Which Accounts Payable metrics do you need to track?

Responsibility of the Accounts Payable department varies from organization to organization depending on the organization size. In general, the Accounts Payable team receive vendor invoice, employee claims, etc. and process it system and pay it on time.

When we talk about Accounts Payable, then it’s essential that all Accounts Payable managers or organizations should track some key metrics. Basically, Accounts Payable metrics are defined as the quantitative values used to determine the effectiveness and efficiency with which specific goals and objectives are achieved within a company’s Accounts Payable Department.

In this article, we will see which Accounts Payable metrics you need to track.

Reasons to track Accounts Payable Metrics

If you want to improve your Accounts Payable (AP) process then you have to keep track, measure, and analysis your Accounts Payable Metrics on day to day basis.

Your Accounts Payable dashboard should have these metrics to track your Accounts Payable performance. Furthermore, these are the essential Accounts Payable KPI’s which you should track on a regular basis.

These metrics determine the effectiveness and efficiency with which specific objectives and goals can be achieved by the Accounts Payable (AP) department, and to determine how to best make use of time and resources. Moreover, if you don’t track your accounts payable metrics, you may not know how productive your team is or how potentially productive they can become.

If you don’t know where to start and what to measure, then here are some useful accounts payable KPIs you should be tracking to smoothen the accounts payable process and improve your business’ performance.

The most useful Accounts Payable Metrics (KPI’s)

1. Tracking of number of invoices received

The main critical activity for any AP department is to keep track of their incoming vendor invoices or employee claims. However, this will give you an idea of how many invoices do you receive on a daily, weekly, monthly, and yearly basis.

This will help you to understand the below points.

1. No of invoices received
2. Type of invoices (Po or Non-Po based)
3. Vendor wise invoice count
4. Resource allocation

2. Rate of invoices processed as a percentage of the total number of invoices received

To keep efficiency in your Accounts Payable process, you need to track this metric. This will give you a fair idea of how your AP team is working. You need to track that whatever invoices you received those invoices were processed or not within a stipulated time period.

If the percentage of your processed invoices is more than 90% of the total invoices received then your accounts payable (AP) team’s performance is on track. If not then you need to more vigilance why the processed percentage is less.

This will help you to identify the issues which slow down the processor in processing the invoices. Also, you will identify the areas which need improvements/automation in your accounts payable workflow.

By identifying and resolving the issues you will increase your team member’s efficiencies as well as productivity.

3. Rate of exception invoices handled as a percentage of the total number of invoices received

Managing exceptions is the biggest problem for an accounts payable department. The number of invoices you processed without any error is better for any organization. You always should try to keep this rate at very low.

Reducing or eliminating exceptions will increase efficiency, reduce the stress on employees and management, delight suppliers, and cut overall processing costs. In most cases, exception invoices required manual efforts.

When you start tracking this metric, you will get to know the reason for this exception. The reason may be due to the difference between PO, GRN & invoice details, like the difference in rates & quantity. You can work on these common exceptions and resolve the same.

4. People productivity- Average documents per day

This metric will help you to understand the per person average productivity by functions within the AP department. This will help you to identify which team member processes more invoices and who is not. However, it is important to check whether members who have quick turnaround times churn out error-proof invoices.

5. Invoice cycle time

This metric will help you to understand the average working time taken from the invoice receipt to pay. If your average cycle time is at low then you have a good system and effective team in place, if not then you have to streamline your AP process.

The average processing time per invoice differs from organization to organization. But, in an effective AP department, it takes 3-4 days, while an average organization takes a maximum of 10 days.

If your team member is taking much time in processing the invoices then probably you need to look into your his/her understanding or way of working on invoice processing. You also need to streamline your invoice processing department, so that the average cycle time will improve.

6. Average cost per invoice

Being in the accounts payable department you always need to keep the focus on decreasing your operational cost per invoice. This can be done by implementing new robotics methods (accounts payable automation) into your AP processes.

The cost of exceptional & non- PO invoices are more than clean invoices. It can be very helpful to refer to a benchmarking study that indicates average and best-in-class measures, to determine how your AP performance compares with your peer’s organization.

The cost per invoice calculation depends on the size of the organization. If your organization is big and you receive a huge number of invoices then your average cost will differ from the small and medium-size organization. It also depends on the length of the invoice.

7. Paid on time

This metric will help you to understand the number of invoices paid within the due date and how much erroneous and duplicate payments made over a certain period of time.

To get the vendor satisfaction you need to pay the vendors/suppliers on time. Delay in payment may result in not only vendor dissatisfaction but also increase the waiting time to get the raw material or services from the vendor.

However, keeping an eye on the paid on time (POT), the rate of wrong payments, duplicate payments as a percentage of total payment can be a good benchmark for identifying and correcting the causes of this type of error, thereby reducing the incidence in the future.

However, automation in the accounts payable payment process will help you to reduce your erroneous and duplicate payments.

8. Days Payable Outstanding

Days payable outstanding (DPO) is a financial ratio that will help you to understand the average time taken by an organization to pay his vendors/suppliers invoices.

An organization with high DPO takes a longer time to pay his vendors invoices. And, this allows the organization to maintain better cash flow. However, higher values of DPO, though desirable, may not always be a positive for the business.

Conclusion

Follow the above metrics on regular basis and help your accounts payable process more error-free and increase the productivity of the team members. Also, take initiative to do the automation in your AP process.

Reach out to me to know more about the automation in your accounts payable process.

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