Categories: Business

Using Metrics To Improve Your Accounts Payable Process

Digitalization of business processes generates data covering everything from purchasing intent to the effectiveness of marketing campaigns and the ability to personalize customer service interactions.

Typically, business data is used to identify, onboard, and retain customers, but it can also provide insights into the organization. Technology allows businesses to track data on internal business processes, identifying inefficiencies and redundancies to optimize operations and maximize employee output.

This can be applied to every business area, including cash flow and managing accounts payable (AP) processes.

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What Are Accounts Payable Metrics?

Accounts payable metrics are units of measurement related to your AP processes. This could be something as simple as the number of invoices received over a given period or something more complex, like the ROI related to different invoicing software or technology.

By measuring and analyzing AP metrics, businesses can better understand their financial outgoings and identify common issues or practices that need updating. AP metrics allow you to benchmark the workflows and processes behind paying your bills.

With this information, you can track performance over time and find ways to enhance operational efficiency.

Below are 6 metrics to track to gain insights into your business’s AP and find ways to manage your finances better.

Metric 1 – Payment Types

A breakdown of the different payment methods used to pay your bills, in terms of the number of invoices and the total dollar amount for each.

Whether you like to pay vendors with a credit card, checks, or electronic payments like ACH or wire transfers, it is helpful to understand the different types of payment methods.

Payment methods charge different fees and timeframes vary depending on which method you use. A detailed breakdown of how each bill is paid enables you to optimize your payment mix.

This could mean minimizing the fees you pay and switching to cheaper methods, or optimizing your cash flow by reducing the time it takes for payments to arrive in your vendor’s account.

Alternatively, if possible, you could consolidate to a single payment method to simplify AP workflows. Using a single payment method makes AP automation easier, removing additional manual input from the process.

Metric 2 – Average Cost Per Invoice

Your total AP costs divided by the number of invoices you’ve processed.

By AP costs, we mean the amount of money it costs your business to correctly process the invoice (labor costs, AP infrastructure, postage fees, etc.), not the cost of goods associated with each invoice.

By understanding AP costs and the amount of resources going into every invoice, businesses can identify unnecessary costs and identify potential cost-saving solutions such as online payment platforms and AP automation.

Metric 3 – Error Rate

The number of invoice errors divided by the total number of invoices.

Useful for tracking incorrect or duplicate payments costing your business money. By understanding the cause of errors and tracking when they occur, you can start to see if any patterns emerge that need to be accounted for.

Perhaps errors are more likely when working with specific vendors or occur at the same time of the month when staff are under more pressure.

Invoice errors also lead to time-consuming supplier inquiries and disputes that bring unnecessary costs.

Metric 4 – Percentage Of Available Discounts Received

The number of discounts received divided by the number offered by vendors, multiplied by 100 to make a percentage.

Many vendors will offer discounts on payments received early. Businesses with successful AP and cash flow processes can organize their funds to take advantage of these discounts and save money.

Tracking the discounts you receive allows you to see the direct monetary outcome of successful invoicing practices. Plus, you can determine the amount you are missing out on, giving you an additional incentive to introduce ways of processing bills faster.

Metric 5 – Additional Costs From Late Payments And Fees

The total amount paid due to late payment fees and interest.

Every business wants this metric to be zero, meeting all of their payments on time. But in reality, mistakes or poor cash flow management sometimes lead to late or missed payments that result in fees and wasted money.

Keeping a close eye on how much money is being wasted due to poor cash flow management or AP errors helps businesses identify the root cause of the problem.

It may be a major cash flow issue you are already aware of or a simple administrative bottleneck you can solve by redesigning your AP practices. Plus, paying on time leads to smoother vendor relationships that may even help you negotiate a better deal down the line.

Metric 6 – ROI Using AP Technology

The money saved using AP technology minus the cost of the technology. Often presented as a percentage by dividing this sum by the cost of the technology and multiplying by 100.

By tracking many of the previous metrics above, before and after introducing AP technology, you can accurately assess any money saved.

A drop in average cost per invoice (resources, employee time, etc.), qualifying for more vendor discounts, and eliminating late fees and interest all add up to reduce AP costs.

Often, AP functionality is overlooked in favor of automating other financial processes, such as payroll or employee expenses. But, a range of AP platforms and bill-pay services can help you automate much of the work.

When implemented correctly, they provide additional transparency and real-time updates into the goods/services received and the invoices being processed.

Optimizing Your Accounts Payable Process With An End-To-End Solution

While these metrics provide useful insights into your internal workflows, the best way to enhance your AP practices is to implement a modern end-to-end solution.

With all of your AP processes managed on a single platform, you can implement new automations while ensuring accountability and proper approval workflows. This removes the burden of repetitive administrative tasks, freeing employees to focus on more creative and strategic work.

Plus, with technology on your side, you can track more data and metrics for greater transparency into your AP processes.