When the accounts payable department works well, payments to vendors and other business partners are always made on time, which makes everyone happy!
To ensure that your accounts payable department works as well and as efficiently as possible, you need a firm grasp of the relevant KPIs.
Crucial Indicators for Managing Accounts Payable
Invoice processes and approval steps can be seen more clearly with tracking. Efficiency and development necessitate transparency. It reveals the strengths and weaknesses of your current AP approach. You can stop guessing and start making decisions based on hard evidence once you have it.
The most crucial Key Performance Indicators for accounts payable are discussed below if pulling some numbers to improve results appeals to you.
1. The Average Cost of Processing an Invoice.
The first metric to keep an eye on in accounts payable is the typical cost of processing an invoice. You can see how inefficiencies affect your bottom line by tracking the total cost of each step required to process each invoice.
The average processing cost per invoice can be determined by dividing the total amount spent on processing invoices during a given period by the total number of invoices processed during that period. The total amount is your AP expense per statement.
2. Typical Time to Process a Payment
Knowing how long it takes for an invoice to be paid on average can shed light on the bottlenecks in your accounts payable department’s workflow. Do they spend most of their time entering data or working on strategic projects with upper management?
- Almost every business follows a similar process flow when handling invoices, with variations attributable solely to the parties involved. Invoice processing typically entails the following steps for accounts payable specialist:
- Acquiring the purchase order invoice (PO)
- Making sure the purchase order invoices are accurate and correct
- Taking down all of the pertinent information from the bill
- Including Invoice Data in General Ledger and Coding
- Invoices on purchase orders are submitted for review and approval before being paid.
- After an invoice has been approved, the next step is to process the payment and request a duplicate from the supplier.
3. Invoices Processed Per Full-Time Employee (Full-Time Employee)
The CEO, CFO, accounts payable team, suppliers, and vendors are usually involved in accounts payable processes from purchase to payment. Analyzing non-AP staff contributions can increase invoice processing per accounts payable employee.
By introducing automation into your accounts payable cycle time, you can reduce the time it takes to process each invoice; consequently, your accounts payable staff can devote more time to other tasks. One way to increase the speed with which invoices are processed is to reduce the time it takes for parties involved in the approval process to issue decisions on submitted invoices.
4. The Ratio of Invoices with Problems to All Invoices.
A billing exception is a discrepancy discovered on an invoice during receipt or processing. The following are examples of standard invoice exceptions:
- Errors in entering invoice information
- As paper invoices are digitized, vital information is lost.
- There is an inconsistency between the invoice and the associated purchase order.
Anyone who has worked in accounts payable for any time has run into exceptions and witnessed the adverse effects that incorrect payments can have on a company, such as added expenses and delays in invoice processing.
5. Taken Versus Offered Early Payment Discounts
Discounts for early payments should be claimed and captured. Failure to pay bills and invoices on time regularly can harm relationships with vendors and prevent you from receiving deals that would otherwise save you money.
By keeping tabs on the percentage of discounts being applied instead of those being missed, you can gauge the efficacy of your AP procedures and identify problem spots.
6. Fees for Payment Delays
It is essential to keep tabs on the number of early and late payments made and any associated penalties and late payment fees. Even though no AP employee ever willfully misses a payment deadline, hazy accounting procedures make it challenging to know when bills are due.
If you’ve found yourself dealing with many late payments and penalties, it may be time to invest in an automation tool for your accounts payable processes. Avoiding late fees and penalties on bills is easier with the help of automation and a reduction in paper-based invoices and processing methods.
7. The Total Number of Disputes and Disputed Items with Suppliers and Vendors
So far, we’ve been concentrating on mistakes typically uncovered before vendor and supplier invoice payments are made. However, even after invoice payments have been processed, discrepancies can arise, leading to disputes between suppliers and vendors.
You can learn where there might be room for invoice accuracy checks by tracking the frequency with which your partners raise questions or file disputes. The health of your supply chain and relationships with your vendors can take a hit if invoices aren’t correctly matched to purchase orders or are recorded incorrectly.
8. The Share of Invoices Received Electronically as a Percentage of the Total
With digital bill processing, it’s easy to overestimate how well accounts payable work. The amount of paper-based processing in your accounts payable (AP) workflows is shown by the percentage of electronic invoices you receive.
9. Number of AP Staff (Operators and Officers)
Can you tell me how many people have been employed in the accounts payable division of your company? Understanding your current AP setup, including the number of AP employees, is crucial for many KPIs I’ve discussed.
Assuring that key performance indicators (KPIs) that rely on headcount are accurate will allow for more effective management and processing of invoices and other payments.
10. Return on Investment for Invoice Automation
How much do you think electronic billing will help you? The financial impact of automating your accounts payable processes may be hard to track, but it is still a metric that you should keep an eye on.