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Seven Accounts Payable Metrics to Drive Process Improvement

webadmin10 Sep 2015

“What gets measured gets improved” is an old adage which is still very applicable to any business, or for that matter any task. The accounts payable process has a number of moving parts and people and unless certain metrics are identified and performance measured against these indicators, it is quite likely that something will fall through the cracks.

KPIs should be measured at least once every quarter or six months. These accounts payable metrics or key performance indicators (KPIs) become all the more critical when a company is going through a merger or acquisition, new technology implementation or organization restructuring. Measuring and comparing KPIs before and after any of these are a good indication of the impact it had on the AP process.

Here are some key KPIs every AP department should track on a periodic basis.

1. Number of Invoices Processed Per Day Per Operator
This metric can help you understand the invoice efficiency of each AP operator. If some operators are way ahead of the curve, they might be able to share tips or train others that are lagging behind. Invoice efficiency also enables you to try different ways of allocating invoices to specialists – PO vs. non-PO invoices, by spend type or by geographic location/business unit – and determine the one that works the best.

2. Average Cost to Process an Invoice (By Invoice Time)
Calculating processing costs can give you valuable insights into the factors driving the costs and ideas on reducing the total costs. Include salaries and benefits, facilities and hardware, software and IT support and managerial overhead in your cost calculations. Also calculate processing cost by different types of invoices – eg: clean vs. exception – and by steps involved in each process – eg: data entry vs. exception resolution – to address the expensive invoice types and processes.

3. Exception Invoices as a Percentage of Total Invoices
It is a well known fact that exception invoices cost way more to process than clean invoices and drive up the overall processing costs for your department. Track the number and dollar value of invoices that end up in an exception queue and log details such as expense type, vendor information and type of exception. Understanding the source of exceptions and addressing them is critical to reduce the occurrence of exceptions.

4. Average Time to Approve an Invoice from Receipt to Payment
Knowing how long it takes an invoice from the time it gets to the AP department to the time it is ready to pay can help you identify where it spends the most time – data entry, approval or exception management – and take the appropriate steps to compress the invoice receipt-to-pay cycle. By accelerating the processing cycle you can reduce late payment penalties and increase capture of discounts offered by suppliers.

5. Discounts Captured as a Percentage of Discounts Offered
While a lot of suppliers may offer a discount for paying early, most companies are unable to capture all the discounts that are offered to them due to lack of visibility into the existence of discounts or lengthy approval cycles. Track the invoices where you are unable to take the discounts with reason codes as to why the discount was missed so you can prioritize associated such invoices to be processes as quickly as possible.

6. Erroneous Payments as a Percentage of Total Payments
Duplicate payments, missed discounts, un-reconciled returns and other errors in payments are a huge drain on the bottom-line. Tracking dollars lost to payment errors promptly can help you recoup the monies from suppliers quickly. Keeping a log of error codes can help you understand the source of errors and address the problem at the root itself, instead of trying to recover the funds after the fact.

7. Electronic Invoices as a Percentage of Total Invoices
Electronic invoices are quicker and cheaper to process as there is no mail float, desk float or data entry involved in the process. Track the percentage of electronic invoices as well as the percentage of supplier sending them. Increasing the percentage of invoices that come into the AP department in electronic format had a beneficial impact on the other two metrics you are tracking – average processing times and costs.

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