‘You can’t improve what you can’t measure’ is the adage that rings true for every accounting function, even more so for the Accounts Payable. Most businesses see Accounts Payable only as a payment function & cost centre and focus on decreasing the cost per invoice as much as possible which though helps, is the unprofitable way of seeing it, especially for a growing business.
Profitable Accounts Payable & KPIs
A perfectly managed Accounts Payable process not only saves money, it improves your accounting performance, liquidity, cash position, and working capital, profitability – but only when perfectly managed.
And you can only manage and improve your Accounts Payable when it is perfectly measured using Key Performance Indices, like we do at Outsourced Bookkeeping.
Working as a remote accounting firm providing Accounts Payable Services to all types of business, we been able to help improve working capital, cash position and liquidity while driving down their invoice processing costs and times significantly, all thanks to our streamlined Accounts Payable Services where KPIs play a major role.
If you are a business looking to improve your Accounts Payable process as well, we urge you to focus on your KPIs. And in case you are not aware of then, don’t worry this blog is here to help. Here we list out major Accounts Payable KPIs that you must consider for a high-performance Accounts Payable process:
What are Key Performance Indices (KPIs)?
Key Performance Indices (KPIs) are the quantifiable metrics of a specific business process that are related to the goals a business want to achieve. Tracking the KPIs helps you quantify & monitor the performance and acts as a compass to help you reach your goals.
Key Performance Indices for Accounts Payable Every Business Must Track:
Whether it is cost savings, efficiency or accuracy of the process choosing the right KPIs is the key to manage and improve any business process. As for Accounts Payable, most business still sticks with invoice processing time and cost per invoice which are no longer sufficient if you a business is looking to improve its cash position, liquidity and profitability. Here a list of 6 important AP KPIs we use at Outsourced Bookkeeping that has helped us reap rewards:
- Days Payable Outstanding: Days Payable Outstanding is the average time in days a business takes to pay off their vendors and suppliers. As a strategic KPI Days Payable Outstanding directly impacts the networking capital which impacts the cash flow and even valuation of the business which is why most businesses try to extend the DPO. By tracking the DPO and optimizing it, renegotiating the payment terms, a business can improve the working capital and cash flow.
- Invoice Processing Cycle Time: A simple metric that can efficiently shed light on how efficiently your Accounts Payable department works to clear those invoices off your boat. From the invoice to the payment processing the average time usually hovers around 15 days, and if your AP department is taking much longer than this period consistently, then you must look to improve your AP process.
- Number of Invoices Processed per Day per Employee: While cost and invoice processing time gives you a picture, this metric gives a detailed picture of the efficiency of the employees. Deep down analysis into this metric can help you find out the tasks that take a lot of time, vendors that cause a lot of process interruptions, bottlenecks in your processing and also top processors in your department.
- Cost per Invoice: Most important and common Accounts Payable KPI is the total average cost for processing an invoice. However, most businesses do not accurately measure this metric owing to a variety of reasons. In general, if you are business with a paper-based manual invoice process you must weigh in total operational and manual labour time and costs, along with this, infrastructure costs, office supplies, postage fees and overall departmental expenses must also be considered.
- Cash Discount Realization Rate: Cash Discount Realization rate is another key metric that can help you keep scores on the amount of money you saved through early discounts. While most businesses neglect the early payment discount offers, our Accounts Payable experts at Outsourced Bookkeeping are big on this metric because our AP workflow makes them an easy win. Unless you are working on improving your working capital, there is no reason you must leave them on the table, track them and take them.
- Percentage of Invoice Exception Rate: Invoice exception is one of the major problems that plague the AP department. Since they demand more time and manual intervention, they single-handedly can bring down the efficiency metric and morale of the department. However, tracking these exceptions is the first step you can take towards reducing their impact on your Accounts Payable Process. Thus you can track the vendors with the most errors, address the errors in payment rates, identify and fix other causes once and forever.
However, not all businesses are completely equipped with manual and technical resources to track and measure the above KPIs and optimize their Accounts Payable process. If you are a business in the same boat, you can simply outsource Accounts Payable to Outsourced Bookkeeping, where Accounts Payable experts help your reap all the above benefits with our streamlined and well-equipped Accounts Payable Services. You can contact us here: https://outsourcedbookeeping.com/