Choosing the right KPIs for your accounts payables can make or break your financial health.
Why does it matter?
The right KPIs help you track efficiency, reduce errors, and improve cash flow.
This guide breaks down research-backed methods to identify, select, and track KPIs for accounts payables.
Let’s dive in.
How to Choose KPIs for Your Accounts Payables: Step-by-Step Guide
TL;DR
- Define your goals to find the right KPIs.
- Review current processes and choose relevant KPIs.
- Set benchmarks and implement tracking systems.
Step 1: Identify Your Goals
First, you need to know what you want to achieve with your accounts payable. Your goals can vary depending on your company’s needs. Some common goals include improving payment efficiency, reducing errors, and managing cash flow.
Define Goals Clearly
Write down specific goals. For example:
- "Reduce invoice processing time by 20%."
- "Improve payment accuracy rate to 99%." Make sure these goals are clear and measurable. This will guide you in choosing the right KPIs.
Step 2: Analyze Current Processes
Look at your current accounts payable processes. This will help you identify where things aren't working well and what needs improvement.
Conduct a Process Review
- Map out existing workflows.
- Identify bottlenecks or frequent errors.
- Document pain points and inefficiencies.
Collect Data
Gather data on how your current processes are performing. This could include:
- Average time to process an invoice.
- Rate of payment errors.
- Percentage of electronic invoices.
Step 3: Select Relevant KPIs
Choose KPIs that match your goals. The right KPIs will help you measure how well you are meeting your goals.
Examples of KPIs
Here are some KPIs that are often used in accounts payable:
- Days Payable Outstanding (DPO): Measures the average number of days your company takes to pay its invoices.
- Invoice Processing Time: The time it takes from receiving an invoice to making a payment.
- Payment Accuracy Rate: The percentage of payments made without errors.
- Electronic Invoice Percentage: The proportion of invoices received electronically.
- Supplier Payment Accuracy: The percentage of payments that match the supplier's invoice.
- Late Payment Percentage: The proportion of payments made after the due date.
- Payment Error Rate: The percentage of payments that contain errors.
AP software like Centime offers real-time visibility into your financial health by automating the tracking of key performance indicators (KPIs) such as Days Payable Outstanding (DPO) and Payment Accuracy Rate. These tools make it easier to monitor performance and optimize your accounts payable process.
Step 4: Set Benchmarks
Once you have chosen your KPIs, you need to set benchmarks. Benchmarks are targets or standards that you want to reach.
Establish Benchmarks
- Use industry standards for guidance.
- Look at historical data from your company.
- Set realistic and achievable targets.
Examples
For instance:
- Reduce DPO to 30 days.
- Achieve 95% payment accuracy rate.
- Process invoices in 5 days on average.
Step 5: Implement Tracking Systems
To measure your KPIs, you need a system to track them. Choose software or tools that can help you monitor your KPIs in real time. AP solutions like Centime feature integrated KPI dashboards, offering real-time insights to help you track metrics such as Payment Accuracy Rate and Invoice Processing Time. These tools automate manual processes, ensuring greater accuracy and efficiency.
Choose the Right Tools
- Look for accounts payable software with KPI tracking features.
- Ensure the tool integrates with your existing systems.
- Consider user-friendliness and ease of implementation.
Examples of Tools
Some popular accounts payable software includes:
- SAP Ariba
- Oracle Payables
- QuickBooks
Choosing the right KPIs for your accounts payable involves understanding your goals, analyzing current processes, selecting relevant KPIs, setting benchmarks, implementing tracking systems, and regularly reviewing performance. By following these steps, you can make data-driven decisions to improve your accounts payable processes.
Key Performance Indicators for Accounts Payables: Top Metrics to Monitor
- Understand critical metrics like DPO and Invoice Processing Time.
- Learn how to measure and optimize payment accuracy.
- Grasp the impact of electronic invoicing and late payments.
Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) shows how long a company takes to pay its invoices. It is a key metric for managing cash flow and relationships with suppliers. A high DPO means the company is taking longer to pay its bills, which can free up cash for other uses. However, taking too long to pay can harm relationships with suppliers.
To calculate DPO, use this formula: [ \text{DPO} = \left( \frac{\text{Accounts Payable}}{\text{Cost of Goods Sold}} \right) \times \text{Number of Days} ]
Benefits and Drawbacks
- Benefits: Improves cash flow, allows for better liquidity management.
- Drawbacks: Risk of strained supplier relationships, potential impact on credit terms.
For deeper insights, consider reading "Financial Intelligence for Entrepreneurs" by Karen Berman. It provides a comprehensive guide on financial metrics, including DPO.
Invoice Processing Time
Invoice Processing Time measures the duration from receiving an invoice to making the payment. This metric is vital for identifying inefficiencies in the accounts payable process. Short processing times usually indicate a streamlined process, while longer times can point to bottlenecks.
Improving Efficiency
- Automation: Implementing electronic invoicing can significantly reduce processing times. AP software like Centime streamlines invoice processing by automating workflows and integrating electronic invoicing, helping businesses reduce their Invoice Processing Time and eliminate bottlenecks.
- Training: Regular training for staff on best practices can minimize errors and delays.
"Lean Six Sigma for Service" by Michael L. George can offer strategies to streamline your invoice processing time. The book provides detailed methodologies for improving service processes.
Payment Accuracy Rate
Payment Accuracy Rate measures the percentage of payments made without errors. High accuracy is crucial for maintaining supplier trust and reducing rework. Errors in payments can lead to financial discrepancies and strained relationships with suppliers.
Strategies for Improvement
- Regular Audits: Conducting regular audits can help identify and correct payment errors.
- Software Solutions: Investing in robust accounts payable software can automate checks and balances, reducing human error. AP software like Centime helps you track Payment Error Rate and identify discrepancies quickly, reducing the likelihood of manual errors and ensuring that payments are both accurate and timely.
For more on this, "The Essentials of Risk Management" by Michel Crouhy is a great resource. It covers how to manage and mitigate risks, including financial inaccuracies.
Payment Error Rate
Payment Error Rate evaluates how often payment errors occur, such as duplicate invoices or incorrect amounts. Reducing these errors can lead to significant cost savings and improved efficiency.
Reducing Errors
- Automation: Automated systems can flag potential errors before payments are processed.
- Staff Training: Continuous training programs for staff can help reduce the frequency of errors.
"Total Quality Management" by John S. Oakland provides strategies for reducing errors and improving overall quality in business processes.
How to Measure Success in Accounts Payable
Success in accounts payable can be measured by evaluating the efficiency and accuracy of the process. Key success indicators include low DPO, high payment accuracy, and minimal late payments. Regularly monitoring these KPIs can help identify areas for improvement and ensure the accounts payable process supports overall business goals.
Tools for Monitoring
- Dashboards: Use dashboards to visualize KPIs in real-time.
- Reports: Generate regular reports to track performance over time.
"Performance Dashboards: Measuring, Monitoring, and Managing Your Business" by Wayne W. Eckerson is a helpful resource for learning how to create and use dashboards effectively.
Metrics for Evaluating Accounts Payable Efficiency
- Measure cost per processed invoice.
- Track early-payment discount captures.
- Monitor supplier lead times.
Discount Capture Rate
The discount capture rate measures the percentage of early-payment discounts your company captures. These discounts are often offered by suppliers to encourage early payment and can lead to substantial cost savings.
Importance of Discount Capture Rate
Capturing early-payment discounts can directly impact your company's bottom line. A high discount capture rate indicates that your AP department is efficient and has good cash flow management. On the other hand, missing these discounts suggests inefficiencies and potential cash flow issues.
