Measuring Your Accounts Payable Effectively: Operational Metrics

Management guru Peter Drucker said, “If you can’t measure it, you can’t manage it.”

This holds true for your Account Payables as well! Before analyzing and measuring your existing AP processes, it is important to establish key performance indicators (KPIs), which will help to track how your AP performance and drive improved efficiency and accuracy.

Accounts Payable metrics can be further classified into three buckets-

• Operational metrics - These metrics are related to process and productivity
• Financial metrics - These metrics are essential to enterprise financials
• Supplier metrics - These are metrics track supplier performance and activity

Some of the operational KPIs the AP departments should monitor and analyze are –

1] Process cost per invoice

• This metric is calculated by taking the direct monthly cost of accounts payable operation (excluding corporate overhead) and dividing that by number of invoices processed per month.
• AP managers should be cautious of their cost per invoice and have an action plan to improve efficiency to drive this cost down.

2] Invoices per FTE

• This operational metric measures the number of invoices processed relative to the number of employees in the accounts payable department.
• This KPI may vary depending on whether a business is using paper invoices or has moved to eInvoicing.

3] Invoice processing time

• The time-to-process KPI refers to the average time taken from when an invoice is received till when it is scheduled for payment.

4] Payment timeliness

• On-time payment of invoices is essential to eliminate the late payment penalties as well to create prospects for early payment discounts and enrich relationships with suppliers.
• This metric calculates the percentage of overall invoices paid on time.

5] Exception rate

• This statistic monitors the mismatches or discrepancies that require verification or correction prior to processing for PO and non-PO invoices.
• This metric directly impacts processing costs and timing. It considers the percentage of overall invoices ending up in exception piles.
• Another way of measuring this metric would be ‘first-pass-match rate’ which would look at the percentage of invoices not getting stuck in exception piles.

As per the industry best practices, here are some key statistics to keep in mind:

Source: Ardent Partners ePayables 2014

• These are just few metrics that we have discussed today, the type of metrics relevant for an organization will also depend on its industry, size, processes and several other factors.
• Using these monthly or real-time statistics, you can effectively manage your AP processes and contribute to your bottom line.

That’s’ all from us on the part 1 and we shall be back with an exciting part 2 to talk about the financial and supplier metrics which help to streamline the AP processes.