The 8 Most Useful Accounts Payable KPIs

If a business aims to fish out the funds-sapping inefficiencies in its operations, accounts payable is an excellent place to begin. Accounts payable KPIs help you estimate the efficiency of your AP operations and the productivity of your accounts payable teams. AP departments are critical in managing vendor relationships and performance through key performance indicators (KPIs). They also ensure that your relationships with your creditors are not short-changing your cash flow and vice versa.

Validating useful KPIs around what your business owes to creditors and suppliers can eliminate accounting errors and slash costs incurred by inefficient services. You also enjoy the many benefits of an optimized AP system when you can tangibly monitor your AP performance indicators. So, below are the most valuable accounts payable KPIs you should consider.

Understanding Accounts Payable KPIs

Definition and Importance of Accounts Payable KPIs

Accounts Payable KPIs (Key Performance Indicators) are measurable metrics used to evaluate the efficiency, effectiveness, and performance of the Accounts Payable process. These KPIs provide valuable insights into financial obligations, supplier relationships, and cash flow, helping organizations identify improvement areas, optimize processes, reduce costs, and manage electronic payments. By tracking and analyzing Accounts Payable KPIs, businesses can enhance financial decision-making, drive success in the Accounts Payable department, and maintain a smooth cash flow.

Benefits of Tracking Accounts Payable KPIs

Tracking Accounts Payable KPIs offers numerous benefits, including:

1. Improved Financial Decision-Making: Businesses can make more informed financial decisions by having a clear picture of the AP process.
2. Enhanced Supplier Relationships: Timely payments and efficient processes foster better supplier relationships.
3. Increased Efficiency and Productivity: Identifying bottlenecks and inefficiencies allows for process optimization.
4. Reduced Costs and Errors: Monitoring KPIs helps in identifying and eliminating costly errors and inefficiencies.
5. Better Cash Flow Management: Effective KPI tracking ensures that cash flow is managed optimally, avoiding liquidity issues.
6. Improved Compliance and Risk Management: Regular monitoring helps adhere to compliance requirements and mitigate risks.

By monitoring and analyzing Accounts Payable KPIs, organizations can identify areas for improvement, optimize their Accounts Payable processes, and achieve financial excellence.

1. Average Payable Days

Your business’s days payable outstanding (DPO) are the average number of days it takes you to close out the payables. The days are simply calculated by dividing the closing accounts payable balance with the credit purchases, multiplied by 365. The result is the average calendar days the business takes to pay the suppliers, and is frequently used by stakeholders to assess working capital management efficiency.

While this KPI may not seem like an issue, it is on the frontline of your relationship with vendors. It also plays a significant role in revealing the status of your cash flow management. As an AP metric, your days payable outstanding should not be too high, and at the same time, it shouldn’t go below specific values. On the high side, it is simply an indication that your credit rating is going through rough paths, and your suppliers may be approaching dissatisfaction. High days payable outstanding also means late payment fees and fines are likely feasting on your profits and distorting your business budget. On the other hand, lower days payable outstanding shows that your business has yet to harness the credit benefits of accounts payable fully. And this in itself isn’t a good business strategy.

2. Cash Discount Actualization Rate

Cash discount actualization rate is the extent to which you recognize and capture transaction discounts during your AP transactions. It shows how well you maximize the discounted difference between your invoice price and what your vendor allows you to pay for a given supply. Unfortunately, a vast majority of businesses do not capture more than 30% of discounted payments offered by vendors.

When your cash discount actualization rate is low, you limit your cash flow as you’ll be ditching golden opportunities to capitalize on payment discounts. You could also devastate your business budget if the discounts were factored into your financial planning. But when you can capture most (up to 90%) of your cash discounts, you improve your relationship with your suppliers and boost your profit margin.

To increase your cash discount actualization rate, harness the numerous digital analytics tools available in the industry. These tools automate your AP processes to ensure that no cash discounts under your nose are left untapped.

3. Paid on Time Ratio

The paid on-time ratio is the ratio of payables made before the payment due date to those made on the due date. It is usually expressed as a percentage of the invoices paid by your accounts payable team within a specific period. Another key performance indicator that reflects the efficiency and productivity of accounts payable teams is the number of invoices processed. A low paid on-time ratio is a significant pointer to an inefficient AP system, as fewer invoices are paid before their due dates.

The factors that contribute to low paid on-time ratio include:

• Vendors sending invoices late.
• Lengthy approval processes.
• Failure to acknowledge invoices as soon as they are sent.

The inefficiency associated with the low paid-on-time ratio translates to dissatisfied vendors and creditors who may not be precisely hospitable during your next purchase. It also means you’re likely hurting your profit margin with late payment charges and forgone discounts. However, you can actively improve your paid on-time ratio by automating your invoice management.

