Accounts payable (AP) is a critical function in any business. AP is responsible for ensuring invoices are accurate, payments are timely, and that businesses pay only for products ordered and services rendered. Inefficiencies, mistakes, or delays can be costly and disruptive, and tracking accounts payable metrics and key performance indicators can help your business identify AP process issues and optimize the invoice management and payment cycle.
In this article, we’ll explore 9 key AP metrics that every business should track.
1. Invoice Processing Time
Invoice processing time measures how long it takes to process an invoice from receipt to payment. It impacts cash flow, supplier relationships, and the overall efficiency of the accounts payable department. A high invoice processing time can lead to late payments, strained vendor relationships, late fees, or missed early payment discounts.
To find the average number of days it takes your company to process invoices, add the number of days it takes to process each invoice received over a given period and divide by the total number of invoices.
For example, if it takes 1,000 days to process 500 invoices over three months, the average time would be two days (1,000 days / 500 invoices).
2. Cost Per Invoice Processed
The cost per invoice processed is the average cost of processing a single invoice, including labor, technology, and overhead costs. This metric is important because it helps assess the efficiency and cost-effectiveness of accounts payable processes. A high cost per invoice may indicate inefficiencies, excessive manual processes, or a lack of AP automation.
Divide the total cost of the AP department (salaries, technology, overhead) by the total number of invoices processed over a given period. If the AP department incurs $50,000 in costs and processes 10,000 invoices in one month, the monthly cost per invoice would be $5 ($50,000 / 10,000 invoices).
By monitoring this metric, businesses can identify opportunities to reduce costs and improve efficiency. Implementing AP invoice automation technologies, such as optical character recognition (OCR) and electronic invoice processing, reduces manual data entry and processing costs. Automation can also help businesses optimize workflows, accelerate the accounts payable process, and leverage early payment discounts to further reduce the cost per invoice.
3. Invoice Exception Rate
The invoice exception rate tracks the percentage of invoices that contain errors or discrepancies or require manual intervention before processing. A high invoice exception rate can lead to processing delays, increased costs, and payment errors.
Divide the number of invoices with exceptions by the total number of invoices processed, and multiply by 100. If 100 invoices out of 1,000 contain exceptions, the invoice exception rate would be 10% (100 invoices with exceptions / 1,000 total invoices * 100).
4. Accounts Payable Turnover Ratio
The accounts payable turnover ratio measures how frequently a company pays its suppliers over a period, usually a year. It gauges the efficiency of the AP process and the company’s ability to manage its short-term liabilities.
A higher turnover ratio suggests a company pays its suppliers more frequently, which is a sign of good financial health and strong supplier relationships. In contrast, a low turnover ratio may show that a company struggles to pay on time, which can strain relationships and bring about supply chain disruptions.
To calculate the accounts payable turnover ratio, divide your total supplier purchases by the average accounts payable balance over the period.
Your procurement software can help you determine the total supplier purchases. Average accounts payable is the average of the beginning and ending AP balance for the period, calculated as follows:
Average Accounts Payable = (Beginning Accounts Payable + Ending Accounts Payable) / 2
For example, if a company’s average accounts payable balance is $100,000 and its total supplier purchases is $1,825,000 for the year, the accounts payable turnover ratio would be:
Accounts Payable Turnover Ratio = 1,825,000/100,000 = 18.25
5. Number of Invoices Processed Per Employee
The number of invoices processed per employee helps businesses measure accounts payable performance and the productivity and efficiency of the AP department. It provides insight into the workload and performance of individual AP team members and reveals opportunities for process improvements or automation.
Divide the total number of invoices processed by the number of full-time equivalent (FTE) employees in the AP department over a given period. For example, if the AP department processes 10,000 invoices monthly with 5 FTE employees, the number of invoices processed per employee would be 2,000 (10,000 invoices / 5 FTE employees).
6. Early Payment Discounts Captured
Suppliers often offer early payment discounts to incentivize customers to pay invoices before the due date. These discounts often range from 1% to 3% of the invoice value, which can add up to significant cost savings over time. The early payment discounts captured metric measures the percentage of available discounts the company successfully captures.
Divide the total value of early payment discounts captured by the total value of early payment discounts available and multiply by 100. For example, if a company captures $10,000 in early payment discounts out of $20,000 available, the early payment discounts captured percentage would be 50% ($10,000 captured / $20,000 available * 100).
7. Payment Error Rate
The payment error rate measures the percentage of payments that contain errors, such as incorrect amounts, wrong payees, or duplicate payments. Payment errors can lead to financial losses, strained supplier relationships, and additional administrative work to correct the issues.
Divide the number of payments with errors by the total number of payments made and multiply by 100. If ten payments out of 1,000 contain errors, the payment error rate would be 1% (10 payments with errors / 1,000 total payments * 100).
8. Late Payment Rate
The late payment rate measures the percentage of invoices paid after their due date. Late payments may result in late fees and can damage the company’s credit standing.
Divide the number of invoices paid late by the total number of invoices paid, and multiply by 100. For example, if 50 invoices out of 1,000 are paid late, the late payment rate would be 5% (50 late invoices / 1,000 total invoices * 100).
9. Percentage of Straight-Through Invoices
The percentage of straight-through invoices measures the proportion of processed invoices that are paid without manual intervention or corrections. Straight-through processing (STP) is an automated, end-to-end process that enables invoices to be received, validated, and paid without AP intervention. A higher percentage of straight-through invoices indicates a more efficient and streamlined AP process.
Divide the number of invoices processed without manual intervention by the total number of invoices processed, and multiply by 100. For example, if 800 invoices out of 1,000 are processed straight-through, the percentage of straight-through invoices would be 80% (800 straight-through invoices / 1,000 total invoices * 100).
Optimizing AP Metrics with Vroozi AP Invoice Automation
Vroozi’s AP invoice automation empowers businesses to accelerate, automate, and improve the accuracy of their invoice processing workflows. AP automation plays a role in optimizing all of the metrics we’ve discussed in this article, with:
- Intelligent invoice capture powered by OCI and machine learning.
- Automatic two and three-way matching.
- Reduced errors, facilitating increased straight-through processing.
- Smart coding and intelligent approval routing with integrated exception handling.
To see Vroozi in action, experience a live version of the app or request a personalized walkthrough from one of our team members.
