Not all key performance indicators (KPIs) are equal — just as not all accounts payable (AP) departments identify and measure the right ones. These analytics gaps can make it difficult for accounts payable departments to reach their goals, as they take one step forward followed by two steps back.
Tracking AP KPIs can identify weak process points and operational inefficiencies. Metrics highlight the tasks and technologies inhibiting an optimized department, telling you where you need to move the needle forward. When utilized to their fullest, the right KPIs also point to these pain points’ solutions. AP departments have to determine how to emphasize the actionable, useful KPIs to track their improvement as they implement new solutions. The increased efficiency you gain can also put money back in your company’s pocket.
Which metrics make the cut? We’ve compiled the most important KPIs for accounting departments to secure the most meaning from your data and strengthen your process.
1. Cost Per Invoice Processed
Businesses spend a median amount of $7.75 per invoice processed. Other industry calculations say bottom performers will dole out a minimum of $10 for a single end-to-end processed invoice — and perhaps even more if processed manually or using legacy systems.
Tracking cost per invoice processed is your organization’s first glimpse into overall departmental efficiency. Some of AP’s most expensive variables (outlined below) go into calculating cost per invoice processed. In other words, the same expenses it takes to run a functional AP department are the same expenses accounting for cost per invoice. It’s a convenient and cost-illuminating overlap, one likely on your radar already.
To fully understand these metric connections, consider the formula for calculating this KPI:
- Cost Per Invoice Processed = Total accounts payable costs / total number of invoices processed
What factors go into “total accounts payable costs” — i.e., what are these traditionally high overall departmental expenses? They include:
- Labor Costs: Labor costs constitute the most considerable AP budgetary expense and one of the largest organizational expenses regardless of department. You determine your labor costs by the number of employees in your department, the hours they work, their benefits and their wages.
- Infrastructure Costs: Infrastructure refers to the physical tools and equipment needed to process an invoice, such as the costs to buy and maintain AP software, hardware and any other accounting tools utilized.
- Office Supplies: This includes paper, envelopes, stamps, pens and more make up your office supply expenses.
- Parcel Service and Postage Fees: Many organizations are decentralized in terms of invoices receipt. Offices each receive and approve their relevant documents on paper, then ship approved invoices via UPS or FedEx in bulk, expedited packages, saving time and reducing some costs but still resulting in parcel fees.
Before you can know your cost per invoice average, you must first calculate these overall departmental expenses. Conduct a simple workflow test case on one sample or a series of invoices. Note every step in the check-processing workflow — from receipt to verification to approval through payment — alongside the materials, technology, equipment and number of touchpoints. Review these findings alongside office supply order rates and parcel mail versus electronic invoice payments. This provides the foundation to calculate your total accounts payable costs and cost per invoice.
2. Average Time Per Invoice Processed
Costs add up when a company processes invoices slowly. Low-performers in this KPI are significantly more likely to practice process inefficiencies across accounts payable, not limited to the following areas:
- Complicated routing workflows: Overly complex workflows involving ad-hoc distribution decisions create headaches for all in the department.
- Slow invoice coding: Correcting erroneous reference information, using legacy software or hunting down too many cross-departmental touchpoints to double-check numbers can all lead to lagging invoice coding.
- Delayed verification: Lag times creep up as invoices get routed to the appropriate personnel through the proper channels but sit on a desk unapproved for days.
- Backlogged invoice closeouts, postings and filings: Siloed from the beginning, the entire end-to-end invoicing process — indeed, the entire AP department — shutters to a halt.
You can calculate your average time per invoice processed using this formula:
- Time Per Invoice Processed = Hours spent keying + hours spent re-keying + hours spent reviewing materials + hours spent identifying route checkpoints + hours spent on approvals + hours on remitting + hours on reconciling + hours on communication statuses updates and approvals
This is a base formula per invoice. Averages for other periods can be calculated using the same compiled time variables divided by the number of invoices processed that day, week, month or year.