4. Accounts Payable Aging

For businesses that process large volumes of invoices regularly, keeping track of the effectiveness of their AP can be quite a hassle. This difficulty comes from an inability to track how much payable is due for each vendor and their respective due dates.

The way out? Accounts payable aging reports. These reports give you quick insights into what you owe your vendors and how long would be too long – or too short – to make payments.

A typical AP aging report features your vendors’ business names, the amounts payable to them, how long you have to pay them, and the overdue payments. You can further organize your AP aging report into columns based on how much you owe your vendors and the age of their respective invoices from the time you received the bill.

5. Duplicate or Overpayment Instances

Duplicate or overpayment instances are also excellent pointers to an inefficient or ill-managed AP system. Payment errors significantly impact the accuracy of payment processing. While paying a vendor twice or more than the payable amount is very unlikely, it sure does happen when it is not strategically avoided. These duplicate or excess payments have been seen to range from 0.1% to 1% of most businesses’ expected value and can quickly add up to outrageous amounts when they are not curbed early.

This key performance indicator often points to erroneous order matching and invoice management. It could also emanate from your vendor’s incorrect billing of your business’ divisions and subsidiaries. When you consistently have duplicate or excess payments, it could simply mean that there may be some fraudulent transactions within your AP department.

However, you can harness the power of AI to effectively control your order matching and invoice processing operations to eliminate duplicate payments. You can also set up accountability tools for your AP staff to curb the rate of typos, errors, and omissions during invoice capture and payment.

6. Invoice Processing Time

This indicator monitors the time it takes for an AP department to capture the process and prepare an invoice for payment. Automating previously manual tasks significantly reduces invoice processing times, leading to improved efficiency, lower costs, and enhanced supplier relations through timely payments and early payment discounts. During this period, the operations carried out include:

• Capturing the invoice data.
• Matching it with the purchase order or contract.
• Approving it.
• Conducting a concluding review before it is forwarded to the ERP system.

When your invoice processing time is longer than average, your invoice management and approval systems could benefit from some improvements. Overall, manual invoice operations are usually the culprits in prolonged invoice processing time. Most of the time, this time can stretch to the limits of 14 to 15 working days. However, when you utilize AP automation and invoice management tools, it should take your business six working days to process order invoices and seven working days for expense invoices.

7. Cost per Invoice Processed

The cost per invoice processed is an essential yardstick for measuring the financial implications of AP processing on a business. Average accounts payable is a key metric for analyzing financial patterns and evaluating the efficiency of the accounts payable team. Fundamentally, it is the total cost incurred by an AP department for processing a single invoice and can be obtained by dividing the total AP process cost by the total invoices processed within that period.

Ideally, the average cost of processing each invoice should range between $5 – $9; any figure above this limit would mean that your invoice processing costs you more than necessary. This high cost often comes from adopting manual and labor-intensive invoicing. It could also mean that factors like forgone supplier discounts and equipment maintenance cost invoice processing.

8. Invoices Processed Per Day Per Employee

The number of invoices each accounts payable clerk processed per day is another inconspicuous KPI for monitoring AP efficiency. The total number of invoices is a crucial KPI that tracks the effectiveness and efficiency of accounts payable processes. While there are several industry-determined factors upon which this metric depends, it is an excellent yardstick to measure productivity within the AP team. The number of processed invoices per employee also gives businesses direction on the exact areas where efficiency needs to be improved within its accounting system.

Nonetheless, this KPI depends on the industry in question and the all-encompassing role of the AP department within the business. It can be improved by introducing invoice automation tools, which allow team members to increase the number of invoices they process every day. Automation also reduces the AP department’s workload, allowing them more room for strategic management and growth.

Vendor Relationships and Communication

Vendor satisfaction is a critical aspect of the Accounts Payable process. By tracking vendor satisfaction KPIs, organizations can ensure that their suppliers are happy with the payment process, which can lead to stronger relationships, better terms, and improved cash flow. Some key vendor satisfaction KPIs include:

• On-Time Payment Rate: The percentage of payments made on or before the due date.
• Early Payment Discount Capture Rate: The rate at which early payment discounts are utilized.
• Vendor Complaint Resolution Rate: The efficiency in resolving any issues or complaints raised by vendors.
• Vendor Satisfaction Survey Results: Direct feedback from vendors regarding their satisfaction with the payment process.

By monitoring these KPIs, organizations can identify areas for improvement and optimize their vendor relationships, leading to better financial outcomes and improved business performance.

Conclusion

Accounts payable tend to be a highly sensitive aspect of a business’s financial system. The slightest mismanagement or inadequacies in this department will inevitably affect a host of other processes. Hence, AP KPIs are necessary to monitor the process of AP operations and single out inefficient and resource-wasting items within a process.

The KPIs explained above clearly show that for your AP operations to be at their most efficient, these indicators should point toward better cash flow and improved relationships with your vendor. They should also point toward reduced operational costs and improved profit margins for your AP and overall business activities.