Accounts Payable Metrics that Matter
Measuring and tracking accounts payable efficiency is critical to maintaining healthy working capital and cash flows. Move away from tedious manual processes towards AP automation.
At first glance, accounts payable seems straightforward. Vendors issue your company invoices and they get paid - simple, right? In practice, invoices that can’t be processed straight-through take up significant resources.
Why measuring your AP efficiency is important
Business owners often overlook accounts payable productivity unless cash flow becomes tight. Duplicate invoices through paper and email, inaccurate invoices, and fraud are just a few of the recurring issues plaguing AP departments.
Stagnant procurement-to-pay workflows are a sign that AP metrics have been ignored in areas ranging from invoicing to approvals. Unfortunately, not paying your vendors efficiently has negative knock-on effects on supplier relationships and working capital.
Top 8 AP metrics to track
Tracking the right benchmarks gives managers tools to evaluate the AP process, track results, and fine-tune workflows that create bottlenecks.
Average processing cost per invoice
Divide the total payment processing cost (including costs like labor, systems, sourcing, printing, and postage) by the number of invoices processed for the same period to calculate average AP costs.
Ideally, you're trying to bring down your average cost without raising process cycle times or causing errors. Compare your data within the industry if possible. Streamlining invoice processing and approval times using AP automation can help eliminate costs eating away at your bottom line.
Average payment processing cycle time
Time is money, and analyzing the payment cycle length can uncover hidden inefficiencies.
Total processing time includes:
- Invoice coding, data entry, and review
- Approval process - Identifying the manager responsible and obtaining approvals
- Setting up payments
- Reconciling payments
Calculate average time by dividing total processing time by the number of invoices processed during the period.
Look for recurring errors and manual workflows to implement AP automation. A shocking 55% of invoices are still processed manually. Address common challenges like manual data entry and long approvals processes with technology like OCR and automated approvals.
Invoices processed per FTE employee
Keep tabs on the ratio of total invoices processed for the month per full-time employee.
Higher invoice per FTE employee numbers means lower time spent on each invoice, so the goal here is to increase this number. The average AP clerk spends roughly 12 minutes processing an invoice manually, but this number can be reduced to 2 minutes for an electronic invoice.
Within a given period, add up the number of transaction-related errors and divide them by total successful transactions for your transaction error rate. Best practices keep error rates below 1%.
Automated error detection can identify failed transactions immediately, potentially leading to cost recovery.
Invoice exception rate
According to Ardent Partners, the average AP department staff spends 24% of the time handling exceptions. Identify the ratio of invoices with exceptions to the total invoices processed for the month.
Exceptions usually come from workflow issues, especially with purchase orders. Reducing exception rates allows businesses to pay suppliers faster and frees up time.
Supplier discounts captured vs offered
Missed purchase discounts are another key indicator of efficiency.
Divide the number of discounts received during a specific period by the number of supplier discounts offered in that same period.
The goal is to decrease the percentage of missed discounts and the dollar amount as well. Best in class AP departments capture seven times more early payment discounts than peers.
Late payments and penalties
Delaying payments comes with avoidable costs such as penalties and interest, while eroding supplier goodwill.
Sum up the value of late payments, penalties, and interest within a specified period. Divide this by the total of all successful payments within the same time-frame. You can also track the quantity invoices paid on time versus total invoices processed.
Using late payment prevention systems bolsters supplier relationships and lowers costs.
Number of supplier inquiries, discrepancies, and disputations
Around a third of companies highlight vendor invoice discrepancy as the biggest pain point in maintaining strong supply chain relationships. Track inquiries, discrepancies, and any disputes to see where to improve your workflows.
Total the number of supplier inquiries, discrepancies, and disputations within a specified period and divide this by the total number of successful transactions for that same period to see a percentage of how many issues are arising.
Scanning for potential issues through a stronger audit process and using electronic document management can help reduce human errors that are usually at the source of discrepancies.
How to streamline your AP operations
Tracking and optimizing AP department metrics is crucial to achieving efficiency. Monitoring these KPIs highlights issues in manual processing that prevent businesses from improving accuracy while reducing processing time.
AP automation lets you carry out workflows at a lower cost. Faster approval and processing and fewer mistakes also mean happier suppliers. Standardizing processes speed up the entire cycle.
Let Lola.com give you real-time control over spending
Take precise control of company expenses with Lola Spend. Distribute software-enabled corporate cards that empower teams to create, track and change their own budgets in real-time.
With Lola.com, you’re rewarded with real-time visibility and control regardless of whether you pay with cards, invoices, bank transfers, or cash. Limit spend depending on the cardholder or merchant and review purchases based on corporate policy before they even happen. Eliminating manual processes and automating review boosts your AP key performance indicators.
Advanced budgeting on the way
Lola.com will soon launch advanced features to extract invoice information and seamlessly categorize spend into a budget. Upload your invoices and let our software take care of the rest, including settling invoices through bank transfer or cheque.
By avoiding manual invoice processing, Lola’s automated solutions let accounting and finance teams focus on value-added functions rather than on coding and data entry.