An efficient Accounts Payable (AP) department is invaluable for an organization. They help you maintain a healthy supplier relationship, manage your cash flows and even help with cost savings. However, the manual processes in most organizations make AP function more transactional and less strategic. To move towards a more strategic role in the business, AP leaders need to walk a tightrope, and the Accounts Payable KPI dashboard will help the AP team keep tabs on the key metrics and identify problems to ensure the AP process runs efficiently.
How can Accounts Payable (AP) increase efficiency
Accounts payable (AP) is a critical but often underrated function within a company. AP ensures that invoices are paid on time and that vendors are happy. But AP can do more than pay bills—it can also be a significant source of efficiency gains for a company.
Failure to adopt an effective AP process can hamper the company’s ability to take advantage of available discounts on payment terms, delay invoice processing, mismanagement of cash flows, and incur considerable expenses in processing invoices. These consequences generally arise when the AP function.
- Still using manual, error-prone AP process.
- Do not confirm if the PR, Invoice, and PO match or not
- Lose access to early payment discounts by over-extending payment cycles or accept deals without calculating the cost of capital outlay
- Lack of processes or systems to prevent late payments, overpayments, duplicate or missed payments.
What are the KPIs for Accounts Payable (AP)
Closely monitoring KPIs is one of the best practices that any AP function can do. The Accounts Payable KPI dashboard (AP dashboard) should have these KPIs to allow us to analyze and drill down any problem or trend. The most common KPIs that every Accounts Payable KPI dashboard should have are:
Total Accounts Payable-
It is the total amount due to third parties at any time. Accounts Payable KPI dashboard has the current status as well as the past trends.
Current Account Payable
The total value of supplier payments still needs to be due, divided by the full balance of AP.
Overdue Accounts payable
The value of the total amount due on the date of calculation has yet to be honored by the company, even after the stipulated time mentioned in the invoice ( 30-60 days). However, Accounts Payable KPI dashboard display this as a percentage of the total AP balance.
Accounts payable aging
Invoices are typically bucketed into 30-60-90 buckets to track the pace of cash outflows and the number of unpaid invoices. It is important mainly for two reasons-
1) Enterprises with stable cash flow prefer avoiding having debt outstanding after its due date.
2) The AP aging chart indicates the possible problems in your AP process. For example, if the goods have been received and the bills still need to be cleared, your AP process has inefficiencies built in that need to be looked
Days Payable outstanding (DPO)
Days Payable Outstanding (DPO) is the number of days the company takes to pay for the goods and services it has received from the vendors on Credit. It is a crucial metric to track in the Accounts Payable KPI dashboard (AP dashboard). A higher DPO means the company has more cash flows to fund operations.
Accounts payable process cost
It is an efficiency metric that calculates the average cost incurred in clearing each bill owed to the supplier. This cost includes labor cost, system, overhead, and others.
Avg. time to pay invoices
Represents the time between when a company receives an invoice from a vendor and the business pays it. The time required to collect approvals may impact that number. Another critical factor is whether the company has an automated AP system that can provide accelerated, straight-through processing for a percentage of the company’s invoices.
It is a grouping of all errors that occurred during the processing of payments- incorrect values, duplicates, omissions, and incorrect vendor information. Errors are evaluated as a percentage of total invoices processed.
What is the account payable benchmark?
AP benchmarking helps enterprises to measure their AP functions against peers and identify improvement opportunities. However, a slight improvement can also have a rippling effect on other processes and cost savings.
For example- a delay in invoice processing can delay supplier payments. This will not only impact the vendor relationship, but the organization can also lose out on discounts on early payments.
What are the benefits of AP benchmarking?
AP benchmarking is pivotal in improving the AP process by measuring the key performance metrics and comparing them against peers. In addition, having an efficient AP team leads to cost savings, helps strengthen the vendor relationship due to timely payments, and helps provide better insights.
5 Accounts Payable Key Performance Metrics (KPIs) to Track Accounts Payable Efficiency
Out-of-control AP operating costs will erode your profitability and powerfully impact your cash flows and working capital management. Therefore, it becomes imperative to monitor the AP operating cost.
