KPIs for the accounting department can act as a compass, giving direction and offering useful ways to measure efficiency, costs and more. Armed with these insights, organizations can quickly improve and streamline their accounts payable processes for the best possible outcomes.
However, in order to measure accounts payable KPIs effectively, the team must determine which metrics they need to track. They must also gather plenty of data and ensure a good reporting process.
Unfortunately, this is where a lot of organizations fall down, and is perhaps why better reporting on KPIs has become a top priority for CFOs this year.
One way to achieve better reporting is to ensure that you select the correct KPIs for the accounts department in the first place. This requires CFOs and other senior team members to carefully identify the right accounts payable metrics and develop a plan to track each one.
Learn more: Understanding Accounts Payable: The CFO’s Complete Guide
Why should you track accounts payable KPIs?
Organizations can benefit hugely by setting KPIs for the accounting department, particularly for the accounts payable team. Some of these key benefits include:
- Setting accounts payable benchmarks helps to monitor overall performance
- Improving the efficiency of multiple accounts payable channels
- Reducing the number of exceptions and manual workflow bottlenecks
- Allowing the team to continuously measure their performance against key business objectives
- Measuring the productivity and efficiency of the individuals responsible for accounts payable
- Keeping suppliers happy by ensuring maximum efficiency
- Saving money by ensuring everything is as cost-effective as possible
With so much to gain, it’s easy to see why tracking the right accounts payable KPIs early on is vital. Thankfully, continuous advances in technology mean that today, almost everything can be easily monitored or tracked.
But how do you know where to start?
To help you get the most from your accounting department, here are seven AP metrics you should measure to improve your accounts payable process.
1. Cost per invoice
One of the most widely used accounts payable metrics is the average cost of processing an invoice. This figure is very important as it can be indicative of the efficiency of your team and their processes.
Best of all, there’s a simple enough way to calculate cost per invoice, and that is:
Total accounts payable costs / Total number of invoices = Cost per invoice
Just be cautious that although this formula looks straightforward, you need to make sure you’re calculating your total accounts payable costs accurately. Otherwise, you could end up with misleading data.
To do this, remember to add all relevant costs to this total. This might include costs such as labor, AP infrastructures such as software, supplies such as paper, envelopes, etc. and any postage fees.
2. Accounts payable expense as a percentage of revenue
As well as knowing the average cost per invoice, it’s helpful to understand your accounts payable expenses as a percentage of revenue. This can be calculated using the following formula (for a chosen period):
Total expenses incurred by the accounts payable department / Total revenue X 100 = Accounts payable expense as a percentage of revenue
While AP associated costs are completely necessary, keeping a close eye on these as a percentage of the company’s overall revenue can highlight any areas that need improving. This figure can also inform bigger decisions, such as when and where to reduce manual labor and embrace AP automation.
3. Number of invoices processed per day, per person
Another popular KPI for the accounts department is the number of invoices that are being processed per day, per person. Tracking this metric can highlight two important factors:
1. Which supplier’s invoices cause the biggest problems for the AP team – and why
2. Which employees move at a slower pace and might benefit from additional training and guidance
Understanding these figures can help you to dig deeper into the reasons why some invoices take longer than others to process and any areas where productivity is dropping. It also demonstrates the areas where your team excels and highlights the employees who are achieving great results.
4. Invoices processed per year
It’s also worth tracking the total number of invoices that are being processed every year for a number of reasons. Firstly, this helps with equations such as calculating the cost per invoice.
Secondly, it’s a good indication of whether your accounts payable team needs new or updated software to further automate the process and make it more efficient.
Finally, this figure can be used as an accounts payable benchmark against peers in the industry, as well as a metric to monitor increases or decreases in efficiency in the future.
5. Average time to payment
The average time to payment is how long it takes between your team receiving an invoice from a supplier and the supplier receiving their payment.
A study from Canon found that the average organization takes 13.5 days to process a payment, whereas some of the most efficient accounts payable teams were able to achieve this in just 3.3 days.
It’s a good idea to keep track of this metric, as shortening the invoice cycle can help to speed up efficiency and boost client relationships. It also gives you a chance to take advantage of early payment discounts.
6. Number of invoice exceptions
Invoice exceptions can plague even the most high-functioning AP teams, slowing down the process and causing additional manual work for employees. These communication errors commonly include problems such as:
- Wrong addresses or phone numbers
- Incorrect or missing purchase orders (POs)
- Erroneous or duplicative credit information
By tracking the number of invoice exemptions that occur over a given period, you’ll take the first step towards recognizing problem areas and reducing the impact on the wider accounts payable process.
This also gives you a chance to analyze the number of data points each invoice must pass through to see which processes could be streamlined in order to reduce the likelihood of future invoice exceptions.
7. Number of payment errors
Last but not least, you need to keep track of any payment errors. Not to be confused with invoice exceptions, these errors refer to problems in payment such as incorrect amounts or duplicate payments.
One in four (25%) AP professionals said duplicate payments create noticeable pain points in their operations. These errors can also damage client relationships.
Therefore, tracking the number of invoice or payment errors per month (or over any given period) can help to highlight whether additional automation or AP software is required to tackle the issue.
Are you tracking the right AP KPIs?
If you’re not familiar with the metrics discussed above, it’s important that you begin tracking the right KPIs for your accounts payable team as soon as possible.
Armed with useful insights and relevant data, your AP department can increase efficiency, cut costs, invest in the right tools and boost client relationships.
So, if you do one thing this year, make sure KPI reporting is a key priority for your accounts payable department. The results will speak for themselves.