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Measuring Your Accounts Payable Effectively: Operational Metrics

accounts payable metrics
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Keeping track of things that matter is always a difficult task. Accounts Payable is one function which though critical is often perceived as difficult to be optimized. However, thanks to advancements in technology and the advent of sophisticated Accounts Payable Automation Software this mindset has changed. Business leaders have finally come to realize that accounts payable has a significant impact on the financial position of a business and a direct bearing on the finances. A whopping 63% finance executives are looking to automate their AP processes by end of 2023. 

Today business leaders pay a great emphasis on tracking accounts payable metrics because these metrics help business leaders better understand their accounts payable process. Closely following accounts payable metrics and measuring them through key KPIs of accounts payable enables business leaders to identify what needs to be altered in order to enhance efficiency.

Management guru Peter Drucker said, “If you can’t measure it, you can’t manage it.” This holds true for your Account Payables as well! Before analyzing and measuring your existing AP processes, it is important to establish key performance indicators (KPIs), which will help to track how your AP performance and drive improved efficiency and accuracy.

What are Accounts Payable Metrics?

Simply put accounts payable metrics is a way to measure the efficiency of your AP function. Tracking metrics for day to day accounts payable function helps identify AP workflows that are underperforming or fail to meet the accounts payable metrics benchmark. A proper tracking of accounts payable KPI (key performance indicator) metrics can help businesses get a better understanding of suppliers, facilitate cost savings, enable them take informed strategic decisions, drive smart decisions, and over all business profitability.

However, the key is to track the right KPI metrics with accounts payable KPI dashboard to make accounts payable more efficient. So what are the metrics one should track? Let’s find out.

Top Accounts Payable Metrics to Track

The metrics to be tracked may vary from one company to another depending on their goals for different AP functions. Accounts payable KPI metrics can be broadly classified in the below three categories:

1. Operational Metrics: All metrics related to the internal operations of a business and accounts payable such as employees, internal departments, processes set up to make payments.

2. Financial Metrics: Actual financial transactions that take place to process accounts payable such as fees, discounts, actual payments made, errors etc.

3. Supplier Metrics: Metrics pertaining to vendors or suppliers.

Let’s now delve into the accounts payable metrics that every business must track to make its accounts payable efficient and agile.

Operational Metrics

1. Number of Invoices Received

The first and foremost metric to track is the number of invoices a business receives and also how it receives it. By how we mean, clearly tracking the number of invoices received digitally and manually. The volume of invoices received is the starting point to decide how to work towards making your AP process more efficient. It also helps determine how AP automation tools can be implemented.

2. Exceptional vs Total Invoices Processed

This statistic monitors the mismatches or discrepancies that require verification or correction prior to processing for PO and non-PO invoices. This metric directly impacts processing costs and timing. It considers the percentage of overall invoices ending up in exception piles. Another way of measuring this metric would be ‘first-pass-match rate’ which would look at the percentage of invoices not getting stuck in exception piles.

3. Number of Invoices Processed

It is important to track the total number of invoices your AP team is able to process in a given time-period (say a week of per day), also number of invoices processed per employee in the AP team. If the numbers are low you really need to identify potential bottlenecks in the workflow or asses if your AP team is understaffed.

4. Average Invoice Processing Time

One can arrive at the average processing time by dividing the time taken to process the invoice by the total number of invoices received. A high processing time is an indicator of major gaps in your accounts payable efficiency. If you are still stuck in manual systems its time you consider moving to AP automation.

Formula: Time Spent Processing Invoices ÷ Number of Invoices Processed

5. Invoices Per FTE

This operational metric measures the number of invoices processed relative to the number of employees in the accounts payable department. This KPI may vary depending on whether a business is using paper invoices or has moved to e-invoicing software.

6. Payment Timeliness

On-time payment of invoices is essential to eliminate the late payment penalties as well to create prospects for early payment discounts and enrich relationships with suppliers. This metric calculates the percentage of overall invoices paid on time.

Financial Metrics 

1. Payment Errors

Duplicate payments, delayed payments, excess payments all of these qualify as payment errors and can adversely impact supplier relationships and your reputation. A high number of payment errors is a clear indicator of a badly fractured AP workflow in need of immediate attention. This clearly is one of the most critical accounts payable metrics to track.

Formula: Number of Incorrect Payments ÷ Number of Invoices Paid

2. Payables Aging

The average number of days taken to settle supplier payments for their services is payables aging. A high number of days here is really like a double—edged sword. While it may be a good indicator of well-managed cash flow, consistent payment delays could lead to strained vendor relations.

Formula: Accounts Payable x Number of Days ÷ Cost of Goods Sold (COGS)

3. Percentage of Discounts Captured and Obtained

Percentage of discount captured refers to the number of discount offers a business receives for early payment. Percentage of discounts obtained refers to the payments done early to leverage the early payment discount and the number of such opportunities missed. Small discounts on multiple invoices if leveraged can cumulatively result in big cash savings and high-profit margins for a business. By tracking these metrics one can identify the reason for such opportunity loss and consider automation to make leverage early discounts a 100%.

Formula: Number of Discounts Captured ÷ Number of Discounts Offered

4. Process Cost Per Invoice

This metric is calculated by taking the direct monthly cost of accounts payable operation (excluding corporate overhead) and dividing that by number of invoices processed per month.
AP managers should be cautious of their cost per invoice and have an action plan to improve efficiency to drive this cost down.

Learn More: Merlin for AP Automation Software

Supplier Metrics 

1. Vendor Disputes

Tracking number of vendor disputes is highly critical as it clearly indicates the health of your relationships with vendor and also gives deep insights on your accounts payable internal controls and processes. The most common reasons for vendor disputes could be wrong payment value, misplaced invoice, and clerical/data entry/manual errors at the time of processing.

As per the industry best practices, here are some key statistics to keep in mind-

Ardent Partners ePayables 2014 Stats

Source: Ardent Partners e-Payables

Transform your Accounts Payable with Zycus AI-Led AP Automation Software  

AP automation is the way forward to improve accounts payable metrics, stabilize and improve supplier relationships, and create a streamlined and agile AP function. Zycus AI-led Accounts Payable Automation Software automates all processes of AP. It’s Merlin AI legacy, ability to seamlessly integrate with native S2P suite, and 3rd party integration with any ERP makes it a perfect solution for all kinds and size of businesses. 

Experience touchless invoice processing with the E-invoicing Software and ensure 100% compliance with all legal and regulatory requirements. Strengthen supplier relationships with the supplier communication module. Reduce invoice processing time by 75% and processing costs by 65%.  

Get detailed reports on key metrics and eliminate manual errors with automated reconciliations. Transform your accounts payable with Zycus, request for a demo today. 

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