• Benjamin Elliott

Top 8 KPI’s For Accounts Payable

Updated: Apr 28

We’re well-versed in what accounts payable (AP) is and what it means for a business, but let’s take a good look into what the most important aspects of AP are in terms of the measures of success.


Basically, how do you nail it?


Understanding the KPIs for accounts payable is important for improving efficiency and maximising your business success. The best AP departments are carefully monitored to make sure that they’re performing properly.


Tracking the right KPIs helps finance leaders to improve their reporting, find ways to cut down on costs, and improve the company’s bottom line.


Here’s a list of eight absolute must-have KPI’s for your finance teams.


Let’s take a look.



Keep Track Of These Eight KPI For Accounts Payable


1. Days Payable Outstanding (DPO)


The DPO shows how many days it takes for an accounts payable department to pay its vendors. This metric gives you an idea of how much money your company has spent on paying invoices. It helps you understand whether your vendors are being paid on time, and if your cash flow balance is healthy.


You should track this metric on a monthly basis. If this KPI for accounts payable is too high, it could mean that your business is paying suppliers late. This could result in higher fees and potentially damage your credit score.


If the DPO is too low, it could mean your business has more room to take advantage of the credit terms.


2. Percentage Of Late Payments


The percentage of late payments is calculated as follows:

  • Number of late payments divided by number of outstanding invoices × 100%

For example, if you have 50 outstanding invoices and 20 of those are late, the percentage of late payments would be 40%.

If you notice the percentage of late payments increases over time, you should look into this, as it could mean that your business may be growing too fast, and your team doesn't have capacity to keep up with all the customer payment schedules. This is one of the most important accounts payable KPIs to monitor if you want to keep your cash flow healthy.


3. Cost to Process Each Invoice


The cost to process each invoice is calculated as follows: Cost per invoice / Total number of invoices.

This metric takes the cost of processing each invoice into account.

This includes everything from supplier charges to the number of man-hours, and general operating expenses.

Understanding the total cost is necessary for knowing if your team is functioning like a well-oiled machine, or if there is room for improvement.

If you notice that the cost to process each invoice increases over time, you may want to mix up your AP processes. Using an expense tracking solution like Sweep is the easiest way to reduce processing costs and optimise the AP process.

Accounts payable costs generally fall under operating expenses. However, it's a good idea to monitor these costs as a percentage of revenue. This helps you gain a better picture of how much of an impact it has on the business.


4. Time Taken to Process Each Invoice


Just like how you need to understand how much it costs to process each invoice, you also need to understand how long this takes. The time to process each invoice is an important metric for monitoring productivity.


This metric helps to understand if your AP team is able to keep up with your invoicing demands. If you find the invoicing time is too slow, you might want to consider a new software solution, changing standard processes, or adding new team members to the accounts payable department.

The average time to process each invoice is calculated as follows: Time taken to process each invoice / Total number of outstanding invoices.

The easiest alternative to maximise efficiency is to automate the accounts payable process. This can easily be achieved with the right digital AP tool.


5. Payment Errors


Payment errors can have a significant impact on your business. Errors in payments made can damage relationships with your vendors, and they can harm your credit terms.

You can track this metric by taking the amount of AP payments processed that contained errors and dividing this over the total number of transactions issued over the same period.


6. Invoices Processed Per Employee


Keeping track of the number of invoices processed per permanent employee will help you understand how efficient your AP department is.


This is done by processing the average number of invoices processed per employee, per day.


7. Percentage of Invoice Exceptions


This metric shows the percentage of invoices where there are exceptions. An exception could mean anything from a customer paying less than the full amount owed, or a customer requesting a change to an existing order.

When calculating this metric, the dedicated AP person must exclude any invoices where the exception is related to a returned merchandise item.


8. Invoice Cycle Time


The invoice cycle time represents the time from when the AP team receives an invoice to the time the payment is actually made. The turnaround time for this process should be relatively quick; that way, there’s no backlog of invoices, and your relationships with vendors are intact.

Monitoring this metric will keep you in the loop of missed invoices or invoicing irregularities. It will help you understand the efficiency of your AP department, and it will help you to avoid late payments.



Final Thoughts


By tracking the KPIs listed above, before you know it, your AP team will be running like an efficient, well-oiled machine.


Want to add a nifty tool into the mix to maximise efficiency? An accounts payable automation platform like Sweep, will ensure that all the KPIs are easily monitored and automatically assessed.


This is the smartest way to manage your AP department.


 




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