Your organization's accounts payable department is a manifestation of your financial dexterity. When AP flows like water, your procure-to-pay stands out. According to McKinsey, enterprises that lead in P2P also lead in corporate performance. That shouldn't be surprising. Maximizing your end-to-end AP lifecycle directly impacts your bottom line and propels you towards a bigger, brighter, and more financially stable future.
But how do you know if your AP department is performing above the threshold? And how do you ensure that your AP strategies are salvable against the grains of digital transformation? The answer is simple: you measure it.
Why Measuring AP Efficiency is Important
Let's cut to the chase: AP isn't sexy. Managing vendor relationships, handling invoices, and managing liquidity involves redundant processes layered on top of technical, math-heavy figures. So, plenty of businesses sweep AP under the proverbial rug of operations and focus their efforts towards brighter, more accessible units. We get it! It's easy to let those day-to-day routine business practices blend into business background noise. But letting AP off the hook for digital transformation is a massive mistake.
AP may not be sexy. But it is powerful. It's the beautiful bridge that connects vendors, processes, and technology to liquidity and relationships. And, like other business units, it needs a powerful jolt and some norm-defying innovation to keep it relevant, healthy, and efficient. However, that's part of the problem. Most businesses don't think of AP as a cost-leader. In fact, most leaders consider AP a necessary revenue sap. So, why would you measure the efficiency of that inconsequential unit? Shouldn't you be pumping time and energy into marketing or sales?
Here's a secret: AP is the glue that keeps your business together. In traditional, manual-driven environments, AP can be costly, mundane, and repetitive. But in a fully-automated environment, AP can quickly transform into a highly automated unit that reduces your vendor costs, solidifies supply chain relationships, and re-imagines the way liquid assets flow throughout your business.
But before you can break down those age-old processes, you need to understand your AP department. What's happening? How much is each invoice costing you? Where are your processes failing? Are there any significant time saps? And what strategies do you need to rethink to drive tangible value into your business? And what accounts payable benchmarks should you begin to measure your organization against?
How to Measure AP Efficiency
Efficiency can be measured quantitatively or qualitatively. But efficiency can only accurately be measured quantitatively. Your goal should be to take qualitative ideas and make them into quantitative and measurable metrics. These are Key Performance Indicators (KPIs). There are millions of KPIs. And you can create a KPI for virtually any goal you want to measure. For example, if you want to know how many invoices capture an early-bird discount, you can measure your discounts captured per invoice. But how do you choose the right KPIs? And what do you do with them once you've chosen them?
In general, you want to follow these steps:
- Plan: What are you trying to measure? It's easy to go overboard with KPIs. Do you really need to measure your discounts captured per invoice if you're already measuring your total time-per-invoice? These hit the same notes on the piano. If your time-per-invoice is low, you'll automatically be capturing discounts. You want to distill your KPIs down. Too many KPIs can make analysis and post-analysis strategy sessions a nightmare. Keep it condensed and simple. We'll cover the core six below.
- Execute: Once you know which KPIs you're chasing, you need to find an actionable way to measure them. Ideally, this will happen automatically via AP automation software. However, you may need to implement some measurement systems. Warning: if your processes are manual, this can be a nightmare stage.
- Analyze: Once you start measuring KPIs, you want to analyze them to discover discrepancies, benchmark them against industry standards, and scrutinize them for opportunities.
- Strategize: This is the post-analysis stage. How can you use these KPIs to create meaningful strategies that bring about change in your department. Alternatively, this step can be used to justify AP tech investments to stakeholders.
There are hundreds of KPIs that you could use to measure AP efficiency. But, in general, most of them are supplementary. Here are the six KPIs you absolutely must measure to stay on top of your AP department.
6 Key KPIs for AP Efficiency
1. Cost Per Invoice
This is the bread-and-butter of accounts payable KPIs. How much is it costing you to process a single invoice? Unfortunately, this KPI is also the trickiest one of the bunch if you aren't automating. This is a notoriously deceptive KPI that many manually-based businesses end up calculating incorrectly. Cost per invoice guides AP decisions at the elemental level, so having a deceptively low CPI can incorrectly inform tech investments, employee and staff needs, workflows, and even workday structure.
On the surface, it may seem easy to calculate CPI. You simply take tangible costs like labor and technology and mash them together to calculate an estimate of how much each invoice costs to process based on employee time input and salary (along with the cost of tech). But that's not accurate. CPI should also be based on intangibles and hidden costs.
Here are a few considerations:
- Overpayments, late payments, missed early payments, etc.
- Cost of materials
- Vendor relationship impact
- Employee productivity, happiness, and culture
- Time cost from other departments
This is a major headache area for manual-based AP teams. It can be incredibly difficult to calculate a moderately accurate CPI when your processes are still largely manual, semi-invisible, and glued to archaic systems of filing and communication. However, it's in your best interest to attempt to calculate those intangibles and hidden costs. You may be surprised at what you find.
2. Invoice Lead Time
As the old adage goes, time is money. Here's a question: how long does it take your AP department to process and invoice end-to-end? From the moment an invoice is received until it's made ready-for-payment, it goes through plenty of nuanced steps. Matching, coding, approval, and all the other steps involved in invoice approval can be time-eaters, especially if you still use manual processes.
