12 Accounts Payable Metrics to Improve Efficiency

How do you feel about the success of your accounts payable processes? 

If you are thinking, well, let me check my spreadsheet and I’ll have a clear answer in a couple of days or weeks, stop and start reading this. If you don’t have any idea of what are talking about, please do the same. 

Accounts payable are necessary and very popular in the accounting department, that we know. However, did you know that it’s not only necessary to do the process but also measure their success? It’s the most effective way, after all, to detect any deficiencies that could harm your operations in the long run. 

Why don’t we learn more about it?

What are AP Metrics?

There’s no need to panic here, understanding accounts payable metrics is quite simple, they are only standards or points of reference that can guide you to analyze the level of efficiency of your AP operations. 

Why Measure AP Efficiency

Efficient AP processes lead to faster payments, fewer errors, and reduced costs as they can give you a better picture of your current relationship with your suppliers, creating the space to find cost-saving opportunities. 

Now, tell us that it doesn’t sound good.

How to Set AP Goals?

What would be the point of working with metrics if you don’t have a specific goal in mind? Pointless, right? 

That’s why you need to create goals that are aligned with your business, first things first, go over your current AP processes, and analyze what’s working and what could be improved. Once you’ve collected the answers, go for SMART goals, which stand for specific, measurable, achievable, relevant, and time-bound, this way you’ll know that you’re working towards clear, actionable objectives that can be tracked and evaluated.

An example of a SMART goal in AP would be something like reduce the average days to pay from 15 to 10 within the next quarter.

How do you Measure Accounts Payable Efficiency?

Measuring AP efficiency is about assessing how well your team manages the accounts payable process. To achieve this you’ll need to focus on a combination of factors like speed, cost-effectiveness, accuracy, and vendor satisfaction, that’s where KPIs become essential. 

Here we’ll go over the most 12 common accounts payable metrics. 

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12 Accounts Payable Metrics

Accounts Payable Expenses 

AP expenses include everything related to the management of your accounts payable function, such as employee salaries, technology costs, invoice processing fees, and other overheads. Understanding your AP expenses is one of the fundamental steps you can take to manage the cost of operations and find areas to optimize.

But how do you do that?

Categorize all costs related to the AP function and track them monthly. Analyzing trends in your AP expenses will help you identify areas where you can cut costs, such as reducing manual processing time or investing in invoice automation.

ROI on Invoice Automation

Yes, automating your invoicing processes is always a good choice, however, that doesn’t mean you shouldn’t keep an eye on the costs. How else could you know if the procurement software is really delivering the results you wanted? 

To calculate ROI on invoice automation, compare the cost of the automation system, including software, implementation, and training costs, against the savings generated through reduced manual labor, faster processing times, and fewer errors.

Average Days to Pay

A very important indicator of your liquidity and the status of your supplier relationships can be found in your average days to pay. This metric tracks how long it takes your company to pay invoices after they’ve been received.

In order to figure it out this, you must divide the total number of days taken to pay invoices by the number of invoices processed. Tracking this over time can help you set realistic goals for improvement. Reducing the average days to pay will certainly improve your vendor relationships.

Percentage of Digital Invoices

Don’t you enjoy the simplicity of working with digital invoices? Well, so does everyone else, as electronic invoices become more popular, you should consider tracking the percentage of invoices you receive in digital form, so it becomes easier to measure the level of automation in your AP process.

But…how?

Very simple, just divide the number of digital invoices by the total number of invoices received and multiply by 100.

Total of Invoices Received 

Knowing the total number of invoices your AP department receives helps you understand the volume of work your team is handling. Something very important if you are aiming to evaluate your team workload and setting performance targets.

There’s no secret formula for this, it’s enough to count the number of invoices received in a given time. Depending on the results, you could discover that you might need additional resources to handle everything. 

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Payment Cycle Time

This is different from the previous metric of average days to pay in the sense that measures the total time it takes from receiving an invoice to issuing the payment. To calculate payment cycle time, track the number of days from invoice receipt to payment date for each invoice, then calculate the average across all invoices.

Duplicate Payments

Often the result of manual processes and the consequent human errors, duplicate payments occur when the same invoice is paid more than once. Having a close understanding of this metric allows you to spot potential issues in your AP process.

Okay, sounds good but how do you do that?

Begin with regularly auditing your AP records for duplicate invoices. Another option is to set up systems to flag duplicates before payments are made, such as using matching algorithms in your accounting software.

Cost Per Invoice

A quite important one

Cost per invoice measures the total cost of processing each invoice. This includes labor, software costs, and any other resources required to handle an invoice from receipt to payment. Lowering the cost per invoice is often a sign of an efficient AP system, especially when automated tools are in place.

The formula?

Pretty straightforward, divide your total AP expenses by the total number of invoices processed.

Average Invoice Processing Time

Invoice processing time is the amount of time it takes from receiving an invoice to completing the approval and payment process. This metric is very useful if you want to discover how quickly your AP team can handle invoices, which directly affects your payment cycle time and vendor relationships.

But how?

Track the time from the moment you receive an invoice until it is processed and paid. Analyzing this data will help you identify bottlenecks in the process, so you can develop improvements.

Payment Errors

Payment errors, such as incorrect amounts, missed payments, or payments sent to the wrong account, can lead to significant issues in your AP process. These errors can damage vendor relationships, lead to fines or late fees, and even impact your company’s reputation.

So you should measure it as well?

Yes

Keep a record of the number of incorrect payments made over a given period. You can further break this down by type of error to identify recurring issues like data entry mistakes, and system glitches.

Days Payable Outstanding (DPO)

Forger the slightly weird name, DPO is the average number of days it takes your company to pay its accounts payable. This metric is essential for understanding how long a business holds onto cash before making payments. If you end up with a higher result, it means that while you are keeping the money longer, your supplier relationships could be suffering as you are delaying their payments. 

Okay, how do you figure out this?

Divide your total accounts payable by your total credit purchases for the period and multiply by the number of days in the period, typically 365 for a year.

Invoice Accuracy Rate

Last but not least we have an invoice accuracy rate

Errors in invoices, such as incorrect amounts, misapplied discounts, or wrong payment terms, are a terrible mix that can lead to delays, disputes, and worse, additional costs for the company.

The goal here is to achieve a high level of accuracy and you can do this by dividing the number of error-free invoices by the total number of invoices processed and multiplying by 100. 

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