13 Accounts Payable KPIs That Drive Performance

What are accounts payable KPIs?

Simply put, KPIs are the metrics or statistics that can be used to readily identify the success of an operation. For example, if you are a manufacturer, one of the common KPIs that you’ll want to track is the percentage of defective products in a given production run. If that number is increasing over time, something is likely going wrong in your manufacturing process. But if that figure goes down, you’re likely doing something right.

Within the realm of accounting — particularly your accounts payable (A/P) department — there are a plethora of statistics that you should be actively considering throughout your payment and associated decision-making processes. It’s a pretty typical part of accounts payable best practices to encourage you to use KPIs for your accounts payable department to constantly drive efficiency improvements within your A/P efforts.

13 KPIs for accounts payable that you should be tracking

1. Accounts payable turnover ratio

Also known as the creditor’s turnover ratio or payables turnover, the accounts payable ratio metric tracks the average number of times a company pays its creditors over a given accounting period. In particular, the accounts payable turnover ratio grants insight — particularly to outside creditors — into the short-term liquidity of an organization.

A high ratio indicates that a company is paying its creditors promptly, while a lower rate indicates cash flow problems or other financial uncertainty. Of course, looking into the “Why?” behind any given figure is always useful since a low rate might also result from favorable credit terms that allow a business to make payments less frequently without penalty.

Accounts payable turnover ratio formula:

A/P turnover = Net credit purchases ÷ Average A/P

2. Average accounts payable

It’s often useful to know how much debt your business is carrying at any given moment and on average. By mapping out this total by month, quarter, and year, you can better detect financial patterns and gauge the relative health of your operations.

Average accounts payable formula:

Average A/P = (Beginning A/P for a given period + Ending A/P) ÷ 2

3. Cost per invoice

The average amount of money spent to process a given invoice is a useful metric to track the overall efficiency of your accounts payable. But to first determine this figure, you’ll need to identify the total cost of each factor in your A/P processes — labor costs, infrastructure costs, payment processing costs (or shipping costs if you use paper checks).

Cost per invoice formula:

Cost per invoice = Total A/P costs ÷ Number of invoices

4. Days payable outstanding (DPO)

DPO tracks the days your accounts payable processes require you to pay back a supplier or vendor after receiving a good or service. Of course, this average will fluctuate if you are actively adjusting payment schedules to control your overall cash flow.

Further, if your DPO is too high, you might also need to monitor your late payment rate to ensure that you’re paying suppliers on time. Conversely, a low DPO could indicate that you’re not taking full advantage of your credit terms, unnecessarily restricting cash flow.

AP days payable outstanding formula:

DPO = (Average A/P x Number of days in the accounting period) ÷ Cost of goods sold

5. Early discount capture rate

Sometimes, delaying payments to prioritize cash flow is a smart — even critical — decision. However, when making this choice, it’s wise also to consider what is being given up for this financial flexibility. Nothing is free, and by missing out on early payment discounts, your business could be artificially inflating overall costs and undermining the advantages that a large cash reserve can offer.

Early discount capture rate formula:

Early discount capture rate = Number of discounts used ÷ Number of discounts offered

6. Error rate

Overpaying or underpaying your bills is never advisable. And either mistake runs the risk of damaging your vendor relationships and undermining your internal cashflow management efforts. Of course, mistakes happen, so you’ll never be able to reduce this rate to zero, but the lower the figure, the lower the likelihood that your company is making erroneous, inaccurate, or duplicate payments.

Error rate formula:

Error rate = Number of incorrect payments ÷ Number of invoices paid

7. Exception rate

Unlike an error rate, an exception rate instead focuses on identifying problematic invoices requiring additional review. These issues might be flagged during a purchase order (PO) to invoice matching efforts. Or there could be a timing issue, such as receiving a bill for a delivery or service that hasn’t been completed yet. Ideally, you’ll want to track this rate for each given supplier that you work with regularly. And if you notice an increase or heightened level of issues, let’s have a frank conversation or begin looking for an alternate vendor.

Exception rate formula:

Exception rate = Number of problematic invoices ÷ Number of invoices received

8. Invoices processed per employee

We are by no means advocating micromanaging your accounts payable workforce. But keeping track of this KPI offers valuable insight into employee and process efficiency. For example, by examining this metric at a more granular level (e.g., the total number of invoices processed per employee per day), you can more readily identify which specific vendor invoices cause the most work for your personnel. Similarly, you can better isolate when and what outside factors are drawing the attention of the responsible A/P staff away from invoice processing.

Determined by:

Invoices processed per employee = Number of invoices processed ÷ Number of A/P staff

9. Late payment rate

You should not only track your successes but your failures as well. Admittedly, sometimes it makes more sense to hold onto your cash reserves than to meet a payment deadline. But even in those cases, there is a clear indication that something went wrong, and you need to take measures to prevent it from happening again in the future.

Late payment rate formula:

Late payment rate = Number of late payments ÷ Number of total payments

10. Per-vendor spending

It might be difficult to determine which relationships need to be prioritized depending on how many suppliers and vendors you’re working with. But by actively monitoring how much you spend with any given company, you’ll be equipped to more easily identify which suppliers are most critical to your day-to-day operations.

Determined by:

Adding up all of the paid invoices for a given vendor during a set time period

11. Ratio of electronic vs. paper invoices

Ideally, you’ll transition your business from manual, paper-based processes to more digital operations. And routinely, an e-invoicing or electronic data capture strategy will save you a healthy amount of time and effort—all while cutting back on the risk of manual transcription or calculation errors. As you make a push for this transition, tracking the adoption rate among your suppliers and vendors will help you determine how far your efforts have gone.

Determined by:

Electronic/paper invoice ratio = Number of electronic invoices ÷ Total number of invoices

12. Time per invoice

Similar to tracking average costs, by tracking the time required to process the average invoice, you’ll have another general diagnostic available regarding the overall efficiency of your efforts. If your operations are trending longer, you likely have a process bottleneck occurring that is pushing back payment windows and potentially undermining supplier confidence.

AP time per invoice formula:

Time per invoice = Time spent processing invoices ÷ Number of invoices processed

13. Touchless invoice rate

Assuming you’ve begun the automation journey when it comes to your accounts payable, you’ll likely want to benchmark the overall success of these efforts. By tracking how many individual invoices you can process straight-through—without human interaction—you can better determine what effect your current automation efforts are having and how they might be improved.

Touchless invoice rate formula:

Touchless invoice rate = Number of invoices processed straight through ÷ Number of invoices processed

How can automation with Invoiced help you achieve your KPI targets?

Automation can boost the performance tracked by these metrics as well as streamline, simplify, and accelerate your business’s overall accounts payable management efforts. Even a small shift towards automation can help your business drive greater efficiency and:

• Accelerate cycle times: Reduce processing delays and avoid late payments with automated workflows and invoice verification
• Limit fraud: As automation promotes straight-through invoice processing, you limit the number of internal staff that have access to your critical data
• Lower costs: Drive new efficiencies and empower staff to process more invoices with less direct labor
• Reduce errors: With a digital invoicing strategy, you can limit — if not eliminate — the number of touches required, driving down the opportunity for human error
• Simplify auditing: Typically, automation tools include intuitive reporting functions, and at every step of the process, these metrics are linked with corresponding metadata, which makes it easier to vet and justify operations
• Strengthen cash flow management: as you limit the time and resources needed to process your outgoing payments, you can focus on strategic tasks that leverage your gathered metrics for smarter decision-making