As a controller or accounts payable (AP) manager, you can use more than a dozen key accounts payable performance indicators (KPIs) to track the performance of your AP systems.
What are Accounts Payable Metrics?
Accounts payable metrics are key performance indicators that track and evaluate the efficiency and effectiveness of your accounts payable process. These metrics can help a company identify areas for improvement in your accounts payable process by reducing delays in processing invoices or improving communication with vendors. Three in particular stand stand out:
- average cost to process invoices
- average time to process invoices
- average number of people needed to process invoices.
These KPIs for accounts payable track especially valuable efficiency metrics because they help generate relevant and intelligent insights to make smart decisions that substantially improve overall AP performance.
We’re going to dive in to these three accounts payable KPIs in more detail. Along the way we’ll tackle potential concerns, stress points and misconceptions about these KPIs in the context of AP automation.
We’ll help you think of KPIs and AP automation in new ways, from different perspectives using fresh frameworks, that will help you decide whether these metrics, and this technology, is right for your business.
Accounts Payable KPI 1: Average Cost to Process Invoices
The average cost to process an invoice is one of the most widely used accounts payable KPIs. You definitely want to track this because it’s highly indicative of the efficiency of your AP process. It’s calculated this way:
Total accounts payable costs divided by total number of invoices processed
Before going any further, let’s lay out a few important words of caution: Although this formula seems straightforward, it can produce misleading data if not used correctly or viewed in the proper context.
Here’s the rub: The average cost per invoice can vary depending on costs included, or not, in the calculation. Other variables include the industry, number of invoices processed and whether AP automation or AP manual processes.
So be careful how you calculate this . Be sure to view the results through the proper lens. and avoid a pervasive industry mistake — underestimating costs.
Remember to add all costs, especially labor because it’s often the highest of all. And don’t forget to include costs for audit fees, lost supplier discounts, mailing and printing, payment mistakes and equipment.
If your company doesn’t consider those “hidden costs” that stem from time-consuming, inefficient manual process, your cost per invoice may seem surprisingly low. And that could lead to misleading interpretations and flawed decisions.
Cost savings of 60-to-70 percent with automated AP
With these cautions in mind, one fact should be abundantly clear to you: It costs a lot less to process an invoice using AP automation instead of manual methods.
For an AP team to manually process one invoice, the processing and labor costs amount to $16.00 for medium-size businesses and $22.26 for small businesses, according to Goldman Sachs.
In an automated system, these numbers drop to $5.89 and $6.89, respectively. What does all this come down to? You save approximately 60-to-70 percent in net cost by automating AP.
Reluctant to make change? We understand.
Many controllers and AP managers may be reluctant to spend more time doing the stressful and tedious work of calculating invoice processing costs. But the fact of the matter is the trend is only becoming more widespread.
A recent survey by PYMNTS/com and VersaPay showed 96 percent of CFOs have or plan to digitize their AP/AR operations within the next year. The dramatic difference in cost per invoice (again, a pervasive industry KPI) proves AP software solutions have the power to boost efficiency and transform the way AP departments prove their worth.
Along those same lines, an IOFM and AvidXchange report found companies processed 66 percent of invoices electronically in 2020. The report also discovered 73 percent use an automated AP software system, up from 66 percent in 2019 and 45 percent in 2018.
Real estate company speeds up process up to 75 percent
The Pinellas County Housing Authority offers a great illustration of a company that was concerned about falling behind on invoices and payments and solved that using AP automation.
Since implementing AP software, the AP department cut the number of steps in the invoice approval and payment process by 75 percent.
Using AP automation gives the company a much better handle on the average cost to process a single invoice. Based on that data, it can make more informed and smarter decisions about how to process invoices more efficiently.
Accounts Payable KPI 2: Average Time to Process an Invoice
The second crucial accounts payable KPI to track is the average time to process an invoice. This metric gives quantitative insights into how efficiently you’re operating from a daily, weekly, monthly and yearly perspective.
To calculate this number, add the time spent doing the following tasks for one invoice:
- typing in invoice data
- reviewing materials
- approvals
- payments
- reconciling
- updates
The key here is whether you’re doing all this manually or using automation. From a KPI perspective, there’s a big difference. Businesses typically spend up to 70 percent less time using AP automation compared to manual processes, according to Goldman Sachs .
Simple translation: These companies cut the time to approve invoices from 10 days to three.
Why is this so important? Because processing invoices slowly translates to delayed payments, late fees, strained relationships with vendors and suppliers and missed early payment discounts.
Approving invoices on the beach
Jason King, a board member for the condominium community Trellis Fifth Avenue in San Diego, California, recently took a vacation and proved how AP software kept the invoice approval train rolling even while enjoyed some R&R.
While on break, three vendor invoices arrived. For all three, he simply clicked “approve” from his smartphone. On the beach.
He was able to keep a handle on the average time to process invoices instead of returning to his office days later to a stack of papers that required a physical signature.
In all, AP software cut Trellis Fifth Avenue’s average time to approve invoices and deliver payments to vendors from 30 days to seven days.
Accounts Payable KPI 3: Average Number of Employees Needed to Process Invoices
Delays, as well as accelerations, in processing invoices directly relate to your employees’ use of automated or manual processes and their productivity levels. The formula to calculate the average number of employees needed to process invoices is:
Annual invoice volume divided by the number of full-time employees in your AP department
An IOFM survey of 400 AP practices found that, using automation, top performing small-to-medium-sized businesses can triple their per-person invoice processing per year compared with manual processing. They process, on average, 2,350 invoices per full-time employee.
Fast access to status of invoices
This marked improvement in efficiency is facilitated by the ability to track invoices from smart phones or PCs, at home or at their corporate offices or sitting on the beach, at any time day or night. Additionally, this helps managers track how many invoices each employee is processing per day, week and month.
This desire for visibility cannot be overstated: finance pros need to be able to determine and track the performance of their department. Automation solves that problem.
Terra Holdings’ executive VP Greg Zammit said the most important problem AP automation software solves is the need for total transparency throughout the invoice and payment process, which accelerates productivity.
“I can see what the status of the invoice is at any point in time. That solves a major issue for me,” Zammit said.
But there’s more to this. Having this employee productivity KPI, you’ll be able to figure out more precisely how many employees you need to process invoices and how much that should cost you per month, week or year depending in ups and downs and invoice volumes.
Based on those determinations, you’ll be able to plan more sensibly to free up specific amounts of time for your finance team to advance their careers by developing more financial and business skills and, ultimately, live more fulfilling daily lives at work.
Convince Your CFO to Automate AP Processes
This report guides you on how to speak the CFO’s lingo strategically. Learn powerful techniques to think through how automating AP syncs with your CFO’s strategic goals and find out how to come best prepared with answers to tough questions.
Final Thoughts
The path to an efficient AP department starts with closely tracking, and then leveraging to your advantage, these three all-important accounts payable KPIs.
You can add others over time you find especially useful. Don’t get overwhelmed from the outset with a deluge of KPI metrics that are unwieldly to sort through, time-consuming to track and calculate, and may not be of much use in giving you the data that really counts to make better decisions.
But this situation is ultimately about more than three important KPI numbers and using a new software.