by Sarah Dell’Aringa
The workflow and processes within accounts payable departments are constantly evolving, and productivity and performance are measured best using various different methods. Heads of AP and finance departments alike are constantly honing in on what goals and achievements they can reach to accomplish within their company, and making sure the attributes of their employees match with said company’s values. In order to assess the efficiency and success of your accounts payable department, it is important to put an emphasis on not only the quality of work, but each employee’s specific productivity levels, and the overall costs of what it takes to keep your department completely functional and running. Most all business professionals use several key performance indicators to analyze performance and results – including finance professionals – so AP departments will not be overlooked. To confirm that your accounts payable department is operating as well as possible, we’ll be examining costs per invoice, transactions per employee, the number of invoices per AP full time employees, vendor payment processing cycle times, and invoice lead times. First, we’ll be diving into the term KPI, and what makes a properly functioning performance measure in your specific department.
Key Performance Indicators and Benchmarking in AP Departments
In order for key performance indicators (KPIs) within accounts payable departments to work as accurately as possible, they should include quantifiable data points and be set and agreed upon by all staff members, including specific project members if your company is measuring success based on individual assignments. KPIs should be observed regularly, be time-bound, and have the overall goal of ensuring your AP processes are in line with your company’s goals and missions regarding broad improvement and growth. In general, KPIs are measurable values that serve as extremely helpful tools to measure your company’s success and status on achieving particular business objectives. Benchmarking is also an important term all companies should be familiar with, which is the process of comparing your company’s success with others. Specifically in accounts payable departments, the drive to measure costs, efficiency, and effectiveness is constant, so keeping track of the correct metrics is essential.
Analyzing Costs Per Invoice
The average cost of processing just one invoice through differing organizations depends heavily on your specific AP department, and can vary greatly depending on several different factors. One company’s cost per invoice could depend on how time-consuming and labor-intensive their invoice processing system is, or how much time spent by employees in AP departments are diverting towards invoices. When examining other contributing factors regarding cost per invoice, you could look at your systems and equipment set in place, mailing, processes for late or missed payments, general errors, supplier discounts, and audit expenses; all in all, your costs will depend on what systems you have set in place, and how much of your AP department is automated. Finance and AP professionals of all statuses should pay close attention to this KPI, as alternative methods should always be sought after to cut costs and focus on driving expenses down long-term. However, the metrics regarding costs only need to reflect what core values your company has expressed; if spending more heightens efficiency, then that is your department’s prerogative to do so. Either way, careful assessments towards identifying the best measures for your company should be made.
Accounts Payable Transactions per Employee
An additional productivity metric is the complete number of transactions performed by the AP function over a set period of time, combined with the total number of AP employees; this is specified as the accounts payable transactions per employee. Analyzing the success using AP transactions can make known various issues including invoice quality, AP software interfaces, volume of invoices requiring manual entries or overstaffing within AP departments. When looking into ways to increase productivity in this area, it is important to be using as many streamlined and efficient processes within AP, including methods to reduce low quality invoices and automate processes in order to save time on manual entry and invoice matching. This may require extra training and attention towards employees struggling within these parameters and showing a lower quality of work, but effort can always be improved with good communication between higher-ups and all employees within AP departments.
Number of Invoices Per AP Employee
Another way to measure success is the number of invoices per AP full-time employees. This KPI is slightly complicated seeing as how often the volume of invoices are measured within your department can affect the numbers and make benchmarking more difficult. The easiest way to analyze this metric is to take your annual invoice volume and divide it by the number of full-time AP employees. When done correctly, the number of invoices per AP employee is a good indicator of your team’s general performance, and should be measured to assess overall productivity and success.
Vendor Payment Processing Cycle Time
Vendor payment processing cycle time is another way to benchmark within AP departments, as examining the number of business days required for a company to process an invoice can give insight once again on employee productivity and the quality of work accomplished. While higher and lower values can have two different meanings, ultimately the goal for this KPI is to improve on typical processes for payments including formats for invoice submission, monitoring any and all internal errors, reducing paper invoices as well as keeping track of manual input and enhancing management practices.
Invoice Lead Time
Further benchmarking using invoices in AP departments is tracking the overall time it takes for a single invoice to be received, processed, and finalized; this entails coding, data matching, and completing a final review which is posted to the ERP. All of these efforts combined help measure overall growth and success within AP processes. Once again, automation stepping in to remove manual steps improves heavy workloads and is a tool all AP departments should be utilizing. Not only do using these metrics help measure success, but automation will directly boost efficiency of all the processes being measured.
Why Is Measuring Success So Important?
All businesses must strive to track productivity and performance, but it is especially important for AP departments to keep track of these metrics in order to avoid any possible liabilities, whether financial or reputational. Late payments, errors within invoices, or bad credit terms could all put a company at risk of losing clients or taking significant financial hits. Comparing your company to others to assess success and efficiency is essential to making sure your workers in all departments are consistently hitting the marks; benefits of doing so include increased workflow in AP processes, reduced costs, measured performance towards goals in AP departments, set expectations for your company, and better problem-solving through accountability. To learn more about benchmarking and implementing KPIs within your workplace, feel free to reach out to an oAppsNET Partners consultant to learn more today.