Key performance indicators (KPIs) are a widely accepted and proven means of driving performance and gaining insight into an organization. Can accounts payable (AP) teams benefit from KPIs? If so, what are the best KPIs for accounts payable departments and why? This article will cover the top 5 accounts payable KPI examples to help inform strategic decisions and improve operational performance.

Key performance indicators (KPIs) are quantifiable metrics demonstrating how effectively a company achieves its key objectives. KPIs are used to track progress and assess the success of a company, department, or specific initiative. KPIs typically align with the organization's strategic goals and objectives and can be financial and non-financial measures. KPIs provide valuable insights into an organization or department's overall health and can help identify areas for improvement.

Accounting departments are often rife with inefficiencies and manual processes due to their reliance on paper and spreadsheets. This department is sometimes overlooked when it comes to tracking and enhancing performance because of its heavy workload and time constraints. 

In order to integrate the accounts payable department with the organization's overall objectives, KPIs should be tracked to identify roadblocks and bottlenecks. Doing so can provide several advantages, including:

• The increased transparency enables you to better understand how time, resources, and assets are allocated in your AP processes.
• Eliminating manual tasks, such as data entry, reduces accounts payable costs and the risk of errors.
• Accurately measuring AP performance provides greater accountability and helps you to identify bottlenecks and track progress toward departmental goals.

1. Invoice processing time

Inefficient AP processes, such as complicated routing workflows, backlogged approval processes, and overstretched AP resources, can be identified by measuring the average time it takes to process a single invoice.

Longer invoice processing times can result in late payment fees, which can strain supplier relationships. They can also result in missed opportunities for early payment discounts and lead to delays in month-end closing.

How to calculate invoice processing time: Record the date and time each invoice is received. Once the approval cycle is complete, document the date and time the invoice was entered into the financial system. Subtract the two dates to find the total number of days. Then take the average across all invoices over a specific period, such as monthly or quarterly.

Pro tip: This is automatically done using AP Automation software. Businesses can reduce invoice processing to 5 days or less with a fully automated AP process.

2. Cost to process a single invoice 

When hidden costs like data entry, routing, and follow-ups are considered, manually processing invoices can be expensive. The average cost to manually process an invoice can be as high as $15. And this cost can increase due to additional time spent chasing approvals, human errors resulting in delays, or unnecessary time spent on reconciliation.

Tracking the cost per invoice processed is a good indicator of an AP team’s overall efficiency. Organizations can identify cost savings and scale their processes by closely monitoring this metric.

How to calculate the processing cost per invoice: take the amount it costs to process an invoice – including labor, infrastructure, office supplies, and document storage – and divide it by the number of invoices over a given period or utilize our AP ROI calculator.

3. Invoice exception rate

The AP process is occasionally slowed by invoice exceptions containing mistakes or inconsistencies. The culprit could be a duplicate PO or a coding error. Whatever the error, it takes time for your personnel to identify, investigate, and correct. Once you’ve determined the most frequent types of exceptions, you can devise an action plan to resolve them.

How to calculate invoice exception rate: Keep a record of each exception as it happens. To calculate the invoice exception rate, divide the number of exceptions per month by the total invoices processed monthly and multiply by 100 to get the percentage of exceptions per month.

4. Invoice to purchase order (PO) rate

Uncategorized invoices or invoices that don’t correspond to a PO slow the approval process. This may also indicate that unauthorized purchases are being made.

How to calculate the invoice to PO rate: Keep a record of whether your invoices are linked to a PO or not in a spreadsheet or create a custom field in your financial system to track this data.

Review the spreadsheet to calculate how many invoices were linked to a PO after a period of time (one month or three months, based on the total number of invoices processed).

5. Budget variance

Proposed budgets aren’t always accurate. By regularly comparing the budget versus actuals, finance professionals can clearly see their current position compared to their financial goals for the month, year, or quarter.

Analyzing the variance between planned spend and actual spend will enable you to:

• Adjust your budget for the upcoming year
• Identify areas to reduce expenses or increase income
• Determine if you require additional funding

How to calculate budget variance: Subtract the actual spend from the planned budget for each line item over a given period. You can use a spreadsheet to do this or use your financial system.

Download our white paper: The Top KPIs Every AP Team Should Measure to learn more about these KPIs and industry benchmarks. And, read our article How to calculate accounts payable for information on additional KPIs worth tracking for accounts payable success.

Automating your AP processes can significantly improve your KPI performance. AP automation solutions like Quadient AP by Beanworks eliminate manual data entry and approval follow-ups to empower your accounting team, making your accounts payable process more cost-effective and less error-prone.

• Automation significantly reduces the time it takes to process invoices since it simplifies routing workflows and speeds approval time.
• AP automation lowers the cost of processing a single invoice since it eliminates manual data entry, automates routing for approvals, and reduces the need for manual follow-ups.
• Automation decreases the invoice exception rate considerably since it reduces errors and inconsistencies.

When selecting KPIs to evaluate the performance and efficiency of your AP department stick to quantifiable metrics relative to a goal that aligns with your business strategy. One of the reasons why KPIs fail is that measures and strategies are misaligned. Using mobile apps for approvals or eliminating paper by moving activities to the cloud are examples of practices that indicate an AP team is operating efficiently. The important thing is to avoid using metrics as a stand-in for strategy.