Increasing Discount Capture Rate
To increase your discount capture rate, ensure that invoices are processed promptly. Automation can help by flagging invoices with early-payment discounts and prioritizing them. Regular training for AP staff on the importance of these discounts can also be beneficial. For further reading, "Managing the Accounts Payable Process" by Steven M. Bragg offers in-depth strategies.
Supplier Lead Time
Supplier lead time tracks the duration from placing an order to receiving the goods. This metric is crucial for inventory management and planning.
Factors Affecting Supplier Lead Time
Several factors can affect supplier lead time, including the supplier's location, their production schedule, and the shipping method used. Delays in any of these areas can extend lead time and disrupt your supply chain.
Improving Supplier Lead Time
To improve supplier lead time, consider working with suppliers closer to your location or those with more reliable delivery schedules. Establishing strong relationships with suppliers can also lead to better communication and quicker resolutions to any issues. For a deeper dive into these strategies, "Supply Chain Management: Strategy, Planning, and Operation" by Sunil Chopra is highly recommended.
Invoice Processing Time
Invoice processing time measures the average time taken from receiving an invoice to completing the payment. This metric is critical for cash flow management and maintaining good supplier relationships.
Steps to Reduce Invoice Processing Time
Reducing invoice processing time often involves automating the AP process. Implementing an electronic invoicing system can speed up the approval process. Regularly reviewing and optimizing workflows can also help identify and eliminate bottlenecks. "Accounts Payable in the 21st Century" by Christine H. Doxey covers modern strategies for improving invoice processing time.
Payment Error Rate
Payment error rate measures the percentage of invoices that have errors. High error rates can lead to delays, additional costs, and strained supplier relationships.
Identifying Common Payment Errors
Common payment errors include duplicate payments, incorrect amounts, and payments to the wrong supplier. These errors often result from manual data entry and complex approval processes.
Reducing Payment Errors
To reduce payment errors, consider implementing automated matching systems that match invoices with purchase orders and receipts. Regular audits and staff training can also help identify and correct recurring issues. For more on reducing payment errors, "The New Accounts Payable Toolkit" by Christine H. Doxey offers practical advice and tools.
Best Practices for Selecting Accounts Payable KPIs
- Align KPIs with business goals.
- Involve key stakeholders.
- Use technology for real-time tracking.
Align KPIs with Business Objectives
Understand Business Goals
First, know your company's broader goals. Are you aiming to reduce costs? Improve cash flow? Your KPIs should support these goals. Make sure your accounts payable (AP) KPIs are directly linked to these objectives. For instance, tracking the "Cost to Process Each Invoice" can help in reducing costs.
Review and Adjust Regularly
Business goals can change. Your KPIs should too. Set a schedule to review and adjust them. This ensures they remain relevant. A good practice is to review KPIs quarterly. This keeps them aligned with evolving business needs. Regular reviews can help in identifying areas for improvement, such as reducing the "Average Time Per Invoice Processed".
Involve Key Stakeholders
Gather Input from Departments
Include input from finance, procurement, and other relevant teams. Each department has different insights. This helps create well-rounded KPIs. Reach out to department heads and ask for their input. For example, the procurement team can provide insights into "Supplier Discounts Captured".
Ensure Understanding and Support
Make sure everyone understands the chosen KPIs. Hold a meeting to explain why these KPIs matter. This builds support across departments. When everyone is on the same page, it’s easier to achieve your goals. Ensuring understanding can also help in reducing "Payment Errors".
Use Technology and Automation
Implement Software Solutions
Use software for real-time tracking of KPIs. This provides up-to-date information. It’s crucial for making informed decisions. Popular solutions include SAP, Oracle, and QuickBooks. Automation tools like BILL Accounts Payable can help in tracking KPIs efficiently.
Automate Manual Processes
Automation reduces errors and saves time. For example, use automated invoice processing. This speeds up the workflow and ensures accuracy. Consider tools like AP automation software to handle repetitive tasks. Automation can also help in improving the "Ratio of Electronic Invoices".
