There are an infinite number of KPIs an AP department can track. And that’s part of the problem … more is not necessarily better. It’s a typical “quality over quantity” situation. Just like a doctor measures only a handful of vital signs, you too should focus your insights on a select group of KPIs that have the most impact on your company.
The current business landscape and pandemic economy have only added to AP’s strategic value. So, as finance leaders’ goals and priorities continue to shift, the metrics they’ve been tracking up until now might not being reflecting an accurate view of AP performance anymore.
In our experience, these 10 are the bee’s knees when it comes to assessing AP performance and eliminating costly inefficiencies.
#1 Cost to process a single invoice
In a time where cash is more important than ever, AP departments need to know what they’re paying to process each invoice and have a strategy in place to mitigate costs.
FACTORS TO CONSIDER
The total cost to process one invoice can be tricky to pinpoint. To get an accurate assessment, consider every expense involved in AP processing, including:
- Costs associated with routing
- Copying and follow-up
- Staff salaries
- Managerial overhead
- IT support
#2 Time to process a single invoice
There’s a reason people say time is money. In order to maximise AP’s profit-generating potential, companies must identify what’s slowing their process down and how to fix it.
WHAT’S AT STAKE
The time it takes to process a single invoice is a good KPI for determining how much value an AP department is either wasting or adding on a regular basis. The longer the processing time, the more likely it is you’re losing money on things like:
- Missed vendor discounts
- Late-payment fees
- Low staff productivity
- Vendor dissatisfaction
#3 Invoices processed per day per full time equivalent (FTE)
Measuring staff productivity is a way to optimise AP invoicing even further, as what you learn from this KPI can be used to improve multiple areas of your operation.
HOW TO CALCULATE
The FTE calculation is an employee’s scheduled hours divided by the employer’s hours for a full-time work week. To determine the number of invoices processed per day per AP clerk, follow these three simple steps:
- Take the number of AP invoices processed per month.
- Divide that by the number of FTEs who handle them.
- Lastly, factor in who’s responsible for what aspects.
(Note: There’s not a definitive market average for this KPI due to all the factors that play into the calculation.)
#4 Invoices linked to a PO
If it impacts processing time and cost, you better believe it’s worth tracking. Smart AP departments use this KPI to gauge how seamless their process really is and see where improvement is needed.
WHY IT MATTERS
Invoice validation is a key step in the approval process, so it makes sense that delays — like those caused by information not matching the PO — would be of great concern to the AP team. In general, the lower your percentage of invoices linked to a PO, the slower, more expensive your AP process will be.
#5 Invoice exception rate
Invoice exceptions are the bane of existence for AP clerks. Accounts payable staff spends a staggering amount of time managing and correcting invoice exceptions. To maintain process efficiency, AP departments should track and continually review this KPI.
WHAT’S AT STAKE
Considering the regularity of exceptions, it’s easy to see why they pose such a problem. The amount of time and resources required to resolve them is a big reason why AP departments underperform. More often than not, exceptions are caused by:
- Discrepancies in PO and invoice data
- Missing/incorrect PO
- Bottlenecks in approval workflow
#6 Straight-through invoice processing
With no manual intervention is needed, straight-through or “touchless” processing is significantly cheaper and faster than manual methods. Measuring and improving this KPI is key to maximising margins and efficiency.
WHY IT MATTERS
Invoices that are automatically processed without any human intervention take only a fraction of the time as ones that have to be processed manually. Organisations with high levels of straight-through processing benefit from:
- Lower costs
- More time for value-added activities
- Greater security
- Increased business efficiency
- Supplier satisfaction
#7 Suppliers that submit invoices electronically
Getting suppliers to submit invoices electronically is the best way to speed up processing and make it easier for other companies to do business with you.
FACTORS TO CONSIDER
There are two parties included in this metric: your company and your suppliers. Providing a way for suppliers to submit invoices electronically is only half of the equation. The other half is actually getting them to use your technology. The ability to onboard suppliers quickly and easily plays a big role in increasing electronic invoices submitted.
#8 Early payment discounts captured
It’s a win-win situation that lets you pay less for paying faster, and a KPI you should be tracking and capitalising on.
WHY IT MATTERS
Now more than ever, businesses are doing whatever they can to optimise cashflow. Early payment discounts allow you to keep more money in your company pocket, while also benefitting your suppliers’ bottom lines — helping to build stronger, longer-lasting supplier relationships.
#9 On-time payments
If you can’t pay early, paying on time is the next best thing you can do to avoid paying late fees and straining relationships with suppliers.
WHAT’S AT STAKE
The health of your bottom line is what’s at stake with this one. A low rate of on-time payment is usually associated with highly manual AP processes that require more time and resources. Additionally, vendors are happier to do business with organisations that they trust to pay on time, every time.
#10 Days payable outstanding (DPO)
While more strategic and complex to calculate, DPO is one of the few KPIs that can demonstrate AP’s value beyond invoice processing and help justify department costs.
FACTORS TO CONSIDER
Unlike the other metrics mentioned, DPO is much more subjective and ultimately dependent on cashflow strategy. DPO is the efficiency ratio for how long it takes for a company to pay its suppliers, and it can pack a major punch when it comes to working capital. It can also be the determining factor between suppliers considering your company a “good client” or a “bad client.”
To sum it up…
There is no magic wand or secret formula for becoming a top-performing AP department. Making the jump from average to best-in-class is as simple as this two-step process:
- Measure the most valuable KPIs according to your operational goals and evaluate them over time; and
- Leverage a solution that can optimise KPI management while improving AP invoicing as a whole.
For a deeper dive into AP KPIs you should be tracking, check out our 10 Accounts Payable KPIs Ebook.
-Written by, Taylor Bucher