Avg. AP operating cost per unit= Total operating cost divided by the number of invoices processed.
The lower the avg. operating cost per unit, the better the performance of the AP function.
For example- if the total AP Operating cost is $100,000 and the team processes 10,000 invoices on an average every month, the avg. operating cost will be = $100,000/10,000= $10 per unit.
This cost can then be compared to IOFM benchmarking report, which reports that AP teams with best–in–class organization process invoices at $2.02 /unit, while the median cost per invoice is $5.71.
Avg. operating cost/invoice may be misleading if the total invoices processed include many Non-PO invoices and exceptions.
Invoice processed per FTE
This metric helps to gauge the efficiency and productivity of your AP team.
Invoices processed per FTE= Total invoices processed/ total number of FTE employed.
As per the Hackett group, highly- productive AP teams can process 23000 invoices per FTE, whereas an avg. team can process only 6082 invoices per FTE.
This also can be attributed to more manual processes than AP automation.
The best-performing organizations apply automation to process invoices using an automated workflow to improve staff efficiency.
Percentage of discount lost.
It is one of the most crucial KPIs that leads to revenue loss.
Percentage Of Discounts Lost = Total transactions where discounts were not captured divided by Total trades where suppliers offered discounts
The lower this score, the better it is. The business needs to analyze this KPI to improve their invoice processing faster to capture discounts wherever possible.
Number of discrepancies and disputes
If an AP team spends significant time resolving discrepancies and queries, the AP team needs to be more efficient. It can’t create value. According to Ardent Partner’s AP metrics report, AP staff spends 22% of their time resolving queries.
To minimize the time AP teams spend answering queries, the organization can use AI-led accounts payable automation tools like a brilliant desk that can check the intent of all questions in the mailbox using AI and reply to them, accordingly, thus freeing up the precious time of the AP team. In addition, the automation will also help in 2- 3-way matching invoices for faster payments and eliminate the risk of duplicate invoices and payments.
Vendor Payment Errors = Erroneous transactions divided by the total number of transactions over the same period.
A significant reason behind vendor payment errors is the deep-seated practice of organizations to make manual payments. According to Ardent Partners’ Accounts Payable Metrics Report, 43% of B2B payments are still made manually. Manual payments are prone to human errors and unnecessarily increase invoice cycle time.
Organizations should integrate their AP with upstream data to improve this KPI and use electronic payment methods for faster payments.
Invoice exception rate
When an invoice misses essential details like incorrect vendor name, vendor data, or routing errors, it causes unnecessary delays at the AP process end.
Invoice Exception Rate = Invoices flagged for an exception divided by total invoices received in a period.
According to Ardent Partners AP metrics, 24.6% of invoices are flagged for incorrect details/exceptions. This causes delays at the AP process team’s end as they have to perform additional work to get the invoices rectified or approved for exceptions. This eats to the value able time, which could have been used for strategic purposes to achieve company goals.
By automating the AP process, organizations can reduce the invoice exception rate as the system would do a 2-3way matching of the invoices with PO and send instant alerts in case of any exceptions.
Accounts Payable KPI Dashboard
Setting up a new Accounts Payable KPI dashboard requires forethought and planning to provide the most valuable information for each user efficiently and intuitively. Here is a sample template that can be used
Template – AP Dashboard.xlsx
Automating AP process with AI-led automated AP Software.
An efficient AP process can improve vendor relationships, save time for the AP team to get involved in more strategic work, and result in significant cost savings.
For example, automating AP using Zycus’ AI lead automated accounts payable automation software can reduce invoice processing costs and time and help manage cash flows better.
For a long AP, the process has been considered a back-office expense, but automating the process can transform that area of business into more of a strategic advantage.
In addition, the Accounts Payable KPI dashboard (AP dashboard) provides real-time visibility into the payment process to enable better cash flow management, optimization of discounts, and enhanced supply chain management.
Are you struggling with Accounts Payable KPIs? See the Difference with a Live Demo!
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