Topics: Accounts Payable Optimisation, Accounts Payable Process

7 Accounts Payable KPIs CFOs Must Track to Optimize AP Efficiency

Posted on May 16, 2022
Written By Divya Ramaswamy

accounts payable KPIs

“Progress is made where progress is measured.”

All business functions use certain performance metrics to gauge their efficiency and contribution to the overall success, and accounts payable isn’t any different. As finance leaders continually strive to use data more effectively to produce better reporting KPIs, it becomes easier to make informed decisions that steer their company in the right direction.

Ascertaining your accounts payable team’s success isn’t just about tracking the number of past due invoices but rather understanding its performance & health to make critical adjustments in your execution to achieve strategic goals. Closely monitoring the key performance metrics around what you owe your suppliers, vendors, and creditors can help avoid errors and cut down costs borne by process inefficiencies alongside optimizing cash flow.

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A business’ AP department running smoothly and efficiently is a clear indication that bills are always paid on time and that the company gains a stellar reputation among suppliers and partners for prompt payments. Understanding the right AP metrics is key to optimizing your AP department for efficiency and cost.

Let’s look at the 7 most important metrics every accounts payable department should be measuring.

KPI #1: AVERAGE PROCESSING COST PER INVOICE

Although this is an obvious and number one AP metric when it comes to invoice processing, it isn’t an easy one, considering the number of steps involved. This key productivity metric includes all costs to AP of processing payments, including operational expenses and supplier charges. In addition to the costs associated with goods & services for which they are issued, invoices can generate additional expenses via delay or error. An estimated 90% of all invoices globally are still processed manually. While processing one manually costs between $12 and $30, automation has significantly cut down costs to $5 or less, per invoice.

Why track this metric?  This metric is a strong motivator for change. Knowing the true cost of invoicing emphasizes the power of automation. Finance leaders should use this AP metric carefully, preferably to focus on monitoring their performance over time rather than comparing their benchmark with peers.

KPI #2: DAYS PAYABLE OUTSTANDING (DPO)

This metric indicates that the average duration it takes for your company to pay back your suppliers is used in cash cycle analysis. A high or low DPO compared to the industry average can affect your business. Although a high DPO can be advantageous for your company as the excess cash on hand can be used for short-term investments, payment delays can affect supplier relationships. On the other hand, a low DPO suggests that the company isn’t wholly utilizing its credit period and could also indicate that it is operating inefficiently.

Why track this metric? DPO is an important concept in a company’s financial modelling and measures how well a company is managing its accounts payable. It is one of the most valuable metrics for evaluating overall efficiency and productivity in AP. It ensures that the business achieves the right balance between cash flow and vendor satisfaction. It can also assist you in expanding, maintaining a healthy financial statement and competing effectively.

KPI #3: INVOICE PROCESSING CYCLE

Evaluating this metric can help you understand where your AP staff is spending the most time. Besides identifying time-consuming tasks, monitoring this KPI also helps avoid late payment penalties. Businesses that process invoices manually take up to two weeks or more to process, and with automation, you can drop that to hardly a day or two. The longer an invoice is out, the greater is the risk it poses to your business. The processing costs will rise, but you will miss early payment discounts.

Why track this metric? Understanding your invoice processing time can help reveal gaps in efficiency. The longer the cycle, the more costly the process gets due to associated labor charges. CFOs analyze this KPI alongside the average cost per invoice to determine where improvements can be made.  

KPI #4: PAYMENT ERRORS AND PENALTIES

Although it is widespread, payment errors are major financial drains facing organizations today, can affect credit terms and take a toll on vendor relationships. The most common payment errors include data entry errors, payments made to the wrong vendor, and processing an invoice multiple times. The higher the rate of late payments, the more money your business will lose via statutory interests and fees. Also, tracking errors like duplicate payments can help identify fraud. Identifying which AP team member has committed which error allows for identifying additional training needs and process breakdowns.

Why track this metric? This can be a critical metric because erroneous payments, duplicate payments, or overpayments can drain your business’ finances and estrange vendor relationships. Finance leaders track the error type and reason for the error and address them regularly to reduce future losses and save the company’s reputation.

KPI #5: DISCOUNTS OFFERED Vs CAPTURED

Businesses constantly aim to get as many discounts as possible to save costs and improve their company’s bottom line. This metric refers to the number of early payment discounts your business secured in relation to how many were offered to you. Not only does it help track missed opportunities and the amount of money you could have saved during an early payment, but it also indicates whether your company is meeting supplier obligations. Finance leaders make it a goal also to track the reasons the discounts weren’t captured – such as payment delays, vendor terms not set up correctly in the system, or invoice holds that prolong payment processing.

Why track this metric? It helps gain insight into the performance of your AP process and highlights the areas for improvement. Tracking the rate of discounts captured as a percentage of total discounts offered by suppliers can help you realize missed opportunities and present you with strategic imperatives.

KPI #6: STRAIGHT THROUGH INVOICE PROCESSING RATES

Straight through or touchless invoice processing eliminates paper invoices and the hassles of manually matching POs with invoices. The higher your touchless invoice processing rate, the lower your overall costs. Having a strong straight-through processing rate influences most of the above-mentioned AP KPIs. Removing manual steps can help cut costs and shorten the lead time to process an invoice. The best-in-class AP departments hit about 71% touchless invoice processing rate.

Why track this metric? It is considered the king of AP KPIs, considering its massive impact on processing costs and processing times and how it can save valuable man-hours. Tracking touchless invoice processing rates can help position accounts payable as an efficient function within the organization, fine-tune processes and manage by exceptions.

KPI #7: ROI ON INVOICE AUTOMATION

Even though automation is the best practice for increasing AP efficiency, it is still important to evaluate your ROI. Estimating how much invoice automation will benefit your business can be complex. It requires considering factors including the average salary of AP staff and the amount of time and resources your business spends processing each invoice. When this AP metric isn’t tracked, you might not know what’s helping and what needs to be changed.

Why track this metric? You can compare this data with your pre-automation data in real-time to learn the impact automation has brought on your AP efficiency. It helps you understand your AP automated solutions’ financial impact on your business. Finance leaders continuously monitor, analyze and make improvements to ensure a solid ROI whenever there is any change or AP automation workflow update.

Final thoughts

Automating your accounts payables operations can help you unlock the ability to track your key performance indicators more closely. AP automation and actively reviewing the metrics mentioned above can help limit errors and decrease supplier inquiries. Moreover, automation allows for the centralized data collection of your payment data. Advanced and predictive analytics can give you a complete picture of your AP operations. A successful accounts payable process is just around the corner with proper metrics.

Book a Consultation

Interested in exploring everything AP automation can do for your business? Schedule a demo with one of our experts today to find out how you can streamline and digitize your accounts payable process.

Originally published May 16, 2022 05:05:43, updated Jun 27 2022

Topics: Accounts Payable Optimisation, Accounts Payable Process


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