs important?
Accounts payable KPIs help evaluate payment processes for efficiency and can also help determine the overall financial health of your business. Tracking KPIs in your AP processes can help optimize cash flow management, enhance vendor relationships, and provide leadership with the information they need to make informed decisions based on data-driven insights.
Why does your accounts payable department need KPIs?
The obvious reason to track accounts payable KPIs is to improve the efficiency and effectiveness of your accounts payable process. By monitoring KPIs, businesses can identify areas of improvement, streamline processes, reduce costs, and enhance overall financial management.
However, accounts payable KPIs are also important for monitoring a company's financial health. When applying for funding, lenders and investors may use AP KPIs to evaluate your business. It's important for these KPIs to indicate strong financial leadership.
10 top KPIs your AP team should be tracking in 2024
Help your accounts payable team stay ahead of the game with continuous process improvement by tracking and analyzing KPIs on a regular basis. Here are 10 top KPIs that your AP team should be tracking in 2024.
1. Average accounts payable
The average accounts payable metric calculates the total AP debt carried by a business over a specific time period. It helps in understanding financial patterns, seeing how well your AP team is keeping up with invoices, and assessing the overall health of operations.
Formula: Average AP = (Beginning AP + Ending AP) ÷ 2
Calculating your average accounts payable is also the first step toward calculating other accounts payable KPIs, such as days payable outstanding, or DPO.
2. Days payable outstanding (DPO)
DPO tracks the average number of days it takes to pay back your suppliers after receiving goods or services, providing insights into cash flow management.
Formula: DPO = (Average AP ÷ Cost of goods sold) x Days in the accounting period used to calculate average AP
As a key metric, DPO is a Goldilocks target—it can be too high or too low—but the right number for your business depends on your strategy. If you take too long to pay your vendors, you risk harming those relationships, not to mention late fees and higher credit interest rates. However, if you're paying your bills too quickly, there's always a chance that you're sending cash out the door too soon instead of leaving that buffer in the bank.
3. Cost per invoice
The cost per invoice metric determines the average amount spent to process a single invoice, indicating the efficiency of accounts payable processes.
Formula: Cost per invoice = Total AP costs ÷ Number of invoices processed
The formula is deceptively simple. What's difficult about cost per invoice is determining the total AP costs. You can start with the obvious, such as envelopes, stamps, and check stock, but this barely scratches the surface of true AP costs.
How many full-time or part-time employees are dedicated to your AP processes? That payroll represents a large part of your AP costs. If you're outsourcing your AP, those outsourcing costs count too.
Think deeply about your AP costs before performing your final calculations.
4. Early discount capture rate
This metric measures the percentage of early payment discounts your business is taking advantage of, highlighting opportunities to save money and reduce expenses.
Formula: Early discount capture rate = Discounts used ÷ Discounts offered
5. Payment error rate
The payment error rate indicates the frequency of errors in payments made by the accounts payable department, emphasizing the importance of accuracy in invoice processing.
Formula: Payment error rate = Payments in a given time period that included errors ÷ Total payments initiated during the same time period
It's important to note that these errors might not be in the amount. Checks sent to the wrong address also represent payment errors, as do duplicate payments—when invoices are paid twice by accident.
6. Invoice exception rate
The invoice exception rate tracks problematic invoices that require additional review, helping to identify issues and maintain strong vendor relationships.
Formula: Exception rate = Problematic invoices ÷ Invoices received
Even when invoice data errors are cleared up without any payment issues, the extra time involved can raise the team's cost per invoice as well as days payable outstanding.
7. Invoices processed per employee
This metric evaluates the efficiency of accounts payable staff by calculating the number of invoices processed per employee, identifying workload distribution and process bottlenecks.
Formula: Invoices processed per employee = Invoices processed ÷ AP staff count
8. Late payment rate
The late payment rate KPI measures the frequency of delayed payments made by the business, highlighting potential cash flow issues and affecting vendor relationships.
Formula: Late payment rate = Late payments ÷ Total payments
9. Average time to approval
The average time it takes for an invoice to pass through the internal approval process can be a significant pain point for many AP teams.
Formula: Average time to approval = Total time spent on approvals in a given time period ÷ Total invoices received during that same time period
Approval delays are often grounded in the AP process, but that doesn't mean the fault lies with the AP department. Managers may take days or even weeks to reply to emails or Slack messages requesting approvals. AP automation software can help by routing approvals to the right people automatically and allowing managers to approve invoices digitally, even on a mobile device.
10. Ratio of electronic invoices
This metric tracks the adoption rate of electronic invoicing processes, highlighting the efficiency and accuracy benefits of digital operations.
Formula: Ratio of electronic invoices = Electronic invoices ÷ Total invoices
How can automation improve your AP KPIs?
Automation is key to improving AP performance and KPIs. By using automated accounts payable solutions, businesses can improve AP efficiency, reduce mistakes, and gain valuable insights into cash flow management as well as other indicators of financial health.
United Fire, for example—providing maintenance, testing, and inspection for fire equipment at commercial businesses in Portland, Oregon—uses BILL Accounts Payable to track AP KPIs. The office manager uses BILL dashboards to see all the performance information he needs within 15 minutes, allowing him to track how the company is doing weekly or even daily.
Discover what BILL Accounts Payable can do for your business.
To learn more, download our complete guide on Accounts Payable KPIs.
Accounts payable KPIs FAQ
Here are quick answers to some of the most common questions about AP KPIs.
How often should I track my KPIs?
The frequency of tracking accounts payable KPIs depends on the type of metrics being monitored. It's important to track KPIs regularly to identify trends, make informed decisions, and optimize business operations.
What is the best KPI for accounts payable?
The best KPIs to track for accounts payable vary depending on your goals and objectives. It's essential to choose KPIs that align with your business priorities. Use the information in the list above to help determine the accounts payable KPIs that are best for your team.
How do you monitor accounts payable KPIs?
Monitoring accounts payable KPIs involves tracking, analyzing, and reporting on key metrics related to the AP process. By using AP analytics and automation solutions, you can gain deep insights into your KPIs and make data-driven decisions.