Top 12 KPIs Every Accounts Payable Team Should Measure
Ira Brooker Written: February 26th, 2019 Updated: March 20th, 2023
Not all key performance indicators (KPIs) are equal — just as not all accounts payable (AP) departments identify and measure the right ones. These analytics gaps can make it difficult for accounts payable departments to reach their goals, as they take one step forward followed by two steps back.
Tracking AP KPIs can identify weak process points and operational inefficiencies. Metrics highlight the tasks and technologies inhibiting an optimized department, telling you where you need to move the needle forward. When utilized to their fullest, the right KPIs also point to these pain points’ solutions. AP departments have to determine how to emphasize the actionable, useful KPIs to track their improvement as they implement new solutions. The increased efficiency you gain can also put money back in your company’s pocket.
Which metrics make the cut? We’ve compiled the most important KPIs for accounting departments to secure the most meaning from your data and strengthen your process.
TABLE OF CONTENTS
- Average Time Per Invoice Processed
- Cost Per Invoice Processed
- Number of Invoices Processed / Employee / Day
- Percent of Invoice Exceptions
- Days Payable Outstanding (DPO)
- Average Time to Approve an Invoice
- Invoices Processed Per Year
- Percentage of Supplier Discounts Captured
- Percentage Of Late Payments
- Payment Errors
- Total Invoice Cycle Time
- AP Expense as a Percentage of Revenue
How AP Automation Can Improve Your KPIs
Complicated routing workflows: Overly complex workflows involving ad-hoc distribution decisions create headaches for all in the department.
Slow invoice coding: Correcting erroneous reference information, using legacy software or hunting down too many cross-departmental touchpoints to double-check numbers can all lead to lagging invoice coding.
Delayed verification: Lag times creep up as invoices get routed to the appropriate personnel through the proper channels but sit on a desk unapproved for days.
Backlogged invoice closeouts, postings and filings: Siloed from the beginning, the entire end-to-end invoicing process — indeed, the entire AP department — shutters to a halt.
You can calculate your average time per invoice processed using this formula:
Time Per Invoice Processed = Hours spent keying + hours spent re-keying + hours spent reviewing materials + hours spent identifying route checkpoints + hours spent on approvals + hours on remitting + hours on reconciling + hours on communication statuses updates and approvals
This is a base formula per invoice. Averages for other periods can be calculated using the same compiled time variables divided by the number of invoices processed that day, week, month or year.
Processing speeds will vary based on the size of your company as well as the industry it’s in. Few metrics are as intertwined with other AP efficiency goals, including the overall cost per invoice processed. High performers increase their processing speeds, boosting productivity and trimming departmental expenses.
How to Improve Average Time Per Invoice Processed with Automation
AP automation software contains e-repositories that help key in, manage and file invoice data at every stage of the workflow. Software can:
- Pre-code program inputs
Employees no longer need to execute tedious data entry tasks or perform ad-hoc document searches to reference data.
- Adopt automatic data inputting
OCR and ICR technology automatically input physical and digital documents into ledgers, reducing erroneous entries while increasing entry rates.
- Lower manual error rates
Fewer errors downstream mean fewer upstream exceptions, invoice duplications, and fraud risks.
2. Cost Per Invoice Processed
Businesses spend a median amount of $2.80 per invoice processed. Other industry calculations say bottom performers will dole out around $6 for a single end-to-end processed invoice — and perhaps even more if processed manually or using legacy systems.
Tracking cost per invoice processed is your organization’s first glimpse into overall departmental efficiency. Some of AP’s most expensive variables (outlined below) go into calculating cost per invoice processed. In other words, the same expenses it takes to run a functional AP department are the same expenses accounting for cost per invoice. It’s a convenient and cost-illuminating overlap, one likely on your radar already.
To fully understand these metric connections, consider the formula for calculating this KPI:
According to my research, these costs have fallen dramatically since this was first written, probably due to advancements in automation. Still a compelling KPI, of course.
