When your accounts payable department runs smoothly and efficiently, bills are always paid on time, and your company gains a stellar reputation among suppliers and partners for prompt payments.
One key element to optimizing your AP department for efficiency and cost is understanding the right accounts payable metrics to track.
What are accounts payable metrics?
Accounts payable metrics provide insight into how effectively your business processes, pays, and manages incoming invoices.
While making payments on time is the most crucial aspect of accounts payable, accounts payable metrics help you understand the why's and how's behind your accounts payable performance. This rich information guides you toward what's working well and what needs to change to keep your team performing up to par.
If you want to improve your accounts payable process or understand how efficient it is (or isn't), you need to track invoices and accounts payable metrics.
Why measuring accounts payable metrics is critical
While the idea of efficient, well-managed accounts payable is appealing, it can be challenging to know where and how your AP department needs to improve and become more efficient.
Accounts payable metrics are key performance indicators (KPIs) that allow you to spot inefficiencies and areas for growth in your accounts payable processes so you can make them more efficient (and possibly save money).
For example, writing paper checks for business-to-business transactions has decreased significantly as electronic payment options become more readily available and suitable for corporate needs.
And yet, many companies still use paper checks as they process payments, despite the reality that checks are slower, costlier to process, and more prone to fraud than electronic ACH transfers.
By measuring the relevant accounts payable metrics for your company, you'll easily spot ways to make your AP workflows more efficient and less costly.
You'll also improve financial reporting since the data from accounts payable can be used for budgeting, supply chain planning, and other critical types of financial analysis. These are the most crucial account payable metrics to track.
AP metric 1: Average processing cost per invoice
The "Number One" AP metric to track is the average processing cost per invoice. By measuring the overall cost of each step needed to process each invoice, you can directly determine the impact of inefficiencies (or improvements) on your budget.
To calculate the average processing cost for each invoice, you divide the total number of invoices for a specific period by the costs incurred to pay them. The resulting figure is your AP cost per invoice.
Some factors that you should consider while calculating the operating costs of processing invoices are:
- Labor costs: This includes the wages paid to employees for the time they spend processing invoices. Calculating this cost requires a thorough knowledge of all employees involved throughout an invoice's journey and tracking time spent on invoice processing tasks.
- Software costs: The costs associated with your invoice processing software are the next cost to consider. Divide the cost for each piece of software used for processing invoices by the appropriate time period.
- Physical goods: This cost includes any fees paid for paper, envelopes, ink, stamps, printer maintenance, and other physical goods used by your accounts payable department to process invoices.
- Transaction fees: In general, ACH transfers, eChecks, credit card payments, and wire transfers all have processing fees associated with them. These fees should be included in your cost-per-invoice calculations.
Calculating your total invoice processing costs can help AP professionals underscore the need to improve AP functions to senior management staff.
Knowing the cost of processing invoices will also highlight any significant cost savings gained by AP automation in efficiency throughout your accounts payable department.
AP metric 2: Average payment processing time
The average payment processing time for an invoice can help you understand where your accounts payable staff spends the most time. Are they spending most of their time on data entry or collaborating with management on strategic activities?
The invoice processing workflow is generally the same in all companies, with minor differences that mainly depend on the parties involved. In general, an invoice processing workflow involves the following steps for an accounts payable professional:
- Invoice data is lost as paper invoices are digitized
- Verifying that the PO invoices are legitimate and accurate
- Recording relevant data from the invoice (date, contact info, and purchase details)
- Entering and coding the invoice data into the general ledger
- Submitting PO invoices for approval before processing payment
- Processing invoice payment, once approved, and requesting a copy from vendors
If your staff spends most of their time on data entry throughout this process, consider investing in AP automation software to reclaim valuable time.
An alternative metric that similarly tells you similar information with some added nuance is days payable outstanding (DPO).
AP metric 3: Invoices processed per FTE (Full-Time Employee)
Tracking the number of invoices processed by each full-time accounts payable employee is another KPI related to staff productivity.
From the time of purchase to the time of payment, the people usually involved in accounts payable processes are:
- The C-suite staff, like the CEO or CFO.
- The accounts payable team.
- The suppliers and vendors.
Improving the number of invoices processed per accounts payable employee includes examining the role of non-AP staff to see how they can help improve invoice turnaround times.
Incorporating an automated system into your accounts payable cycle will allow for a shorter turnaround for each invoice that each AP employee handles, meaning they'll be more productive as your processes become more efficient.
For example, since the response time on invoice approval requests affects average invoice processing time and invoice payment times, one way to improve the invoice processing rate is to improve response times from the parties involved in invoice approval.
AP metric 4: Percentage of exceptions vs. total invoices processed
In accounts payable, invoice exceptions refer to errors found on an invoice as it's received or being processed. Some common types of invoice exceptions include:
- Invoice data is entered incorrectly
- Invoice data doesn't match the corresponding purchase order
Anyone involved in accounts payable for any length of time has encountered exceptions and seen the ugly impact that erroneous payments can have in terms of costs incurred, invoice processing delays, and other impacts (fiscal and otherwise).
Measuring the percentage of exceptions vs. the total number of invoices processed lets you track how much time your AP staff spends being productive instead of fixing mistakes and processing errors. You can only offer a solution once you have fully diagnosed the problem.
