Successful CFOs value the importance of driving corporate performance. Key Performance Indicators (KPIs) are a widely accepted and proven method of gaining insight and even predictability across an organisation. They are often deployed at the individual and departmental levels.
So can an AP Team benefit from KPIs? If so, which ones do top finance professionals use and why?
In this white paper, we break down the top 5 KPIs leading AP teams are using to inform strategic decisions and why they credit them with unlocking growth.
The winning formula
At Quadient AP, we have the benefit of a brilliant customer advisory board composed primarily of finance professionals. They occupy the roles from CFO of large enterprises to AP clerk at up and coming SMBs. Our customer advisory board has identified a select number of KPIs that they found had a positive impact on their AP department.
They are:
#1 Invoice processing time
#2 Cost to process a single invoice
#3 Invoice exception rate
#4 Invoice to PO rate
#5 Budget variance
By paying close attention to these 5 KPIs, your AP team should be better equipped to foresee roadblocks and AP bottlenecks. Our customer advisory board has also enjoyed other benefits from putting in place these KPIs, including:
Increased transparency: Understand where time, resources, and assets are being spent throughout your AP processes
Reduced costs: Eliminate manual tasks such as data entry.
Greater accountability: Accurately measure AP performance, identify bottlenecks, and track progress towards departmental goals.
Breaking down the 5 KPIS for AP Team
Here’s a quick breakdown of each KPI in account payables:
Invoice processing time
The time it takes to process an invoice can help identify process inefficiencies across AP processes, such as complicated routing workflows, approval bottlenecks and stretched AP resources.
Cost to process a single invoice
Tracking the cost per invoice processed is their first glimpse into their accounting team’s overall efficiency. By keeping a close eye on this metric, they have been able to identify cost savings and scale their processes.
Invoice exception rate
On average, AP staff spend almost a quarter of their day managing and correcting invoice exceptions.1 The repetitive nature of this task means it’s easy for mistakes to happen and go unnoticed so tracking invoice exception rates can highlight issues.
Invoice to PO rate
Uncategorised invoices or invoices that don’t match a PO slow down the approval process. It may also mean that unapproved purchases are being made.
Budget variance
We all know that the proposed budget does not always match the actual numbers. By looking at the budget versus actuals on a regular basis, they have a clear picture of their current position compared to their financial goals for the month, year, or quarter.
“We have KPIs to track timing around how soon our invoices are coded by the property managers, how soon are they approved and exported into the system by accounting, and how soon are they paid by accounting.” – Peter Best, President & CEO/Broker, Magnum York Property Management Ltd.
KPI 1: Invoice processing time
Longer invoice processing times often lead to late payment fees which can strain relationships with vendors. It can also lead to delays in closing month-end.
How do you calculate invoice processing time?
In a spreadsheet, document management, or workflow system,record the date and time each invoice is received. After the approval cycle is complete, document the date and time the invoice was input into the financial system. Subtract the two dates to find the number of days. Take the average across all invoices over a period of time eg, monthly or quarterly.
What is the benchmark?
Processing speeds will vary based on your company’s size and industry. As a general guideline, it can take up to 12 days for organisations to approve invoices.2
How does automation cut down invoice processing time?
64% of organisations named quicker invoice approvals as the top benefit of AP automation.3 With a fully automated AP process, companies can reduce invoice processing to 5 days or less.
You can curate an approval channel that best suits the requirements of your company, for example setting up customised routing based on budget, or creating approval subsets where an invoice is marked approved after one of the two approvers have signed it off.
Quadient AP ensures approvers are notified on time and sends reminders for outstanding approvals. They can easily review invoices through their browser or mobile app, and can leave notes on the invoice before approval.
Radisson Hotels were spending 3 hours per day on AP related tasks. With part of their team working remotely, they urgently needed to find a quicker way of getting invoices through their approval process.
“Before Quadient AP, our AP clerk was spending 30-40% of their time doing data entry and keying in invoices. The whole process was time-consuming and Quadient AP has eliminated a lot of that. We’re saving at least 50% of our time in accounts payable.” - Dean Olevson, Director of Finance, Radisson Blu Minneapolis Downtown
KPI 2: Cost to process a single invoice
How do you calculate the cost to process a single invoice?
Take your total accounts payable costs and divide by the number of invoices processed.
When looking at total accounts payable costs, we suggest considering these factors:
Labor costs: The time each member of your team spends on AP processes such as data entry, approval management, scanning and filing, purchase order matching, and payments.
Infrastructure costs: The physical tools and equipment you need to process an invoice. This can include AP software, hardware, and any other accounting tools or platforms you use.
Office supplies: The cost of paper, envelopes, and printing. Postage: With 89% of small and medium sized businesses still receiving paper invoices, the cost of postage needs to be factored in.4
Document storage: The cost of digitally or physically storing AP documents, including physical space and equipment such as filing cabinets.
What does the research say?
The average cost for mid-market organisations to process a single invoice manually is GBP £15.5 However, this cost can increase with extra time spent chasing approvals, the cost of human errors which can lead to delays, or unnecessary time spent on reconciliation.
How can automation reduce the cost of invoice processing?
Processing invoices manually can be expensive when factoring in hidden costs such as data entry, routing, and follow-ups. Quadient AP Automation’s SmartCapture technology helps AP teams save time and reduce data entry errors by using AI to capture invoice details, including line items, header information, and the total amount.
