12 Critical Invoice Metrics You Need to Monitor for AP Success
When it comes to evaluating the success of your accounts payable operations, there are several key invoicing metrics that matter. While the market changes constantly, these KPIs tend to remain the same. Evaluating these 12 invoice metrics is the first step in planning out AP improvements and evaluating their success.
1. Invoice Processing Costs
Calculating invoice processing costs isn’t easy. Not all invoices are straight-through processes. There are exceptions, non-PO invoices, and manual invoice processing to consider. If you automate your invoice processing, that cost drops significantly. Still, there is a cost.
Surprisingly, 64% of businesses still process invoices manually. (80% still use paper checks to some degree.)This is shocking once you realize that e-procurement solutions have been out for over 20 years. These platforms can drastically reduce invoice processing costs by automating the entire process.
Manually processing invoices isn’t cheap (around $15 per invoice). There is the cost of your AP staff, materials (for example, paper and ink to print out invoices), and other expenses that roll into that cost.
That cost can drop by as much as $13 with invoice automation. And if you process 300 invoices a month, you could save up to $46,800 each year with invoice automation alone.
2. Invoice Processing (Cycle) Time
Most businesses still process invoices manually. That means that invoices can take two weeks or more to process. In fact, small-to-mid-sized companies take 25 days to process a single invoice (from receipt to payment). With automation, you can drop that processing time down to a day or two.
The longer an invoice is out, the greater risk it poses to your business. Processing costs go up. You miss out on early payment discounts. There are more invoices. And if your team is manually processing these invoices, there’s the added stress and pressure to stay caught up.
Worse, your team is rushing through menial tasks instead of focusing on high-level, strategic activities that can drastically grow your business.
3. Invoice Discounts: Captured vs. Offered
Vendors offer discounts all the time. Does your business take advantage of them? Track how many discounts offers your vendors provide against how many your company gets. Also, look at the value of those discounts in potential savings vs. actual savings.
If your business misses too many of these opportunities, you should look at automating procurement processes. With procurement automation, you can receive notifications and reminders to help your accounts processing department cash in on more vendor savings.
4. Invoice Exception Rates
In a perfect world, all your invoices would be processed straight through. Sadly, that’s not the case. In fact, invoice exception rates are around 23%. Invoice exceptions can grind your accounts payable department to a halt by slowing down invoice processing.
They require more hands-on involvement, analysis, and more team members to solve. Plus, there’s the additional back and forth with vendors as your team tries to verify the details they need to process the invoice.
Luckily, you can put systems in place to help reduce the invoice exception rate.
Self-service vendor portals, for example, make the vendor responsible for submitting accurate data and invoices. They also keep communication centralized in an accessible platform.
E-procurement platforms also lower invoice exception rates by streamlining invoice processing. You can establish clear rules to automate approvals. And you build exceptions into the framework.
Over time, you can build extensive guidelines for approvals that cover a range of situations, lowering your invoice exception rates.
5. Straight Through Invoice Processing Rates
Straight through invoice processing is when an invoice is received, approved, and paid automatically. Straight-through invoices are much cheaper (and faster) to process than invoice exceptions.
The higher your straight-through invoice processing rate, the lower your overall costs will be.
That’s not all.
Your vendor satisfaction rate will be higher (because everyone enjoys being paid faster).
AP Automation can help significantly improve your straight-through processing. Again, with the automated workflows in place, you can process straight-through invoices faster than any humanly possible. Machine learning and built-in guardrails can help increase your straight-through invoicing processing rate, too.
6. Working Capital
Your procurement process is directly connected to your organization’s cash flow. You should be able to accurately measure your working capital by subtracting your liabilities and expenses from your assets.
More so, with streamlined invoicing, you should be able to reduce liabilities and expenses, securing more working capital for the organization. And you should be able to provide these insights in real-time.
7. Invoice Linked to Purchase Order (PO) Rate
The more invoices you have linked to POs, the better your record-keeping will be and the more visibility you’ll have into your spend data. With tracked POs, you can reduce maverick spending, fraud, and other risky purchasing practices. Plus, you can better forecast and secure cash flow.
8. Late Payments and Penalties vs. On-Time Payment
You can lose a lot of money unnecessarily due to late payments and penalties. Additionally, you can needlessly damage vendor relationships and the reputation of your business. Analyze the number of invoices you pay on time against those paid late. Use that as a benchmark to track performance. Your goal should be to eliminate late payments and penalties altogether.
It’s a good idea to track Average Days Delinquent (ADD) and not just the number of late invoices. Seeing how long it takes for your AP department to pay late invoices can be an eye-opening way to gauge efficiency.
9. Supplier Inquiries, Discrepancies, and Dispute Rate
The more your team has to manually untangle difficulties and problems in your supply chain, the less efficient it will be. Sadly, most of these problems happen because of human error. On the bright side, automating your purchasing and procurement processes can seriously reduce most of the issues that arise with suppliers.
Everything from duplicate invoicing to QA concerns can be managed and resolved on these platforms.
10. DSO and CEI
Days Sales Outstanding (DSO) measures how many accounts you have outstanding and their total value. Knowing this helps you better understand cash flow in your organization. The lower your DSO, the quicker your company collects payments. This shows how ready your business is to provide credit to clients and customers.
Collection Effectiveness Index (CEI) also measures how quickly your business collects payments over the long-term. It’s not a snapshot of your collection (like DSO). Instead, it’s an overall view of your collection rate.
11. Invoice Automation ROI
While automation is best practice for increasing procurement efficiency, you still need to evaluate your ROI. Not every system in your purchasing workflows needs to be automated. Instead, you should take a strategic approach and address the major concerns first.
Invoice automation is a great starting point.
Still, you should map out your purchasing workflows and identify key points to improve with automation. Next, you should track performance over time. Finally, you should share those performance KPIs with your leadership team to inspire further AP optimizations.
If you’re starting out and looking for a way to communicate the ROI, you can run the numbers manually and make some projections. Alternatively, you should work with a technology consultant who can walk your C-Suite through the ROI for various AP process optimizations.
12. Vendor and Employee Retention Rate
Inefficient systems burn employees and partners out. People don’t want to work harder than necessary to get a job done. And if you stress them out for too long, they’ll look for better employers or partners. A high churn rate in employees and vendors could indicate that your systems are exhausting everyone involved.
Your goal should be to lower this rate over time.
The Benefit of Tracking Accounts Payable Metrics
If you can’t measure something, you have no way of knowing how well it’s performing. Without that baseline, it’s impossible to suggest improvements or see the impact of your efforts.
You may also find yourself in a position where you’re overfocusing on processes that aren’t the real issue. As a result, you may put a lot of money into new systems that don’t yield a justifiable ROI.
By focusing on these core KPIs, you can streamline your AP operations, drastically reducing costs and increasing efficiencies. And you’ll have the data that underscores the value of your improvements, inspiring you to act and inspiring leadership to give you the resources you need to further optimize purchasing in your organization.
What’s the Best Way to Measure Invoicing Metrics?
When looking for ways to improve your invoice processing, the last thing you want to do is add more time-consuming tasks. Tracking metrics in a spreadsheet, for example, is not a good idea. You open yourself up to data entry errors, slower reporting, and incomplete data. Instead, it’s better to track your KPIs using procurement automation or AP automation platforms.
E-procurement software (whether it’s custom-built or turnkey) integrates your disparate systems and workflows to give you a more accurate picture. You’ll centralize your data for quick access and interpretation. And you’ll gain better transparency into your AP performance over time.