Top Accounts Payable KPIs to Track in 2024

KPIs are essential in the accounts payable process to ensure the efficiency of your business finances. Effectively measuring and monitoring these KPIs can ensure smooth accounts payable processes. 

Accounts payable is an integral part of a company’s accounting procedures. Effectively processing short-term debts can foster better vendor relationships and help companies reduce costs and maintain a healthy cash flow. 

For the smooth running of accounts payable functions in your company, keeping track of some important KPIs that make your finances flourish is important. 

What are KPIs?

KPIs or key performance indicators are essential statistics and insights that can help test a strategy or function’s effectiveness. While metrics can refer to any quantitative measure of a company’s processes, KPIs are performance measures that directly correlate to the effectiveness and success of your business functions. 

In the world of accounts payable, some important KPIs like accounts payable turnover ratio and accounts payable days indicate how well these processes are functioning. 

Why are KPIs important in accounts payable?

Many companies consider accounts payable to be a straight-forward process. However, strategically planning and managing accounts payable can help streamline business operations and improve your company's financial performance. Here’s why KPIs are essential in the accounts payable process: 

Monitor costs and risks

Tracking accounts payable KPIs can help you monitor your accounts payable processes, mitigating risks like invoice fraud in the way. Tracking KPIs can also help you manage costs and budget or forecast your finances better.

Track payments

KPIs also help you keep track of which vendors have been paid, and which are yet to be paid. This can help you be informed of how much cash is yet to go out of your accounts and whether vendors are getting paid on time. 

Improve strategies

Tracking and analyzing KPIs can help you ensure your current accounts payable strategies are up to the mark and enable you to update or test out new plans. 

Align goals

Setting up KPIs and tracking them can also help you track how your accounts payable functions align with your company’s goals and make changes wherever necessary. 

Pain points in the accounts payable process

Manual accounts payable processes are tough to manage and prone to errors, leading to several challenges for accountants. 

High invoice processing time

With hundreds of paper invoices and tough-to-track approval processes, manual accounts payable lead to a higher invoice processing time. Accountants might spend more time correcting errors than engaging in strategic planning. 

A high invoice processing time can also affect timely book closing and financial reporting. 

High error-rate 

It is easy for errors to slip by when processing invoices manually. Even after getting caught, these errors take time to correct by manually checking and correcting records and requesting vendor credit memos. 

Late payments

Late payments can affect vendor relationships and lead to missed payment discounts or incur late payment fees, hurting your company monetarily. Incurring many late payments or uncleared debt at the end of a financial year can also make your company less attractive to investors or shareholders. 

Invoices stuck in approval

Tracking down and chasing business approvers can be a huge hassle for accountants when processing invoices for payment. Approvers might often lack context without proper workflows and documentation, leading to delayed payments. Circulating paper invoices for approval can also lead to losing bills, affecting vendor relationships negatively. 

Overworked staff

With companies constantly scaling and adding new vendors, the subsequent increase in volume of invoices might prove to be draining to accountants. Hiring additional staff will lead to an increase in headcount costs, which can in turn hinder profitability of the company. 

Important KPIs to track accounts payable processes

Accounts payable cost per invoice

Cost per invoice is one of the most important metrics when it comes to tracking the effectiveness of your accounts payable processes. Cost per invoice is calculated by dividing the cost incurred in your accounts payable processes by the total number of invoices your accounts payable team has processed. 

These costs include software and employee costs, as well as costs incurred in processing payments such as late payment fee. 

Therefore, accounts payable cost per invoice is calculated as: 

Cost per invoice = Total expenses incurred by the AP team/ Number of invoices processed 

Days Payables Outstanding

Days payables outstanding indicates the number of days it takes your company to pay back vendors. A high DPO can indicate late payments and might make your company less attractive to creditors. A low DPO can indicate you are utilizing credit effectively and can also hurt the financials of your company. 

Days payables outstanding is calculated as follows: 

Days Payables Outstanding = Average AP x Number of days in time period / Cost of goods sold 

Accounts payable turnover ratio

The accounts payable turnover ratio indicates how many times a company pays its vendors in a given time period. A high turnover ratio indicates the company pays its vendors multiple times within a time frame. A low turnover ratio indicates that the company pays its vendors less frequently and is undesirable for them. 

The accounts payable turnover ratio benchmark depends on factors such as industry, size and geographical location. 

AP turnover ratio = Total cost of goods sold / average accounts payable for the period

Average time to payment

Average time to payment is a measurement of how long it takes your accountants to process one invoice, from receiving it to payment. The average time to payment depends on the approval workflow and complexity of the invoice. For example, invoices with purchase orders that don’t require approvals might get processed faster than invoices that require approval. This calls for an improvement and structure in the approval process. 

Average time to payment = Total time spent on processing invoices / Number of invoices processed.

Error rate

The error rate is the percentage of invoices containing errors that are processed. A high error rate might indicate that the current systems the company uses aren’t able to catch errors. 

Error rate = Number of invoices processed with errors / Total Number of invoices processed. 

Exception rate

Invoices getting delayed in approval or containing discrepancies from their corresponding purchase orders or contracts can delay vendor payments. These invoices are considered as exceptions. A high exception rate can cause problems in smoothly processing accounts payable functions and company cash flow. 

Exception rate = Number of invoices with problems / Total Number of invoices processed. 

Invoices processed per day per employee

The Number of invoices processed per day per employee is also a good KPI to track employee productivity or hiring needs. It is calculated as 

Invoices processed per day per employee = Number of invoices processed / Number of employees involved 

Percentage of invoices processed within payment terms

The percentage of invoices processed within payment terms is an important indicator of how well your company manages to pay invoices. Paying invoices outside of payment terms can lead to decreased creditworthiness and severely affect vendor relationships. Maintaining a high percentage of invoices paid within payment terms can help your company manage its finances better. 

Percentage of invoices processed within payment terms = Invoices processed within payment terms / Total invoices processed x 100

Percentage of early payment discounts captured

A good indicator of how Cost-effective your accounts payable processes are is the percentage of early payment discounts captured. Capturing early payments will help your company manage payables economically while fostering good vendor relationships. 

Percentage of early payment discounts captured = Number of early payment discounts captured / Total Number of invoices with early payment discounts

Spend percentage by payment method

Percentage of spend by payment method measures which payment methods are popularly used by your organization and how long they take to process. Nowadays, electronic payments via credit cards or ACH payments are considered more secure and economical than check payments due to low storage and mailing costs and a higher chance of lost checks. Credit cards also provide the added advantage of rewards or cash back to become more attractive. 

How AP automation can help improve accounts payable KPIs

Accounts payable automation software can help companies reduce manual work and errors while facilitating timely payments. Adopting accounts payable automation software like ClearTech can also help your company track and measure KPIs against industry benchmarks. 

ClearTech’s interactive spend, AP and savings dashboards let you watch your funds and easily view important information for informed decisions. 

Conclusion

• Accounts payable is an essential part of a company’s financial processes, significantly affecting cash flow.
• Tracking accounts payable KPIs can help businesses ensure healthy accounts payable processes.
• Tracking KPIs can help accounts payable teams track payments, improve accounts payable strategies, monitor risks and align AP goals with the company's goals. 
• Some important KPIs to track are Cost per invoice, days payables outstanding, accounts payable turnover ratio, error rate, average time to payment, exception rate, invoices processed per day per employee, percentage of invoices processed within payment terms, percentage of early payment discounts captured and spend percentage by payment method. 
• Adopting AP automation software can help your company avoid late payments and invoice errors while effectively tracking accounts payable KPIs.