For instance, simply looking for paper invoices can eat away up to 40% of an employee's day. Worse yet, 7.5% of ALL paper documents get lost, so that searching journey may end without any tangible value. Between each of the flows in the invoicing process, there are manual frictions, paper burdens, and time-constraining processes that may shock you. Did you know that the average paper-based invoice takes 25 days to process?
That's why it's important to track lead time. 25 days is, frankly, insane. Not only have you missed early payments, created massive labor costs, and put friction on vendor relationships, but you've almost certainly garnered late payments, which add more costs to your CPI. Unfortunately, tracking invoice lead time isn't always simple.
If your entire invoice process happens in one automated system, measuring invoice lead time should be a cinch. But if your AP processes are scattered across tech ecosystems and wedged between manual and automated practices, tracking can become its own cost center. Even if you use a best-in-class ERP, you may still have a fractured AP ecosystem that involves a blend of manual and tech-fueled processes. Case in point, 86% of MS Dynamics 365 users still use manual workflows for invoice receipts, 79% still rely on manual reporting, and 77% still manually approve and route invoices.
Tracking invoice lead time can show you just how slow, redundant, and cost-creating your AP processes are to your business. On the flip side, invoice lead time can also showcase the value of any automation investments. So, it's an important metric to track.
3. Invoice Exception Rate
If there was a final boss for your AP department, it would almost certainly be an invoice exception. Any time there are routing mistakes, matching issues, data entry errors, or approval frictions, you generate an invoice exception. This happens when the data on the invoice fails to match that data on the associated order.
Invoice exceptions are dangerous. They lead to overpayments, time-consuming department hangups, and vendor relationship degradation. Of course, invoice exceptions also worsen every other metric, since they add time, cost, and late payments. The average organization wastes 4 percent of its external spend on high transaction costs and inefficiencies in their financial units. For a hundred-million-dollar organization, that's $4 million in pure leakage dripping down the side of your end-of-year projections.
Tracking invoice exceptions is a surefire way to track some of those excessive costs and inefficiencies. Did you know that 63% of businesses receive duplicate invoices? And, here's the kicker: 33% of them actually pay them. Even if we ignore the ever-so-awkward "oops... we need that money back" conversations with vendors, the simple fact is that many businesses miss duplicate payments. That's pure waste. And that waste may start with invoice exceptions. For businesses that use partial automation (which produce 20x higher costs than full automation), you may have an easy way to track — but not prevent — invoice exceptions. Unfortunately, in purely manual processes, many exceptions are missed — which creates even further issues.
4. Invoices Processed Per Full-Time Employee (FTE)
Like invoice lead time, invoices processed per full-time employee (FTE) helps you track spend associated with time and labor. But, unlike invoice lead time, invoices processed per FTE gives you a clear lens into how much time each employee is spending on invoicing. How much time does it take your employees to process an invoice from start to finish?
Here's where things get scary: the average FTE processes 6,000 invoices per year. That costs you around $7.50 per invoice on labor alone. Again, this is another area where you're going to see massive differences between automated and manual environment. Fully-automated AP ecosystems see 15x higher invoices processed per FTE.
5. Percentage of Digital Invoices
Paper represents a significant cost to your business. Each filing cabinet you have costs $25,000 to fill and $2,000 per year to maintain. 7.5% of paper documents get lost. And it takes a professional 18 minutes to locate a single paper document on average. To put it simply, the actual cost of using paper is 30x the cost of the paper itself. But even if we ignore the remarkable cost of paper, the drain that paper has on your AP department is mind-boggling.
Did you know that it takes the same amount of people hours to process 6,000 paper invoices as it does to process 90,000 electronic invoices? There's a reason that 52% of AP leaders say that paper is their biggest barrier to transformation; paper can stop AP in its tracks. So, figuring out how much of your AP department still relies on paper is critical.
The percentage of electronic invoices is a baseline measure of your move towards digital transformation. The more paper you use, the worse all of your other metrics are going to look. Seriously! Watch what happens when you start raising this percentage. It will seem like magic.
6. Duplicate Invoices Paid
According to research, the average duplicate invoice paid rate is 1.24%. That may seem low. It's not. If you're a mid-market organization, 1.2% of your invoices probably easily represents tens of thousands of dollars. If you're paying tens of thousands extra per month, that's a problem. For enterprises, this could mean millions in leakage annually.
Measuring duplicate invoices paid is essentially like measuring how much money you're throwing in a garbage can. Even one duplicate invoice represents waste. Here's the good news: tracking this KPI can help you catch duplicates. Here's the bad news: remediating those duplicate payments is a painful, awkward process. To be clear, this number should be zero. You want no duplicates. And that's an achievable goal. But you may need to invest in the right automation solutions to make it happen. With scalable AP automation solutions like Dooap, duplicate invoices simply don't happen.
Dooap Can Help You Maximize Your AP Efficiency
When you start measuring AP efficiency, you'll notice an underlying trend. The higher your AP automation potential is, the healthier your KPIs look. In other words, automation is the great enabler of AP. At Dooap, we help organizations realize the tangible value in AP automation. Our end-to-end invoice automation solution can help you generate a hyper-efficient AP department that helps you scale your business and your financials. Contact us to learn how we can help you embrace the future of AP.
Learn more about the benefits of machine learning for AP invoicing in Microsoft D365FO.