Cost Per Invoice Processed = Total accounts payable costs / total number of invoices processed
What factors go into “total accounts payable costs” — i.e., what are these traditionally high overall departmental expenses? They include:
Labor Costs: Labor costs constitute the most considerable AP budgetary expense and one of the largest organizational expenses regardless of department. You determine your labor costs by the number of employees in your department, the hours they work, their benefits and their wages.
Infrastructure Costs: Infrastructure refers to the physical tools and equipment needed to process an invoice, such as the costs to buy and maintain AP software, hardware and any other accounting tools utilized.
Office Supplies: This includes paper, envelopes, stamps, pens and more make up your office supply expenses.
Parcel Service and Postage Fees: Many organizations are decentralized in terms of invoices receipt. Offices each receive and approve their relevant documents on paper, then ship approved invoices via UPS or FedEx in bulk, expedited packages, saving time and reducing some costs but still resulting in parcel fees.
Before you can know your cost per invoice average, you must first calculate these overall departmental expenses. Conduct a simple workflow test case on one sample or a series of invoices. Note every step in the check-processing workflow — from receipt to verification to approval through payment — alongside the materials, technology, equipment and number of touchpoints. Review these findings alongside office supply order rates and parcel mail versus electronic invoice payments. This provides the foundation to calculate your total accounts payable costs and cost per invoice.
How to Improve Cost Per Invoice Processed with Automation
Automating your accounts payable system brings down costs by reducing the need for manual oversight of data entry, invoice matching, approval routing, and most other day-to-day invoicing processes. Reducing human touchpoints in all of those areas is a reliable way to bring cost-per-invoice processed down from the industry median.
3. Number of Invoices Processed / Employee / Day
A key KPI for your accounts payable clerks is tracking the number of invoices each one processes daily, providing key insights into where your AP department processes demonstrate strength and where they need to improve.
There are significant downstream effects to low performers in this KPI. Until an invoice is completely approved and filed into an ERP system, other departments cannot assess its developments or know what stage of the process it’s in.
This lack of visibility especially affects non-purchase order invoices, leading to organization-wide problems like mismanaged cash flows, missed supplier discounts, late payment fees and overall poor vendor relationships. Businesses can use this general formula to calculate the number of invoices processed per employee, per day:
Number of Invoices Processed Per Employee, Per Day = Number of invoices processed per month/number of clerks or full-time equivalents (FTEs) processing them
You’ll also want to keep track of what processing task each clerk or FTE is responsible for. The employee taking on the paper trail of a misclassified non-PO invoice is going to spend a lot more time on their work than the downstream employee who simply gives a final invoice review and approval.
While a general sense of invoice numbers is a fundamental KPI for accounts payable departments, deeper FTE-task specific data points can help you identify things such as:
- Which suppliers bottleneck your operations or cause you the most process interruptions.
- Which software tools help or hinder the end-to-end process.
- Which employees face the most ad-hoc, unstructured tasks.
- Which employees are the top processors, relative to their role in the workflow.
Ask those top employees to share tips to assist the entire team with boosting their performance.
How to Improve Number of Invoice Processed/Employee/Day with Automation
An automated AP software solution provides a clearer measure of how many invoices are processed by each employee each day by giving your team much deeper visibility into invoice processing. An automated dashboard offers at-a-glance information on where each invoice is in the process and how long each team member takes to complete their tasks. That makes it much easier to identify inefficiencies and make adjustments that speed up invoice processing across the board.
4. Percent of Invoice Exceptions
Invoice exceptions plague even the most high-functioning AP departments. Reflected in KPIs, they drag down both processing efficiency and employee morale, particularly when exceptions have more to do with problematic workflow processing practices than manual entry errors. AP invoice exceptions have a number of culprits:
- Purchase order discrepancies such as wrong supplier codes and receipt dates or mistyped supplier zip codes
- Incorrect or missing POs and non-POs
- Erroneous or duplicative PO and non-PO credit amounts
Worst-case exceptions create disputes between purchasers and vendors. The resulting bottlenecks can bring an entire AP department to a halt.
