Streamline Your Accounts Payable (AP) Process: Key Metrics to Watch
As businesses continue to evolve, optimizing back-office operations like accounts payable (AP) has become a key priority for improving efficiency and cash flow management. By focusing on the right metrics, businesses can gain valuable insights into their AP process, identify areas for improvement, and eliminate inefficiencies that often lead to wasteful spending. Understanding and optimizing AP performance can also enhance vendor relationships, reduce manual processes, and ultimately lower costs.
Explore seven essential key performance indicators (KPIs) that businesses should monitor to streamline their AP process. Adopting certain technologies, such as automation tools, can improve these KPIs and help businesses manage their AP operations more efficiently.
1. Days Payable Outstanding (DPO)
DPO is a vital metric that measures how long, on average, it takes for your company to pay its invoices. This metric is especially useful in evaluating your company’s cash flow and identifying opportunities to hold onto cash for as long as possible, without incurring late fees or penalties. However, it’s essential to balance this metric with good vendor relations, as excessively delaying payments may harm long-term business partnerships.
Why It’s Helpful: A high DPO can indicate that you’re using your cash efficiently, but it can also suggest inefficiencies in the AP process that may prevent timely payments. For example, poorly defined approval workflows or reliance on manual processes could delay payments.
Improvement Tip: To optimize your DPO, review your payment terms against industry benchmarks and negotiate favorable terms with your suppliers. Automating the AP process can help streamline approvals, ensuring payments are made on time without compromising cash flow.
2. AP Turnover Ratio
The AP turnover ratio calculates how quickly your company pays its suppliers. A high AP turnover ratio is indicative of good liquidity, meaning your company pays off its creditors promptly, which can foster stronger relationships with suppliers and improve overall cash flow management.
Why It’s Helpful: This ratio is crucial for understanding your cash flow and liquidity. It also provides insight into your AP team’s efficiency and ability to process payments in a timely manner.
Improvement Tip: Improving your AP turnover ratio can be achieved by identifying and addressing bottlenecks in the payment process. Streamlining workflows and improving cash flow visibility can help speed up payments and improve vendor relationships.
3. Cost Per Invoice
This metric measures the average cost associated with processing a single invoice, encompassing everything from labor to paper, postage, and other overhead costs. A high cost per invoice can indicate inefficiencies in your AP process, especially when manual tasks like data entry and approvals are involved.
Why It’s Helpful: Identifying the true cost of invoice processing allows businesses to find areas where costs can be reduced. High costs per invoice are often the result of paper-based processes and manual interventions, which can be eliminated with automation.
Improvement Tip: Transition to electronic invoicing and eliminate paper checks. Additionally, automation tools can help speed up data entry and approvals, which reduces the overall cost of processing each invoice.
4. Rate of Error as a Percentage of Total Invoices Paid
The rate of error metric tracks the number of erroneous payments—whether they be duplicate payments, overpayments, or other inaccuracies—made over a given period. This KPI is crucial for understanding how errors in the AP process impact your bottom line and cash flow.
Why It’s Helpful: Minimizing errors in the AP process can drastically reduce wasteful spending and prevent cash flow disruptions. High error rates may indicate weaknesses in data entry, internal controls, or approval processes.
Improvement Tip: Implement internal controls, such as three-way matching, to ensure that only valid invoices are processed for payment. Using automated tools can reduce the risk of human errors by capturing data more accurately and routing invoices for review automatically.
5. Invoices Processed Per Employee
This metric provides insight into the productivity of your AP team by tracking the number of invoices each employee processes within a given timeframe. A low result can highlight inefficiencies in your team or the AP process itself, such as bottlenecks in data entry or invoice approval.
Why It’s Helpful: Measuring invoices processed per employee helps you gauge how well your team is managing the workload and where improvements can be made to boost productivity.
Improvement Tip: Automating repetitive tasks like data capture, invoice approval, and payment tracking can help reduce the manual workload on your team and allow them to focus on more strategic tasks. Tools that integrate seamlessly with your existing systems can increase productivity and reduce processing time.
6. Discounts Captured
Many businesses miss out on valuable early payment discounts due to inefficient AP processes. Monitoring the percentage of available discounts that your organization captures is a good way to gauge the effectiveness of your cash flow management and AP process.
Why It’s Helpful: Early payment discounts provide an opportunity to save money and improve vendor relationships. A low percentage of discounts captured suggests that your AP process might be slow or disorganized, causing you to miss out on savings.
Improvement Tip: Regularly review payment terms with vendors to identify opportunities to capture early payment discounts. Streamlining approval workflows and automating invoice processing can ensure you never miss a discount opportunity.
7. Percentage of Invoices Processed Straight Through
Straight-through processing (STP) refers to invoices that are processed from receipt to payment without requiring manual intervention or exceptions. A higher percentage of straight-through invoices is ideal, as it reduces the time and cost associated with handling exceptions.
Why It’s Helpful: Higher STP rates result in fewer manual touches, lower processing costs, and quicker payment cycles. It’s an indicator of a streamlined and efficient AP process.
Improvement Tip: To increase the percentage of invoices processed straight through, invest in automation solutions that minimize manual data entry and approval steps. By using electronic invoicing and automatic approval workflows, you can significantly reduce the need for manual intervention and increase processing efficiency.
Why Automation Matters
While optimizing each of these KPIs is essential for improving AP performance, one of the most effective ways to boost efficiency across all these metrics is by leveraging automation. Implementing an automated AP solution can help reduce errors, cut costs, and speed up processing times. For example, Quadient AP provides tools that integrate optical character recognition (OCR) technology to capture invoice data with high accuracy, reducing the need for manual data entry.
Automation also helps ensure invoices are processed straight through with minimal exceptions. Approval workflows are streamlined, invoices are automatically routed to the correct team members, and regular reminders help keep the process moving without delays. By integrating these automated solutions with your ERP system, you gain full visibility into your AP process, allowing for better decision-making and improved cash flow management.
For businesses looking to improve their AP metrics, automation tools offer a way to eliminate manual tasks, reduce errors, and enhance productivity, all while keeping vendor relationships intact.
WANT TO LEARN MORE?
If you’re interested in learning more about how automation can improve your AP process and help you optimize your KPIs, join us with Quadient for our upcoming webinar. We’ll dive deeper into these metrics, explore best practices, and discuss how automation tools can make a significant difference in streamlining your AP operations.
Register TODAY to learn how you can improve your AP performance and take your process to the next level.
