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The great detective Sherlock Holmes once said, “It is a capital mistake to theorise before one has data.” While he was talking about solving crimes, the same can be said about attempting to make your accounts payable department run more effectively. Without the proper information, it’s impossible to know where to focus your efforts.
While there are a multitude of key performance indicators (KPIs) that can be examined, here are a few that will provide you with the actionable insights needed to raise your AP team to the next level.
Days Payable Outstanding
This number represents the average number of days it takes your company to pay its vendors, providing an idea of how well payables are being managed. As a general guideline, it’s better to have a higher number, because it means that you have more cash on hand for short-term investments, and increasing your working capital. That said, a high number can also be a warning sign that the organisation is unable to pay its bills on time. A lower number can indicate that your business is not fully taking advantage of the terms offered by your suppliers.
To calculate DPO, divide your average accounts payable by the cost of goods sold. Then multiply the result by the number of days in the accounting period.
Processing Cost Per Invoice
These days, every penny counts. It’s important to minimise expenses wherever possible. If your organisation is still processing invoices manually, the chances are you are spending too much.
To find your processing price per invoice, you’ll need to take the amount it costs to process an invoice–including labor, infrastructure, supplies, and transaction fees — and divide it by the number of invoices over a given period.
Payment Errors
According to OpsDog, vendor payment errors are common, and can often be as simple as a mistyped address or incorrect payment amount.
However, just because the occasional mistake is inevitable does not mean that this number should be ignored. Frequent payment errors can damage relationships with vendors and impact the terms they are willing to offer.
To determine the percentage rate, divide the number of outgoing payments which contained an error by the total number of transactions over a given period.
Duplicate Payments
Closely related to the previous metric, tracking duplicate payments will let you know how often you are paying the same invoice multiple times. As in the previous equation, you’ll simply need to divide the total number of duplicate payments by the total number of overall transactions over a given period.
While the goal is to attain the lowest possible number, it is worth noting that according to APQC even the best performers typically have a rate around 0.8%, with the median being 1.5%. Anything over 2% is considered low-performing.
Invoices Processed Per Employee
Calculating this will provide you with an idea of how productively your accounts payable team operates — the lower the score, the less efficient you are. This can be due to an over-reliance on non-automated AP practices such as manual data entry, use of paper invoices, or a poorly defined approval process.
Only two figures are needed to find this number. Take your average monthly invoices and divide them by the average number of employees working in AP.
The ideal rate for your specific team will vary based on industry standards.
Optimising the Results
Adopting an US$15. Using Beanworks, the amount drops to US$5 or less.
By eliminating time-intensive processes like data entry, and through custom approval workflows, the software also reduces the amount of time it takes for invoices to be processed, ensuring that your team is operating as effectively as possible. Beanworks also helps your team create AP ledger entries in seconds, with 99% accuracy. In addition, it uses 2-way sync with your accounting software to verify which invoices have been paid, helping eliminate duplicate payments.
Equipped with the right information and automation, you can optimise your accounts payable process, protecting your company’s cash flow and maintaining the important vendor relationships you’ve built.
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