Tracking invoice exception rates is the first step to reducing the impact of their discrepancies. Organizations can analyze a number of data points to understand their exceptions and tailor solutions, such as:
- Addressing wrong payment rates: Erroneous payments should be few and far between, especially when compared to the percentage of total payments.
- Improving manual re-keying rates: Instances of manual re-keying can be cut once you’ve reviewed your manual inputting data, either through AP software tracking features or from ledgers submitted by employees.
- Tracking most frequent types of exceptions: Know your most common exception types in order to address their sources and discover vendors or suppliers with the most errors to their names.
How to Improve Percent of Invoice Exceptions with Automation
AP automation works like an extra pair of eyes — or an extra hundred — canvasing your invoices, matching them with purchasing orders, comparing line item detail to purchasing and receiving data, all within seconds. Introducing automation software can directly reduce manual-based exception rates, plus other business benefits such as:
- Automatic PO matching and document retrieval
- More early payment discounts captured
- Fewer invoice bounce rates, re-entries, re-keying and re-routing
- More satisfied suppliers and vendors
Since invoice exceptions remain the dominant reason today’s AP departments still underperform, exception-related KPIs can see dramatic improvements with that extra automated attention.
5. Days Payable Outstanding (DPO)
Days payable outstanding (DPO) is a financial ratio used to determine the average number of days a business takes to pay invoices and bills, usually calculated on either a quarterly or annual basis. DPO can be seen as a snapshot of how well a business handles its cash outflows and other financial considerations. DPO is sometimes referred to as “creditor days” or “accounts payable days” because it helps vendors, suppliers, financiers, and other creditors in evaluating how many days it will take to be paid by a particular organization.
A higher DPO indicates that a business takes a longer time to pay off its creditors. Contrary to what a layperson might assume, a high DPO can actually be a sign of a healthy organization because it indicates that the business is keeping a higher amount of cash on hand. (Of course, it can also indicate a business that simply does not pay its bills on time, so creditors are well-advised to look at factors beyond DPO.)
Days payable outstanding can be calculated using either of two formulae:
- DPO calculation method 1: (Average Accounts Payable x Number of Days in Your Accounting Period) / Cost of Goods Sold = DPO
(Cost of Goods Sold (COGS) is defined as the Beginning Inventory plus Purchases, minus the Ending Inventory)
- DPO calculation method 2: Average Accounts Payable / (Cost of Sales / Number of Days in Your Accounting Period) = DPO
(Cost of Sales is defined as the Beginning Inventory plus Purchases, minus the Ending Inventory.)
How to Improve Days Payable Outstanding with Automation
Calculating DPO manually is a repetitive and time-consuming process, and applying your findings to your AP operations can be a complicated process. The data analytics and deep visibility provided by an automated AP software solution make it much easier to not only calculate DPO, but also to identify bottlenecks and inefficiencies in your process that can impact DPO times.
6. Average Time to Approve an Invoice
The average speed with which a business processes its invoices can be a strong indicator of its overall efficiency and accuracy. For most organizations, the invoice approval workflow can be broken down into five distinct steps.
- Receive the invoice: Invoices may be sent in a number of formats, including PDFs, Word documents, Excel spreadsheets, faxes, emails, or paper documents.
- Capture invoice data: Relevant data is entered into the accounts payable system either via manual data entry or an automated tool using optical character recognition (OCR)
- Verify invoice data: All necessary invoice data is matched against information from the purchase order and the receipt of goods or services. This can be handled manually or via an automated 3-way matching tool.
- Route invoice for approval: The invoice is sent to every required department to obtain necessary sign-offs for approval.
