Accounts payable are short-term liabilities that must be paid based on the suppliers agreement. Nevertheless, we all know that merchants seldom give you a year (most are due on receipt or within 30 days). Other obligations for your firm, such as short-term loans, payroll expenditures, or income taxes, are documented elsewhere.
When you purchase products or services from anyone but do not pay for them at the time of purchase, you are doing it on credit. These are recorded as accounts payable in your financial statements. It may seem self-evident, but you must pay these off within a certain amount of time to avoid late penalties and interest. Some sellers will even give you a discount if you pay in advance.
What are Account Payable Metrics?
Accounts payable metrics and the AP department might be an often overlooked aspect of your business. It’s frequently uncomfortable to think about since it’s a source of money that’s going out rather than coming in.
Accounts payable metrics show how well and efficiently the department is accomplishing its aims and outcomes. These quantifiable metrics may subsequently be used to enhance overall employee work quality, individual employee performance, and AP-related expenses.
- Concrete AP Benefits
By determining which payment indicators are most relevant (KPIs), you may simplify procedures and gain actual AP advantages.
- Increased visibility into your accounts payable processes, revealing where time, resources, and commodities are being dispersed.
- By minimizing duplicate invoice payments and decreasing redundant work processes, AP expenses are reduced.
- The capacity to assess department and personnel performance correctly and track progress toward definable performance targets.
- Automation is regarded as an advantage rather than a hinderance in the creation of a proactive work environment in which AP personnel are increasingly accountable.
- Matter of Neglect
In many situations, the accounts payable department does not receive priority from a company’s CEO as other departments. It isn’t often the first area of a business to receive cash for improvement. Despite this, AP teams play an essential part in a company’s operations and maximize available working capital.
The accounts payable team’s general duties, such as monitoring cash flow, lowering costs in the procure-to-pay cycle, and managing supply chain relationships, demand a lot of attention right now. With such duties in mind, it’s critical to track certain accounts payable metrics to guarantee that the department is operating at peak performance.
Seven Account Payable Metrics That Matter to Your CEO
- Invoice Processing Time
As per studies conducted by Ardent Partners’ Bob Cohen and Matthew York, the typical invoice processing time in 2020 was 8.3 days. On the other hand, highly effective teams may process invoices three times quicker when they use automation.
Undoubtedly, the size of the company and how it is organized have an impact on invoice process time. Provided that invoice approval process is one of the most common bottlenecks in the invoice production process. Implementing an efficient automated invoice approval methodology will help accelerate the process and facilitate disbursements. It will also allow the company to reap the benefits of any early payment rebates, which are one of the most cost-cutting opportunities.
According to Level Research Consultant Major Bottoms Jr, 64% of companies see faster invoice clearance as the main benefit of AP automation.
- The Price of Handling a Single Invoice
Processing invoices is a costly process, and lowering operational costs is one method to lower total expenditures. “The poorest performers are spending $9 or more each time an invoice goes out,” says Perry Wiggins, APQC’s CFO, Secretary, and Treasurer. The companies that spend the least amount of money to invoice a client are those that spend less than $4.
Salary, copying, follow-up, routing, management, and IT support are all included in these figures. Of course, firms that manually handle invoices incur more expenses, whereas centralized and automated solutions generally perform better. Streamlining procedures saves time and money by reducing some of the most time-consuming activities.
- Rate of Invoice Exceptions
When it comes to invoice processing, handling errors is one of the most time-consuming tasks. Every time a member of the AP team needs to stop and look for missing information, such as POs or addresses, the overall process slows down and causes severe delays throughout the department.
According to data, invoice exclusions are still a big issue for AP departments, with the average invoice exception rate standing at 22.6%. Increasing productivity, reducing stress on staff and management, meeting suppliers’ expectations, and lowering total processing costs can all be achieved by reducing or removing outliers.
All of these are strong reasons to establish a robust method for submitting invoices for payment.
- Recorded VS Offered Discounts
Suppliers provide early payment discounts to keep their trade receivables moving, and they may be a useful source of savings for client firms.
You can discover lost savings opportunities by keeping track of investment income and the number of missed reductions. Furthermore, the use of reason codes aids in identifying where the division is losing sight and where changes are needed. Using an automated accounts payable system that alerts the AP team before discount periods expire helps to ensure timely payments.
- Number of Supplier Inquiries, Disputes, and Dispute Resolutions
Another place where efficiency and processing times may be slashed rapidly is here. Supplier conflicts and disagreements slow down the department and waste a lot of time and resources. Increasing efficiency and getting suppliers paid faster will almost certainly result from reducing the number of discrepancies.
Automating some of the systems allows for electronic document transfer and the creation of a site where suppliers may submit questions.
- Working Capital
Accounts payable metrics and good working capital management guarantee that businesses are always able to satisfy their short-term obligations. Working capital is determined by subtracting current obligations from current assets. It includes cash on hand, short-term investments, and accounts payable.
- Incorrect Payment Rate Expressed as a Percentage of the Entire Cost
Inaccurate payments not only waste the firm money and effort to fix, but they also give the impression the organization is inexperienced. Keeping track of the percentage of incorrect payments as a percent of overall payments can be a useful benchmark for identifying and resolving the reasons for this sort of error, and thereby lowering future occurrences.
Although accounts payable is frequently behind in terms of automation, firms who digitize their processes often realize significant cost reductions.
Implementing the appropriate accounts payable KPIs in your business will lower costs, boost staff morale, and promote positive supplier relationships.