AP metric 5: Early payment discounts offered vs. captured
It's critical to capture and claim early payment discounts.
Repeatedly being late on payments damages goodwill with your suppliers and costs you money that'd otherwise be claimed through discounts for early payment of bills and invoices.
By tracking captured discounts compared to missed ones, you gain insight into both the performance of your AP processes and the areas to improve.
AP metric 6: Late payments and penalties
It's essential to track early payments, but it's equally important to track late payments and any penalties and late payment fees incurred.
While no AP professional is intentionally late on processing payments, a lack of clearly defined accounts payable processes makes it harder to determine when bills need to be paid.
Discovering a large number of late payments and penalties can indicate that your AP processes require the help of an automation tool.
Automation and reducing reliance on paper-based invoices and processing methods will help you manage bill deadlines and avoid paying late fees and penalties.
AP metric 7: Number of discrepancies and disputes from suppliers and vendors
Until now, we've focused on errors usually discovered before invoice payments are processed for vendors and suppliers. However, invoice discrepancies can happen after processing payments, leading to disputes.
Measuring the number of discrepancies and disputes from your partners can help you spot opportunities for verifying invoice accuracy.
Suppose invoices are being matched to the wrong purchase order or recorded incorrectly. In that case, this can eventually impact your supplier relationships and harm your supply chain.
AP metric 8: Percentage of electronic invoices vs. total invoices received
When it comes to digital invoice processing, it's easy to make false assumptions about the efficiency of your accounts payable processes.
By tracking the percentage of electronic invoices compared with total invoices received, you can assess how much your AP workflows rely on outdated, paper-bound processing methods.
After tracking the percentage of electronic invoices versus your total number of invoices, it might be time to invest in a quality accounts payable system if you discover that you're still relying too much on paper.
AP metric 9: Number of AP operators or officers
Do you know how many people work in your accounts payable department? Many of the key performance indicators discussed rely on an intimate knowledge of your existing AP department setup, including the number of AP employees.
Knowing how many AP officers or employees are working to manage and process bill payments will ensure that any KPI calculations relying on personnel count are accurate so proper improvements can be made.
AP metric 10: ROI on invoice automation
How much will invoice automation benefit you? It can be challenging to track the ROI of your accounts payable processes and automation. Still, it's a metric that's definitely worth tracking.
If you haven't started automating invoices yet, try measuring your invoice processing times and looking up industry benchmarks for the average procure-to-payment (P2P) times within your industry. Using this data, you can start tracking how much time you spend on processing invoices.
After incorporating automated invoice processing, you can compare this data with your pre-automation data in real time to see how automation has impacted your accounts payable efficiency.
With software options like BILL, invoice automation is easy. It lets you automatically import invoices, automate routing workflows, and gain flexibility and visibility into your invoice processing workflow.
By incorporating automation into your accounts payable software, you'll save your AP staff many hours of manual data entry work so they can efficiently use their skills and abilities to support your company.
AP metric 11: Percentage of straight-through invoices
Straight-through invoices go from purchase to payment, with no errors or discrepancies. Tracking this metric gives you clear insights into the effectiveness of your system.
It's easy to assume things are going well if no supplier complains. However, having no disputes might mean your suppliers haven't caught the discrepancy yet.
On the other hand, if you have been tracking the percentage of straight-through invoices, you can spot and correct discrepancies that your vendors have yet to notice or have yet to bring up.
Simplify accounts payable KPI reporting with AP automation
Improving your accounts payable process can feel like a two-step process. First, you have to track the metrics to determine your performance and then make changes to hit your goals.
But you can actually accomplish both with one change.
BILL provides a full suite of accounts payable metrics and dashboards to understand just how strong your AP process is. It also automates much of the accounts payable process, from data entry and workflows all the way through sending the payment.
By integrating with top accounting software like QuickBooks, Oracle, Xero, Sage, and more, everything stays up-to-date with no extra work. That means more accurate results with less effort.
Try BILL to see how it can help you track your account payables goals and help you hit them.
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Accounts payable metrics FAQ
How do you measure success with accounts payable?
Just as there's no best KPI, success with accounts payable should reflect the business's priorities. For some, success is paying invoices on time, while others might want the most efficient accounts payable team.
Before defining what accounts payable success means, think about your goals. The definition of success should always reflect them.
How do you monitor accounts payable metrics?
How you monitor your accounts payable metrics depends on your accounts payable platform.
If you're using a mostly manual process, consider starting with Excel templates, which you can customize to suit your needs.
However, a dashboard is the easiest way to track and measure accounts payable performance. Look for accounts payable software that enables customizable dashboards (like BILL) to get a birds-eye view of the stats you value most.
What are accounts payable metrics best practices?
Some general tips to get the most out of your accounts payable metrics are:
- Define what success looks like: If your goal is to "improve the accounts payable process," there isn't a finish line to know when you've succeeded. Set numerical goals that match your priorities.
- Have regular check-ins: Whether it's daily, weekly, monthly, or whatever period you want, what matters is you make a habit of checking the metrics and making adjustments if things are off-track.
Embrace technology: Tracking accounts payable metrics manually will inevitably add more to a to-do list. Use technology to automate tasks and free up time to track metrics.