- Payment is issued: Once all of the approvals have been confirmed, the accounts payable team can approve and issue a final payment.
How to Improve Average Time to Approve an Invoice with Automation
Speeding up time-consuming processes is one of the key benefits of investing in AP automation. The ideal time for moving an invoice from receipt to approval will vary by industry and business size, but automation is an even bigger factor. Research shows that it can take around 25 days for an average-sized business to process a single invoice using a mostly manual process, while a similarly sized organization using an automated AP system can get an invoice approved in five days or fewer.
7. Invoices Processed Per Year
Not only is the overall volume of invoices an organization processes each year a valuable performance indicator in its own right, it’s also a necessary figure for calculating several other important KPIs such as cost per invoice and percent of invoice exceptions.
Assessing the number of invoices processed per year also provides useful contextual information about invoice volume compared to competitors within the industry. That can help a business make decisions about whether to invest in more AP automation and how to decide on signing contracts with suppliers.
How to Improve Invoices Processed Per Year with Automation
Automation is useful in both tracking the number of invoices processed each year and in putting that information to its best use. The data generated by an automated solution provides at-a-glance insights into your annual invoice volume and allows easy comparison against competitors, industry standards, and your own organization’s historical performance. If your invoice processing figures are lagging behind, the speed and efficiency of an automated solution can help get you meet more ambitious targets.
8. Percentage of Supplier Discounts Captured
Vendors frequently offer discounts for early payments. Tracking how frequently an organization is able to take advantage of those discounts can be a strong indicator of an AP department’s efficiency. Regularly qualifying for early payment discounts also helps to improve an organization’s relationships with vendors and establishes a trusted partnership.
As mentioned in the above section of DPO, however, early payment discounts are not always the most desirable target. Discounts should be weighed against assessments of cash-on-hand in order to assess how effective an organization is at keeping suppliers paid while also investing wisely in its own business.
How to Improve Percentage of Supplier Discounts Captured with Automation
Automating your organization’s AP functions increases the likelihood of receiving early payment discounts by speeding up your organization’s overall invoicing process. Automation can further aid in that effort by sending out notifications and reminders about approaching payment due dates and pending approvals that might hold up payment.
9. Percentage Of Late Payments
While early payments are not always the most desirable approach, late payments should be avoided as a rule. Keeping a close watch on the number of invoices that are paid after their due date can provide valuable insights into inefficiencies in an organization’s AP process.
Late payments are a problem for organizations on several fronts. For one, many vendors assess fees or penalties for late payments. For a business with consistent struggles in paying invoices in a timely fashion, those fees can add up quickly. Potentially even worse is the reputational damage that comes with being tagged as a business that doesn’t pay its bills on time. That can create lasting damage with your current vendor relationships and make other vendors wary of doing business with your organization.
How to Improve Percentage of Late Payments with Automation
For businesses using an automated AP software system, added visibility into every step of the invoicing process makes it much easier to identify and correct problem areas that may be causing delays in payment. If a particular step in your payment process is a consistent source of bottlenecks, for instance, having a digital record of your invoice processing allows your team to quickly identify the problem area and start taking steps to correct it.
10. Payment Errors
Frequent mistakes in payments are obviously not a positive indicator for any business. Closely monitoring the frequency, degree, and resolution of payment errors and identifying their sources is a key consideration for any responsible AP team. Not only are these errors costly and time-consuming to correct, they can also do extensive damage to your business’s relationships with valued vendors and suppliers.
Common payment errors to watch out for include:
- Overpayments and underpayments
- Duplicate payments
- Late payments
- Payments made without a receipt
- Data entry errors
How to Improve Payment Errors with Automation
Fortunately, many of the most frequent AP errors can be reduced or avoided by investing in an automated solution. Automation reduces the number of human touch points involved in processing an invoice, and likewise lowers the risk of human errors. When errors do slip through the cracks, your system can automatically flag discrepancies and exceptions while also making it easier to look back through the process and pinpoint their causes.
