6 Essential Accounts Payable KPIs You Should Be Tracking

Accounts payable or AP operation is the backbone of a business. It is immensely important because it involves nearly all of the company’s payments, except payroll. Whether it is handled by a dedicated accounts payable department in a large firm or by a bookkeeper in a small-sized business, regardless of the company’s size, the importance of this process can’t be ignored. That’s why it becomes even more important to keep improving your account payable operations by tracking key performance indicators (KPIs). These metrics determine the effectiveness and efficiency with which specific objectives and goals can be achieved by the AP department.

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

1) Number of Invoices Processed Per Employee

The accounts payable productivity metric of the total number of invoices processed per employee over a certain period of time (say per day or month) measures the staff productivity. To calculate it, take the number of invoices per month and divide it by the number of employees who process them. If the value of this ratio is low, then it indicates that there are inefficiencies in the process. It includes high-volume of invoices requiring manual entry, lack of required skills, overstaffing, non-user-friendly AP software or poor invoice quality. Once you have found out the root cause of the low ratio, you can look for ways to streamline the process such as providing training to employees, implementing automation, taking help of an accounts payable service or introducing methods to improve the quality of invoices.

2) The Time and Cost to Process One Invoice

Analyzing the time and average cost to process a single invoice will help you find out how much value the accounts payable department is wasting or adding and how the delayed processing is affecting your relationship with your vendor. Longer processing cycle will not only cost you more money but also lead to missed vendor discounts, late payment fees, and supplier dissatisfaction. If you find that the invoices of a particular supplier are taking more time and hence more money, identify the cause and find solutions to ensure a faster process. However, if your AP team is delaying the transaction, then ask them the reason for the delay and make efforts to save time.

3) The Percentage of Duplicate Invoice Payments

Duplicate invoice payments can happen especially in the case of manual processing. Also, there are times when employees forget they have already finished a task and redo it. This is a costly mistake for your business. If you don’t want to double pay a vendor, track the percentage of duplicate invoice payments. It can be calculated by the division between the number of invoices paid more than once over a certain period and the total number of invoices paid during the same period. A low value of this metric indicates that you need to make the accounts payable process more transparent to avoid paying invoices more than once. The best bet is to use a centralized online database that can be accessed by the employees to view orders, invoices, payments and other relevant information. It will allow the employees to see which invoices still need to be completed and which ones are already paid.

4) The Rate of Invoice Exception

An invoice exception occurs when some discrepancies occur on the supplier’s end during invoice processing. If you’ve employed automated accounts payable software, then an invoice exception requires manual intervention. This can cost more compared to the usual cost of invoice transactions. That’s why it makes sense to track the rate of invoice exceptions. It will help you identify the common reasons and sources of the exceptions such as the difference between the purchase order and invoice information, incorrect purchase order and invoice the generated for the wrong supplier. After the sources have been identified, find the way to easily resolve them to potentially reduce exceptions and lower the cost.

5) The Percentage of Discounts Captured

Many suppliers offer discounts for early payment of invoices, but it is not always possible for a business to get all the discounts they are eligible for. However, the aim should be to make the most of the discounts offered to improve the company’s bottom line. Here’s when the next KPI comes into the scene. Tracking the percentage of the discounts captured is important to know the discounts lost, what were the reasons for the loss and where to put more emphasis to maximize the discount opportunities offered by the suppliers.

6) The Percentage of Erroneous Payment

Errors in invoice a payment put strain on the AP department. That’s why the percentage of erroneous payment is an essential key performance indicator worth tracking. This metric is useful for analyzing what went wrong and what measures can be taken to prevent these payment errors. Assign error code to erroneous payments to identify and resolve the causes of these errors. Also, you can opt to hire a third-party accounts payable service provider to ensure error-free payments at a relatively lower cost.

Tracking the right KPIs in your AP department can improve your accounts payable process and make it smoother and more efficient. The metrics listed in this blog post are useful to spot the problem areas and implement new strategies to resolve the issues. However, if you need help in managing your AP department, then get in touch with Virtuous Bookkeeping, a leading accounts payable outsourcing company in Toronto.