If a business is aiming to fish out the funds-sapping inefficiencies in its operations, accounts payable happens to be an excellent place to begin. Accounts payable KPIs help you estimate the efficiency of your AP operations, as well as the productivity of your AP staff. 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 your creditors and suppliers can effectively eliminate accounting errors and slashing costs incurred by inefficient services. You also stand to 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 pay attention to.
1. Average Payable Days
Your business’s payable days 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 much of 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 average payable days 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 average payable days also mean late payment fees and fines are likely feasting on your profits and distorting your business budget. On the other hand, lower average payable days show 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. A low paid on-time ratio is a significant pointer to an inefficient AP system, as it means that 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. And 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 an incorrect billing of your business’ divisions and subsidiaries by your vendor. And when you have a consistent occurrence of 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. 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, it means your invoice management and approval systems could benefit from some improvements. Overall, manual invoice operations are usually the culprits in prolonged invoice processing time. And most times, this time can stretch to limits of 14 to 15 working days. However, when you utilize AP automation and invoice management tools, it should take your business an average of six working days to process order invoices and an average of 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. Fundamentally it is the total cost incurred on 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 to $9; any figure above this limit would mean that your invoice processing costs you more than necessary. And often, this high cost comes from adopting manual and labor-intensive invoicing. It could also mean that factors like forgone supplier discounts and equipment maintenance are making invoice processing costlier.
8. Invoices Processed Per Day Per Employee
The number of invoices processed by each accounts payable clerk per day is another inconspicuous KPI for monitoring AP efficiency. 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 with which team members can 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.
Accounts payable tends 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 procession of AP operations to single out inefficient and resource-wasting items within a process.
From the KPIs explained above, it is clear that for your AP operations to be at their most efficient, these indicators should point toward a better cash flow and improved relationships with your vendor. They should also point to reduced operational costs and improved profit margins for your AP and overall business activities.