Processing speeds will vary based on the size of your company as well as the industry it’s in. Few metrics are as intertwined with other AP efficiency goals, including the overall cost per invoice processed. High performers increase their processing speeds, boosting productivity and trimming departmental expenses.
3. Number of Invoices Processed Per Employee Per Day
A key KPI for your accounts payable clerks is tracking the number of invoices each one processes daily, providing key insights into where your AP department processes demonstrate strength and where they need to improve.
There are significant downstream effects to low performers in this KPI. Until an invoice is completely approved and filed into an ERP system, other departments cannot assess its developments or know what stage of the process it’s in.
This lack of visibility especially affects non-purchase order invoices, leading to organization-wide problems like mismanaged cash flows, missed supplier discounts, late payment fees and overall poor vendor relationships. Businesses can use this general formula to calculate the number of invoices processed per employee, per day:
- Number of Invoices Processed Per Employee, Per Day = Number of invoices processed per month/number of clerks or full-time equivalents (FTEs) processing them
You’ll also want to keep track of what processing task each clerk or FTE is responsible for. The employee taking on the paper trail of a misclassified non-PO invoice is going to spend a lot more time on their work than the downstream employee who simply gives a final invoice review and approval.
While a general sense of invoice numbers is a fundamental KPI for accounts payable departments, deeper FTE-task specific data points can help you identify things such as:
- Which suppliers bottleneck your operations or cause you the most process interruptions.
- Which software tools help or hinder the end-to-end process.
- Which employees face the most ad-hoc, unstructured tasks.
- Which employees are the top processors, relative to their role in the workflow.
Ask those top employees to share tips to assist the entire team with boosting their performance.
4. Percent of Invoice Exceptions
Invoice exceptions plague even the most high-functioning AP departments. Reflected in KPIs, they drag down both processing efficiency and employee morale, particularly when exceptions have more to do with problematic workflow processing practices than manual entry errors. AP invoice exceptions have a number of culprits:
- Purchase order discrepancies such as wrong supplier codes and receipt dates or mistyped supplier zip codes
- Incorrect or missing POs and non-POs
- Erroneous or duplicative PO and non-PO credit amounts
Worst-case exceptions create disputes between purchasers and vendors. The resulting bottlenecks can bring an entire AP department to a halt.
Tracking invoice exception rates is the first step to reducing the impact of their discrepancies. Organizations can analyze a number of data points to understand their exceptions and tailor solutions, such as:
- Addressing wrong payment rates: Erroneous payments should be few and far between, especially when compared to the percentage of total payments.
- Improving manual re-keying rates: Instances of manual re-keying can be cut once you’ve reviewed your manual inputting data, either through AP software tracking features or from ledgers submitted by employees.
- Tracking most frequent types of exceptions: Know your most common exception types in order to address their sources and discover vendors or suppliers with the most errors to their names.
How Accounts Payable Automation Can Improve Your KPIs
Automating certain accounts payable tasks eliminates paper-based processes and speeds up workflows, its main benefit to AP departments. Automation also has another advantage — it can improve department-critical KPIs, including the metrics described above.
1. Cost-Per-Invoice Processed
Very few companies say their operations qualify as “highly automated,” with many saying paper-based and manual matching processes still account for the majority of their invoicing. Departments can reduce manual invoice oversight when utilizing paperless AP automation software.
That decrease in labor is a direct product of fully deployed automated tools. Businesses see a hefty return on investment for every dollar put into the new software. Best of all, they can bring their cost-per-invoice processed down from the $7.75 industry median.
2. Average Time Per Invoice Processed
AP automation software contains e-repositories that help key in, manage and file invoice data at every stage of the workflow. Software can:
- Automatically code vendor invoices: This includes general ledger coding gleaned from purchasing data for purchase order (PO) invoices and general ledger (GL) coding pre-set by the vendor and managed by AP clerks for expense invoices.