By reducing the data entry time and streamlining approvals, automation decreases the cost of processing to GBP £3 - 5 per invoice. For companies processing 500 invoices per month, that is an annual savings of at least GBP £60,000.
Athabasca Catering provides meals and janitorial services for construction and mining sites.
“Before, everything was on paper: all our invoices, and our check stubs and payment advice slips were stored in filing cabinets.” - Robert Cremers, Director of Finance and Administration, Athabasca Catering
Moving to Quadient AP has reduced Athabasca’s spend on paper by about 75%. They have also slashed their spend on printing and copying from £400 per month to £100 per quarter. By doing so, they’ve reduced their overall cost of invoice processing.
KPI 3: Invoice exception rate
How do you calculate invoice exception rate?
The best way is to keep a record of each exception as it happens. To calculate the invoice exception rate, take the number of exceptions per month, divide by the total invoices processed per month, and times by 100.
% of Exceptions = Number of exceptions per month ÷ Total invoices processed per month x 100
More often than not, exceptions are caused by:
- Discrepancies in PO and invoice data such as wrong supplier codes, incorrect dates or typos in the supplier zip codes
- Missing or incorrect POs
- Erroneous or duplicate invoices
What do the numbers say?
Based on findings from an Ardent Partners study, the market average for invoice exception rates is 24.6%.7 However, best-performing AP teams have halved this to 10.6%.6
Reducing invoice exceptions with automation
Reducing or eliminating exceptions will increase efficiency, reduce the stress of finding and fixing errors,cut overall costs, and keep your vendors happy. Automation software can directly reduce manual-based exception rates as it works like an extra pair of eyes – or an extra hundred – helping to quickly flag duplicate invoices and payments.
Quadient AP AI-powered data capture offers 99% accuracy. Approvers can leave notes for clarification on the invoice before approval. This can help to reduce errors which can happen such as keying errors
PETA was previously using SharePoint to process invoices. It was a challenging process - if managers declined an invoice, the AP team would have to go in, rename the file, and resubmit.
With Quadient AP, PETA’s managers can now easily manage approvals online, leaving notes in the software and resolving issues without exiting the platform.
“Managers and directors would decline invoices for something really minor. The process to re-submit the invoice was cumbersome because SharePoint would only accept the same file one time.” - Kelly Fidler, VP of Finance at PETA Foundation
KPI 4: Invoice to PO rate
How do you calculate the invoice to PO rate?
Set up a spreadsheet to record if your invoices are linked to a PO or not. Alternatively create a custom field in your financial system to record this. After a period of time (one month or three months depending on your invoice volume), review the spreadsheet and calculate how many invoices were linked to a PO.
How do other AP teams perform?
56.3% is the market average for the percentage of invoices linked to a PO, while “best-in-class” AP teams have an average of 80.2%.8
Using automation to improve the invoice to PO rate
AP automation eliminates double data entry as it automatically matches purchase orders to invoices so you don’t have to enter the information twice. You also don’t have to worry about uncategorised invoices.
It also enables better spend management by creating purchase requisitions directly in Quadient AP and automating the approval process in one place.
Christian School District was spending a significant amount of time tracking down POs. By eliminating paper, the AP team instantly gained control over their processes.
“Data entry is now being completed on the purchase order side by the purchase requisitioner. Follow up calls regarding purchase order approvals have almost been eliminated. Staff can just log in to the system and see the workflow.” - Cynthia Boaz, CPA, Business Director at Christian School District
KPI 5: Budget variance
The bottom line
We all know that the proposed budget does not always match the actual numbers. That’s where a budget variance analysis comes in. By looking at your budget versus your actuals on a regular basis, you’ll have a clear picture of your current position compared to your financial goals for the month, year, or quarter.
Reviewing the differences between planned vs. actual spend help to:
- Adjust your budget for the next year
- Identify opportunities to reduce expenses or increase income
- Determine if you need to seek additional financing
How do you calculate budget variance?
To calculate your budget variance, subtract the actual spend from the planned budget for each line item over the given time period. You can set up a spreadsheet to do this or use your financial system.
Budget variance = Planned spend - Actual spend
During the global pandemic, many AP teams increased their forecasting and variance analysis from quarterly to every week. The right cadence for your company will vary based on your needs, industry and market environment.
“Invoice processing time is an important KPI for CFOs to measure. The speed of how fast things move in a remote or a hybrid environment is important to track. In accounts payable it comes down to making sure that everything is flowing smoothly. And it has been flowing quite smoothly for us during this time with our automation software.” – David Gaskin, CFO, Independent Contractors and Businesses Association of BC Management Ltd.
What do the numbers say?
Budget variance benchmarks vary by company and by industry. A good rule of thumb is to consider anything over 10% as very volatile. Ideally, the variance will be as low as possible.
Accurate budgeting and forecasting with automation
Automation helps finance teams analyse spend before and as it happens, rather than weeks after the fact.
AP automation can help improve employee compliance with templated POs. 61% of companies that have automated their PO process reported improved procurement visibility and transparency.9
A customised purchasing process helps control who is able to buy what and how much money they can spend - with set spending limits based on department, project, vendor, department, or manager.
For Brickell Biotech, the increased visibility and the ability to plan and forecast has been a game changer.
“The biggest advantage is having it all in one place and being able to generate reports. We can clearly see if a purchase order has been approved. It removes the risk of committing to something that we shouldn’t have.” - Jose Breton, Chief Accounting Officer at Brickell Biotech
Download the full whitepaper for more information