Focus on Quality Over Quantity
Choose Relevant KPIs
Select KPIs that truly matter. Avoid cluttering your dashboard with too many metrics. Focus on 5-7 key KPIs. This keeps your team focused on what’s important. For instance, focusing on "Days Payable Outstanding (DPO)" can provide valuable insights into cash flow management.
Measure What You Can Act On
Only measure what you can act on. If you can’t change it, don’t track it. Each KPI should lead to actionable insights. This ensures your efforts are impactful. For example, tracking "Invoice Processing Time" can help in identifying bottlenecks and improving efficiency.
Benchmark Against Industry Standards
Research Industry Averages
Know what’s standard in your industry. This helps set realistic targets. Use industry reports and surveys. Websites like APQC and Hackett Group offer valuable benchmarks. For example, understanding the average "Cost Per Invoice Processed" in your industry can help in setting targets.
Compare and Adapt
Compare your performance against these benchmarks. Adapt your KPIs if you're below average. If you're above average, set higher targets. This keeps your team striving for excellence. Regular comparisons can help in improving "Accounts Payable Turnover Ratio".
Always remember, the right KPIs can drive significant improvements in your accounts payable process. Keeping these best practices in mind will help you select KPIs that are aligned, supported, and effective.
Accounts Payable KPI Benchmarks: Industry Standards
- Understand industry benchmarks to gauge performance.
- Set realistic targets based on these benchmarks.
- Focus on continuous improvement for efficiency.
Understanding Industry Benchmarks
Industry benchmarks are essential for understanding how your accounts payable (AP) department measures up against others. Benchmarks provide a reference point. They can show whether your processes are efficient or need improvement.
Common KPIs
Common KPIs include Days Payable Outstanding (DPO), cost per invoice, and invoice processing time. DPO measures the average time a company takes to pay its invoices. A lower DPO indicates quicker payments, which can improve supplier relationships. Cost per invoice includes all expenses related to invoice processing, such as labor and software costs. Invoice processing time measures how long it takes from receiving an invoice to making the payment. These KPIs are standard across industries and provide a solid starting point for benchmarking.
Industry Standards
Different industries have varying standards. For instance, manufacturing companies might have different DPO averages compared to retail. According to the APQC's Open Standards Benchmarking, the median DPO for manufacturing is around 45 days, while for retail, it's closer to 30 days. Knowing these standards helps tailor your KPIs.
Setting Realistic Targets
Using industry benchmarks helps set achievable targets. It's not enough to know the numbers. You must adjust them to fit your business context.
Tailoring Benchmarks
If your industry standard for DPO is 45 days but your current DPO is 60 days, setting a target of 45 days might be unrealistic initially. Instead, aim for incremental improvement, such as 55 days. This makes the target more achievable and maintains employee morale.
Business Context
Consider your business size, structure, and market conditions. A small business might not have the resources to match the DPO of larger companies. Adjust targets to reflect what’s feasible for your business.
Continuous Improvement
Setting targets is just the start. Regular review and adjustments are crucial.
Regular Reviews
Track your KPIs monthly or quarterly. This helps identify trends and areas for improvement. Are you consistently missing targets? Why? Regular reviews can answer these questions and guide your strategy.
Process Optimization
Use the data from your reviews to make changes. If invoice processing time is high, look for bottlenecks. Is the approval process too long? Are invoices often inaccurate? Identifying these issues can lead to significant improvements.
Ready to Optimize Your Accounts Payables?
Choosing the right KPIs for your accounts payable is crucial. We've covered setting goals, analyzing current processes, selecting KPIs, and implementing tracking systems.
This information helps you manage cash flow, improve payment efficiency, and maintain strong supplier relationships.
Now, review your accounts payable goals and processes. Select the KPIs that align best with your objectives. Implement tracking systems to monitor your progress.
Are your current KPIs driving the results you need? Evaluate and adjust as necessary.
Take a tour of Centime today and see how we can help drive AP results.