- Initiate downstream workflows: Software notifies the appropriate individuals at each workflow stage that it’s their turn to perform a review or validation. Notification examples include purchase price variance, quantity variance and expense invoice approval.
- Automatically input correct invoice information: AP automating software collects all the transactional data and identifies errors, then alerts clerks to correct the information. Approved data then flows into accounting ledgers, reducing — and in some cases eliminating — the more error-prone, end-to-end manual entry process.
- Simplify invoice audits and approvals: All documents are in one system, following one set workflow, with all final approvers getting task notices to cross-reference paperwork in real time, within one platform.
In total, top-performing AP teams see time per invoice processing rates of 5.95 days with 90 percent of payments on time, compared to 17.83 days and 65 percent on time for non-automated bottom performers.
3. Number of Invoices Processed Per Employee Per Day
Studies have shown that AP departments using automated software can process a significantly greater number of invoices per employee per day than businesses using mostly paper. AP software addresses the majority of departmental pain points, without significant human oversight:
- Pre-code program inputs: Employees no longer need to execute tedious data entry tasks or perform ad-hoc document searches to reference data.
- Adopt automatic data inputting: OCR and ICR technology enable physical and digital documents to automatically input into ledgers, reducing erroneous entries while increasing entry rates.
- See fewer manual error rates: Fewer errors downstream beget fewer upstream exceptions and invoice duplications and can even combat fraud. You get an overall enhanced, more streamlined department.
With automation, you identify and improve the variables causing issues across your department. Expect the outputs of your employees to soar with updated AP software. Everyone’s roles are made easier, increasing the number of invoices everyone can process each day.
4. Percent of Invoice Exceptions
AP automation works like an extra pair of eyes — or an extra hundred — canvasing your invoices, matching them with purchasing orders, comparing line item detail to purchasing and receiving data, all within seconds. Introducing automation software can directly reduce manual-based exception rates, plus begetting other business benefits:
- Automatic PO matching and document retrieval
- More early payment discounts captured
- Fewer invoice bounce rates, re-entries, re-keying and re-routing
- More satisfied suppliers and vendors
Since invoice exceptions remain the dominant reason today’s AP departments still underperform, exception-related KPIs can see dramatic improvements with that extra automated attention. Organizational management studies have shown data-entry errors exist in the majority of manual accounts-payable date input functions. One mistake has the potential to freeze the whole department, as upstream missteps trigger downstream confusion and miscalculations.
Learn How to Measure Your Accounts Payable Goals More Strategically
Paper-based, manual invoice processing can cost companies anywhere from $7.75 to $30 per invoice. AP automation systems have been shown to reduce invoice processing costs significantly. Invoices processed via automation cost an AP department less than $2 and take only eight days. That’s under half the price of even the cheapest paper-based invoicing methods, like checks. What could your department do with more than half of its processing budget put back in its pocket?
Improving your accounts payable system is about more than tracking broad KPIs. Aggregating data for data’s sake doesn’t help your business grow. You require the right metrics, identified and applied in the right places, to see real results. Zeroing in on these critical KPIs for accounts departments can help you reach your goals and improve your workflow. It doesn’t take a major infrastructure overhaul to do it.
Our integration-ready AP Automation Software is made by business people for business people, providing solutions for accounts payable departments’ most pressing concerns, such as:
- Automated data extraction: Our AP Automation Software pulls and sorts information from paper and email invoices, reducing manual data entry and exception rate KPIs.
- Workflow triggers: Alerts only relevant team members one at a time to perform their validations, then automatically passes invoices upstream.
- Two- and three-way matching: Simplifying PO approvals to decrease your cost per invoice processed and time per invoice processed KPIs while also increasing the number of invoices processed per employee, per day.
- A single-platform agnostic e-repository: Housing your most transparent, efficient, informed and unsiloed AP operations yet.
Contact Vanguard Systems today to get started.