11. Total Invoice Cycle Time
For a holistic look at the overall efficiency of your accounts payable process, tracking your organization’s total invoice cycle time is a hugely useful metric. Invoice cycle time is the average time it takes a business to fully process an invoice, from the time the invoice is received to the time it is paid in full.
While DPO should be taken into consideration here, a lower cycle time is generally a solid indicator of a healthy and efficient AP invoicing process. An invoice process that relies heavily on manual tasks is almost certain to take more time to cycle through, and also raises the risk of human errors that can slow down invoicing even further.
How to Improve Total Invoice Cycle Time with Automation
If your invoice cycle time is consistently high, it may be an indicator of inefficiencies in your process, many of which can be addressed by investing in more AP automation. As with many of these KPIs, this one can be addressed with the overall boost in processing speed afforded by an automated AP system. Increased visibility into your process helps to identify inefficiencies at every stage that might slow down your cycle.
12. AP Expense as a Percentage of Revenue
Accounts payable is the very definition of a necessary operating expense, but even so, it’s worthwhile to keep close track of how those expenses fit into your business’s overall financial plan.
Adding up your organization’s total AP expenses and determining their percentage of your total revenue can reveal important information about whether your business is spending too much or not enough on AP functions. That can inform key decisions about hiring more AP staff, investing in more AP automation, or finding ways to streamline or expand your current AP process.
How to Improve this KPI with Automation
To put it simply, doing the math by hand almost always takes longer and produces less accurate results than relying on technology. Automated data makes it easy to calculate important percentages and identify areas of higher than expected spending. Being able to assess these areas at a glance allows your team to make adjustments and institute practices that keep your spending right where it should be.
Learn How to Measure Your Accounts Payable Goals More Strategically
AP automation systems have been shown to reduce invoice processing costs significantly. Invoices processed via automation cost an AP department around half the price of even the cheapest paper-based invoicing methods, like checks. What could your department do with more than half of its processing budget put back in its pocket?
Improving your accounts payable system is about more than tracking broad KPIs. Aggregating data for data’s sake doesn’t help your business grow. You require the right metrics, identified and applied in the right places, to see real results. Zeroing in on these critical KPIs for accounts departments can help you reach your goals and improve your workflow. It doesn’t take a major infrastructure overhaul to do it.
Our integration-ready MHC NorthStar AP Automation Software is made by business people for business people, providing solutions for accounts payable departments’ most pressing concerns, such as:
Automated data extraction: Our AP Automation Software pulls and sorts information from paper and email invoices, reducing manual data entry and exception rate KPIs.
Workflow triggers: Alerts only relevant team members one at a time to perform their validations, then automatically passes invoices upstream.
Two- and three-way matching: Simplifying PO approvals to decrease your cost per invoice processed and time per invoice processed KPIs while also increasing the number of invoices processed per employee, per day.
Ready to get a better handle on your accounts payable KPIs? Contact us today to schedule a free demonstration of our MHC NorthStar AP automation software.
Accounts Payable KPIs FAQ
AP KPIs are key performance indicators — metrics and indicators that focus on how efficient, effective, and accurate your accounts payable processes are. These KPIs can apply to everything from day-to-day functions such as capturing invoice data to “big picture” items such as an organization’s annual spending on accounts payable.
KPIs are a valuable tool for helping an organization not only set realistic and beneficial goals for itself, but also to measure how effective existing systems are in helping to reach those goals. Tracking metrics such as cash flow, processing times, and rates of error can provide an excellent portrait of an AP department’s overall health while informing decisions on how to improve key functions.
Making KPIs work for you requires setting useful and specific goals, making sure to review and analyze KPI data regularly, and developing a plan for how to best apply the findings from that data. Keeping detailed, easily accessible records of all KPI findings is an important part of making the best use of your KPIs.