Nowadays all businesses use Key performance Indicators (KPI’s) to measure the performance of internal -and external processes and thereby operational success. In the Accounts Payable unit of an organization this should not be any different.
‘If it cannot be measured, it cannot be managed’. Establishing and tracking KPI’s in the Accounts Payable department enables an organization to identify weak processes and operational inefficiencies. A KPI should be specific, quantifiable, time-bound and should be agreed upon by all project members. KPI’s need to be measured on a regular basis to ensure that the Accounts Payable process matches with the goals set by the organization and to identify areas of improvement.
In general, but also in specific cases such as mergers and acquisitions, organizational restructuring and new technology implementations (e.g. Robotic Process Automation, Artificial Intelligence, and Machine Learning) it is imperative to make use of Accounts Payable KPI’s that enable organizations to measure the impact of changes on the Accounts Payable process.
In the last couple of months, we have requested our clients to share the KPI’s that are most important to them in the Accounts Payable department. From the reactions that we received, we have compiled a list of KPI’s that secure the most meaning from available data, which can be used to strengthen the Accounts Payable process.
- The cost per processed invoice
The cost per processed invoice is the cost of processing one invoice in the (entire) organization. This cost can vary depending on the type of business as well as the factors that are taken into account. Important to understand is the fact that the cost per processed invoice may appear to be low, just because the hidden costs that negatively impact the profit have not been taken into account.
One example related to hidden costs is an organization that has a high level of manual invoice processing. This type of organization needs to take into account labour- and operational costs, the risk of human errors, and lengthy processes. In addition, the cost per processed invoice needs to take into account the time spent by employees in the Accounts Payable process. Several other contributors to the cost per processed invoice are systems and equipment, overpayment, errors, lost supplier discounts as well as audit costs.
A second example encompasses invoices that are sent by suppliers, but do not meet the requirements set by the client. This inefficient process results in a chain reaction that increases the number of activities that have to be conducted. Consequently, the costs of processing an invoice will increase.
Over the past 10 to 15 years, the processing costs of an invoice have decreased significantly. Whereas the costs of processing an invoice in the Accounts Payable department ranged between $20,00 and $30,00, some organizations are now able to process an invoice for $10,00, and top performing organizations for $5,00, according to the results of a survey published in 2018.
Accounts Payable departments can reduce the manual handling of invoices by implementing and utilizing paperless Accounts Payable automation software.
- The lead time per processed invoice
The cost of processing invoices increases when an organization processes invoices slowly. The lead time per processed invoice in the Accounts Payable department tracks the total time that it takes for an invoice to be received, processed, finalized, and made ready for payment in the financial ERP system. Processing speeds vary based on the size as well as the industry an organization works in.
If a specific Accounts Payable automation solution manages the total process, starting from receiving the receipt to posting in the ERP, this metric can easily be tracked throughout the system. However, if process steps happen outside of the Accounts Payable automation solution, it might get tricky, but still an exceptional way to measure the overall efficiency of processing invoices in the Accounts Payable.
The key to achieve a reduction in the lead time per processed invoice is automation. By mapping the Accounts Payable process, removing manual process steps and implementing an automation solution that takes on the workload in the back-end of the organization, organizations are able to save valuable time and ensure that the resources in the Accounts Payable can focus on value-adding activities.
- The number of invoices processed per employee per day
One of the KPI’s that should not be neglected is the number of invoices that an Accounts Payable employee processes on a daily basis. This KPI provides key insights into the strengths and opportunities in the Accounts Payable department.
There are a significant number of negative downstream effects in relation to low performers in this KPI. For instance, until an invoice is processed, approved and filed into an ERP system, other departments are not able to assess the development and/or stage of the process the invoice is in.
This lack of insights and therefore visibility leads to organization-wide problems such as missed supplier discounts, late payment fees, mismanaged cash flows, and overall poor relationships with suppliers.
Optimizing this KPI is therefore a must.
- Percentage of invoice exceptions
Invoice exceptions are a plague for Accounts Payable departments and therefore organizations in general. The result of invoice exceptions is twofold. First of all, invoice exceptions cause a reduction in the processing efficiency, having to discuss and agree on the invoice with peers and, in the worst case, creating disputes with purchasers and suppliers. Secondly, invoice exceptions drag down employee morale, especially when the exceptions have to do with structural problems that are related to the workflow. A few examples of invoice exceptions are the following: discrepancies in the purchase order (e.g. wrong supplier codes, receipt dates or zip codes), incorrect, duplicate and missing purchase orders and non-purchase orders.
The bottlenecks that are a result of invoice exceptions are able to bring entire Accounts Payable departments to halt. Being able to reduce the impact of discrepancies requires organizations to track and control invoice exception rates.