8 Key accounts payable metrics to track in 2023
More often than not companies tend to overlook their accounts payable department because it's not very delightful to think about money going out of the business as opposed to money coming in.
But this mindset needs to change as AP is an extremely important function of the business that affects the finances directly.
This is where accounts payable metrics come in to help you understand how your AP processes or the systems you have in place are serving your organization.
By looking at the accounts payable metrics and measuring them through relevant KPIs of accounts payable, you will be able to see what needs to be changed in order to improve productivity.
Accounts payable metrics are basically ways of measuring how effectively your AP team or individual AP accountants are performing and whether they are achieving the specific AP goals in an efficient manner.
These accounts payable metrics help the management gauge performance and analyze which part of your AP system needs improvement.
Understanding the metrics that are most crucial to the success of your AP department and using the insights you derive from analyzing performance will give you direction in terms of what changes need to be made in the AP process.
Doing this will reap many benefits. You will notice reductions in the cost of processing AP, better transparency in payment processing, and an overall more productive way of working for your entire accounts payable team.
AP KPI metrics are often categorized and classified separately as each one needs a different approach to be measured:
Any metrics that are related to the internal operations of the business and accounts payable fall under AP operational metrics. This can include things like your departments, employees, and the processes you set up to make payments.
All metrics that are linked to the actual financial transactions that are happening to process accounts payable fall under the AP financial metrics. Any kind of fees, payments, discounts, and errors related to AP payments are part of this category.
Metrics that are connected with your vendors or suppliers fall under accounts payable supplier metrics. Aspects related to how well they fit within your AP system and vice versa are included in this category.
Each company, each AP team, and each AP employee might have separate KPIs to measure their performance. Or they might have a unified way of measuring success. It all depends on the specific goals and objectives that were set beforehand by the management team.
Setting accounts payable key metrics is very important to have direction and to know whether the tasks being accomplished by the accounts payable department are achieved productively or in an inefficient manner.
When you measure a task based on preset goals will you be able to determine if performance is as per standards or not.
Listed below are a set of accounts payable metrics to be tracked and managed to help identify issues that slow down the accounts payable function:
Vendors and suppliers often provide discounts for early payments, advanced payments, or full payments made using a particular payment method. You can take advantage of this to cut costs significantly over a period of time.
Track all the discounts that you currently get. Track the discounts that you could be getting but are not able to benefit from due to issues like paying vendors only on the due date instead of early payments.
In such cases, setting up automation systems that help you process invoices faster can do the trick.
For suppliers who don’t give you early payment discounts, start building better relationships with them so that they give you the option to do so.
Apart from this, you must also measure the number of complaints or if your vendors are facing any discrepancies in receiving payments from you.
Tracking and rectifying all these problems can build a better relationship with them and lead to trust and loyalty. If manually doing this is not feasible, then you can implement an automated response system to keep track of queries and concerns.
Measuring the time taken by an AP employee to process invoices every month is an accounts payable productivity metric that helps you identify which employee is performing efficiently and who is not.
Doing this will give you an idea about the employees who might need to be trained again or help them fix certain steps in their AP process to enhance their performance.
If the processes turn out to be the problem, then the implementation of an AP automation tool to help each employee improve their invoice processing speed and decrease errors is a great option.
The payment cycle time that you have with different vendors is one of the accounts payable metrics that can impact your workflow and cash flow.
If there is an overlap between when you need to process AP and when you receive money, then the process can be very chaotic.
An even dire situation is when each month you have to process accounts payable before your accounts receivable. It might cause a cash flow problem.
A workaround to this is to negotiate with your vendors and suppliers to adjust payment cycle times to when it is most beneficial to both parties involved.
Duplicate payments are definitely one of the most serious problems faced by any accounts payable team at a company.
The lack of proper processes devoid of matching systems can let duplicate invoices pass through without being noticed costing a lot of money to your business.
To rectify this, stricter processes are definitely needed, but humans can always tend to make errors.
So using an AP automation tool that provides 2-way and 3-way invoice matching can help you detect duplicate invoices more accurately and prevent fraud or duplicate payments.
DPO is a KPI of accounts payable that tells you the average time it takes for your AP department to process all bills and invoices.
Days payable outstanding is a financial ratio that is calculated using the following formula = Accounts Payable / (Cost of Sales / Number of Days).
The lower the number is the better it can be considered if your goal is to process AP payments as fast as possible to get the early payment discounts and reduce overall costs in AP.
Invoice exceptions refer to faulty invoices either due to incorrect values such as the amount due, product details, quantity delivered, etc.
When an AP employee is manually processing all invoices, getting stuck at a faulty invoice can stop the entire process and suck away their precious time by them having to seek out respective team members to rectify the issue.
To make this a non-issue, your business can implement software that helps detect such errors much faster through automation so that other invoices can be processed while errors are forwarded to the relevant employee for clarification and rectification.
The percentage of invoices that are processed immediately and efficiently without any hiccups can give you an idea about the effectiveness of the AP process that you have set in place.
A higher percentage of straight-through invoices indicates that the processes and systems you have set in place are effective and also that suppliers and vendors tend to send you accurate invoices without any errors.
When you choose to automate the accounts payable processes with the help of a software solution, it not only allows for tracking the accounts payable metrics but also uses the KPIs to bring about positive change within the organization.
Some areas that AP automation helps the most include the following:
Any form of manual work such as inputting data from invoices into a system for further processing is drastically improved in quality thanks to an automation system's ability to capture data more accurately.
AP automation systems use a technology called optical character recognition (OCR) that scans a document, automatically reads relevant information and inputs them in necessary fields to process a payment. This improves quality of data entry.
Input timeliness refers to the speed at which incoming invoices are processed for payment. When invoices are to be processed manually, the payment cycle tends to be pretty long.
Using automation software can reduce the time it takes to process invoices by a significant amount.
Because an AP automation system can work on multiple invoices at once compared to a human who has to go through each invoice one at a time, the payment cycle time is reduced and your vendors receive their payments much faster.
Accounts payable automation also plays a major role in enhancing the quality of the process you follow for paying invoices. Right from receiving an invoice to finally entering the payment data in your accounting tool.
The quality improvements in the process are brought in the form of accuracy, speed, and the ability for team members to collaborate easily using a central platform.
Instead of having communication scattered across email threads and messages on different channels. All these small improvements in different stages of processing an invoice make a huge difference to the system that you follow.
The whole point of automation is to improve speed. The best part is that this speed never comes at the cost of quality.
This is because AP automation systems are equipped with error detection and fraud prevention mechanisms that help flag anomalies and let the AP employee resolve them quicker than usual.
An increase in the speed of processing accounts payable ultimately affects your vendor relationships in a positive way.
Related read- Automated invoice processing to better manage cash flow
When the input speed and quality are enhanced, the output speed and quality also improve.
Vendors receive faster payments that build trust between both businesses and a sense of loyalty is developed to provide the best quality goods and services to each other.
Output in terms of detecting errors and resolving them quickly is also improved as there is more time to rectify compared to a manual system.
Volopay is an all-in-one expense management platform that has a specific AP module for companies to manage all their vendors and invoices. System allows you to process invoices for suppliers & vendors both individual and corporate entities.
A major benefit of using Volopay is our multi-currency business account that lets you send payments to international vendors in their local currency so that both parties can avoid currency conversion charges.
You can schedule payments to make sure you never miss out on a payment and also create recurring payments for suppliers who you are in a contract with.