Accounts Payable (AP) is vital for managing a company’s financial obligations along with supplier relationships. Efficient AP management is essential for timely payments and strong vendor relationships. Accounts payable automation may be in place. Yet the AP metrics are complex, but tracking Key Performance Indicators (KPIs) helps businesses gain insights into their financial health and make informed decisions to optimize their AP processes.
In this blog, we will explore 10 crucial AP KPIs that every business should monitor to ensure smooth cash flow, build strong vendor relationships, and improve overall financial performance.
So, keep reading for more.
Explore The Top 10 Accounts Payable KPIs To Monitor
Here are the 10 AP KPIs you need to monitor in your organizations. Check them and understand the way to calculate them.
1. Invoice Processing Time:
This KPI gauges the average time it takes to proceed or process an invoice from receipt to payment. A longer processing time can indicate inefficiencies in the AP process.
How to calculate it?
To calculate the average invoice processing time, add the time it takes to process each invoice and divide it by the exact number of invoices processed. For instance, if 100 invoices took 1,200 hours to process monthly, the average processing time is 12 hours per invoice.
2. Invoice Accuracy Rate:
This metric calculates the percentage of invoice payments free from errors, such as incorrect amounts or vendor information. High accuracy rates indicate effective invoice validation processes.
How to calculate it?
To calculate the invoice accuracy rate, divide error-free invoices by the total processed, then multiply by 100. For instance, if 450 out of 500 invoices were error-free in a month, the accuracy rate would be 90%.
3. Purchase Order Matching Rate:
This KPI measures the percentage of invoices that match the corresponding purchase order, indicating the efficiency of the purchase order process.
How to calculate it?
To calculate the purchase order matching rate, divide invoices that match the purchase order by the total processed, then multiply by 100. For example, if 190 out of 200 invoices matched their purchase orders in a month, the matching rate would be 95%.
4. Payment Processing Cost:
This metric calculates the cost of processing each payment, including labor and software expenses. A higher processing cost may indicate inefficiencies in the payment process.
How to calculate it?
To calculate the payment processing cost, add all associated costs and divide by the total processed payments. For example, if $15,000 were spent to process 1,000 payments in a month, the average processing cost per payment would be $15.
5. Vendor Satisfaction Rate:
This KPI measures the satisfaction levels of vendors with the AP process. High satisfaction rates indicate strong vendor relationships and effective AP management.
How to calculate it?
To calculate vendor satisfaction rate, survey vendors and average their rating on a scale of 1-5 or 1-10. For example, an average rating of 4.5 out of 5 means a 90% satisfaction rate.
6. Discount Capture Rate:
This metric calculates the percentage of discounts received from vendors for early payments. A high discount capture rate indicates effective cash management and cost savings.
How to calculate it?
To calculate the discount capture rate, divide early payment discounts received by eligible invoices, then multiply by 100. For example, 50 discounts out of 100 eligible invoices would be a 50% capture rate.
7. Days Payable Outstanding (DPO):
This KPI gauges the average time a company takes to pay its vendors. A high DPO may indicate a slower payment process, while a low DPO may indicate a strained cash flow.
How to calculate it?
To calculate DPO, divide accounts payable by average daily COGS. For example, if accounts payable are $500,000, and the average daily COGS is $10,000, the DPO would be 50 days.
8. Invoice Volume:
This metric tracks the total number of invoices the AP department processes over a given period. It helps to identify trends in invoice volume and forecast future workload.
How to calculate it?
To calculate the invoice volume, count the total number of invoices processed over a given period of time (e.g., a month, quarter, or year). For example, if you processed 2,500 invoices in a quarter, the quarterly invoice volume would be 2,500.
9. Invoice Approval Rate:
This KPI measures the percentage of invoices approved on the first attempt, indicating the effectiveness of the invoice approval process.
How to calculate it?
To find the invoice approval rate, divide the number of first-attempt approved invoices by the total processed, then multiply by 100. Example: 425/500 processed invoices = 85% approval rate.
10. Early Payment Percentage:
This metric measures the percentage of payments made to vendors before the due date. A higher early payment percentage indicates strong cash management and positive relationships with vendors.
How to calculate it?
To find the early payment percentage, divide the number of payments made before the due date by the total processed, then multiply by 100. Example: 150 early payments / 500 total payments = 30% early payment percentage.
Bottom line
By tracking accounts payable KPIs such as invoice approval rate, early payment percentage, and others, businesses, and agencies can gain valuable insights into the performance of their AP department.
Accounts payable automation with carefully calculated KPIs can identify areas for improvement. Regularly monitoring these metrics can help organizations optimize their accounts payable processes. Ultimately improving the organization’s bottom line.