The top 5 most useful accounts payable KPIs
- 06 Mar 2020
- AP Automation
This statement applies to accounts payable, a process that features many moving parts, potentially labor-intensive process steps, and multiple people across the organization. Business owners must identify metrics and measure performance against these benchmarks, or things will likely fall through the cracks. Nearly all business functions use Key Performance Indicators (KPIs) to measure their efficiency and contribution to the overall business success. And AP should be no different.
While modern finance executives are aware of the term Key Performance Indicators, as an overview, a KPI for accounts payable should be a quantifiable data point closely tied to the success of a specific business project. A good AP KPI should be specific, agreed upon by all project members, and time-bound. KPIs should be measured on a regular basis, at least quarterly, to ensure the accounts payable process is in line with goals and to identify areas of improvement.
In the case of organizational restructuring, mergers and acquisitions, or new technology implementation, it is critical to have the relevant accounts payable KPIs in place to provide baseline metrics and to measure the impact of such changes on the AP process.
AP KPI #1: Cost Per Invoice
The cost per invoice is most often defined as the total average cost of processing one invoice through the organization, but can vary among businesses depending on the factors included in this calculation. A company’s cost per invoice may appear deceptively low, simply because they haven’t considered the hidden costs that are hurting their profit margins.
For example, a company with a highly manual or paper-based invoice process should consider the labor and operational costs of time-consuming, lengthy processes, and the increased risk of human error presented by manual invoice processing. Also, the cost per invoice must include the cost of time spent in the accounts payable process by business users.
The added consideration of human labor costs can radically increase a company’s overall processing cost per invoice. In addition to accounting for staff costs, there are several other major contributors to cost per invoice:
- Systems and equipment
- Overpayment/errors/late payments
- Lost supplier discounts
- Audit costs
According to this year’s State of ePayables Report from Ardent Partners, organizations spend $9.25 on average to process a single invoice. Companies with no or little automation in place spend as much as $10.95 or more per invoice processed, while the best performers can complete the same task at a cost of $2.25 per invoice or less. This rather vast range in price confirms how tricky this benchmark is to measure and compare. Performance differs based on the costs included in the calculation, the organization’s industry, number of invoices processed, percentage of purchase-order-based invoices, systems in use, and how the AP process is configured.
Finance professionals should use this accounts payable KPI carefully, preferably focusing on monitoring their performance over time rather than comparing their benchmark with external peers on an apple-to-apple basis. An alternative metric could be the “total cost for AP as a percentage of revenue”, as suggested by the APP2P Network.
Also worth mentioning is that the goal for this metric must reflect the organization’s ambitions regarding automation quality metrics for the accounts payable process. A company focused on achieving a high level of touchless invoice processing to drive time savings and efficiency will consider investing in an advanced AP automation tool, even if it means pushing the cost per invoice metric up a bit in the short-term. In general, all automation initiatives that remove manual work, speed up the AP process, and take away IT complexities drive cost metrics down in the long run.
AP KPI #2: Invoice lead time
This KPI for accounts payable tracks the total time it takes for an invoice to be received, processed, finalized, and made ready for payment in the financial system (ERP). Those steps often include the time it takes to:
- Digitize the invoice or conform to a standardized data format
- If applicable, match the invoice to supporting documents such as a purchase order, a goods receipt note or a contract
- Approve and/or analyze any deviations
- For expense invoices, code the invoice (G/L account, cost center…) and distribute to the correct budget owner for approval
- Complete a final review and post to the ERP
If an AP automation solution manages the entire process from receipt and data capture to workflow and posting in the ERP, this metric is easily tracked within the system. If parts of the process happen outside of the AP solution this becomes trickier, but is still achievable and an excellent way to measure overall AP process efficiency.
Benchmarks show that the average organization using a modern AP automation solution processes an order-based invoice in six business days and an expense (non-PO) invoice within seven days. Best-in-class companies can reduce these numbers to an impressive performance of less than one day for both invoice types, thanks to a high degree of invoices handled in an entirely touchless process.
In accounts payable, the key to success in invoice lead time is automation. By removing manual steps and implementing a solution that takes on the heavy workload behind the scenes, organizations save valuable time and ensure that their AP resources can focus on more value-adding work, helping to maximize efficiency and drive the business forward.
AP KPI #3: Number of Invoices per Accounts Payable Full-Time Employee (FTE)
The number of invoices processed per accounts payable full-time employee might not be the first KPI you think of as a critical measurement, but should not be ignored as it is a significant indicator of productivity and efficiency. Depending on the way you measure the volume of invoices – daily, weekly, monthly, or annually – this number may fluctuate between businesses, making benchmarking more complicated. The simplest way to analyze it is to take your annual invoice volume and divide it by the number of full-time employees in your AP department.
As with the “cost per invoice” accounts payable KPI, this metric is a bit complex and requires some thought before simply comparing the number with industry benchmarks or peers. While this metric is a good indication of the AP team’s overall efficiency and performance, it might not provide the whole picture depending on the AP department’s role within the organization.
Driving invoice processing automation and efficiency will take the workload off the AP team and save time in their day-to-day work. But this does not necessarily mean laying off AP staff. Instead, many organizations see this as an opportunity to use knowledgeable AP resources for more strategic tasks, including reporting and data management, which in turn supports the finance department and the overall business.
AP KPI #4: Automatic Distribution Percent
Getting the right invoice data in front of the correct approver can take AP staff away from their essential tasks and can also result in lost or misplaced invoices. Solve the problem by automatically routing the invoices to the correct approver through a streamlined AP invoice automation tool.
The “automatic distribution percent” KPI indicates the percentage of total invoices automatically distributed to the correct approver by a solution without user intervention. The most sophisticated tools can route the invoice and apply accurate coding to it, accounting for distribution across multiple locations or departments according to the organization’s pre-defined logic. This logic can be based on a variety of data points, including vendor ID, project number, cost center, or the organization’s pre-configured approval hierarchy.
The performance of this particular accounts payable KPI depends on the level of detailed capabilities of the AP automation solution and how well the configuration of unique business rules has been set up in the system.. The average organization using a modern AP automation solution achieves a 55% automatic distribution rate, with leaders hitting close to 100%. Note that this metric can improve over time and should be the focus for continuous improvements of system configuration, as well as invoice data quality improvement initiatives.
AP KPI #5: Touchless Processing Ratio
This accounts payable KPI represents the percentage of invoices processed with no human intervention between receipt and the point where it is ready to be posted in the financial system (ERP). As such, this metric acts as a key efficiency driver.
Note the term “touchless” or “straight-through” processing can be used loosely when describing an invoice’s journey from receipt to payment. However, as a KPI for a successful AP department, the touchless rate should only be defined and measured as true touchless processing - that is, zero human intervention at any point in the invoice process. Given this definition, only invoices automatically matched to a supporting document in the AP automation solution or ERP (such as a purchase order (PO), goods delivery note (GDR) and/or a contract with a payment plan) can be managed in a genuinely touchless process.
Having a strong touchless processing rate for invoices influences most of the accounts payable KPIs mentioned above. By removing manual steps, an increased touchless processing rate reduces the AP team’s costs and shortens the lead time to process an invoice. And it helps position accounts payable as a highly efficient and professional function within the organization.
For some companies, the most profitable outcome of increasing their touchless processing rate is the ability to capture cash discounts from suppliers by paying invoices well within the early payment discount terms. These hard savings gained from now-attainable discounts can be enough to cover the cost of implementing an AP automation solution.