How Efficient is Your AP Process: Accounts Payable Performance Metrics

The finance industry is going through rapid changes and automation is the major catalyst of this transformation.

A recent study by Ardent Partners highlighted that a majority of organisations now consider automating their accounts payable processes a top priority, as it can lead to up to a 65% reduction in processing costs. With that, it is clear that accounting and accounts payable departments are starting to play a bigger role in a business - they are moving from strictly transactional departments to strategic contributors to efficiency and growth.

In order to continue on this trajectory, though, businesses need to understand and optimise key accounts payable performance metrics. By focusing on the goals and KPIs of the accounts payable department, AP teams and wider financial departments can gain valuable insights into efficiency, costs, compliance, and sustainability.

In this article, we dive into essential accounts payable performance metrics, detailing how they can help businesses streamline processes, enhance strategic decision-making, and ensure compliance.

Accounts payable performance metrics are the key performance indicators (KPIs) that can give a snapshot of the AP’s efficiency, accuracy, and contribution to strategic value. To measure accounts payable performance, it is crucial to track various KPIs and metrics, including traditional measures like processing time and cost, as well as more advanced metrics such as automation rates, compliance, and sustainability.

Taking a closer look and analysing those KPIs can help businesses identify inefficiencies and opportunities for cost reduction, as well as support broader corporate goals, such as ESG initiatives.

Having the right metrics in place for your AP process can shed light on its strengths and weaknesses around efficiency, exposure to risk, and sustainability. Here are some key performance metrics businesses with a global and forward-looking mindset should always keep an eye on:

1. Real-Time Performance Monitoring

Real-time performance metrics allow your business to monitor the accounts payable processes - the average invoice processing time, approvals, and payment execution, as they happen.

Why it matters: Real-time monitoring allows businesses to immediately spot delays and bottlenecks and make adjustments, which otherwise could lead to missed discounts, late payment fees, and errors. In the long run, tracking AP performance in real-time will optimise cash flow and improve vendor relationships.

2. Predictive Metrics for Process Optimisation

Predictive metrics use past data to provide forecasts, such as anticipated increases in invoice volume, error probabilities, or potential for payment errors or delays. All those predictive metrics help AP and finance departments plan resources and prevent bottlenecks and delays.

Why It Matters: Predictive metrics and forecasts help to support finance and AP teams in anticipating potential increases in workload, which allows the business as a whole to allocate resources and system support more effectively during busy periods and avoid costly delays or errors.

3. Cross-Border Processing Efficiency Indicators

For businesses operating cross-border, international processing efficiency is key. The main metrics to track are: processing time of international invoices, tax compliance rates, and foreign exchange (FX) costs. Taking a closer look at those KPIs can give valuable insights into the efficiency and cost-effectiveness of accounts payable for international transactions.

Why It Matters: A solid base of cross-border transaction and accounts payable processes is the cornerstone for companies trading or looking to expand internationally. That way, they can navigate the complexities of cross-border trade and regulations and build strong relationships with suppliers, ensuring they are always paid accurately and on time.

4. Automation Rate and Straight-Through Processing (STP) Metrics

The automation rate is a relatively new metric, and it looks at the percentage of invoices processed automatically, while straight-through processing (STP) rates measure the rate of invoices processed from receipt to payment without any manual intervention. A high automation and STP rate suggest that accounts payable are sufficiently automated and streamlined, and free of manual errors or bottlenecks.

Why It Matters: Regularly measuring automation and STP rates provide useful insights into the efficiency and impact of technology that's currently in place. Highly automated processes usually result in reduced errors and wasted time. Seeing issues with automation and STP rates can also point to potential areas for improvement when it comes to bringing new automation technology on board.

5. Compliance and Risk-Related Metrics

Key compliance-related metrics include tax remittance accuracy, adherence to vendor agreements, and compliance incident rates. Monitoring those KPIs ensures adherence to regulations, helps the business avoid penalties, and keeps financial and reputational integrity.

Why It Matters: Tracking risk and compliance KPIs as they relate to accounts payable allows businesses to address errors before they become a regulatory issue leading to a penalty or reputational harm, and ensure ongoing compliance with financial reporting standards.

6. Sustainability and ESG-Related AP Metrics

The financial sector places an increased emphasis on sustainability and ESG-related metrics, which have made their way into the accounts payable processes. In practice, this means monitoring the percentage of electronic invoices, the use of paper, and the carbon footprint of AP operations.

Why It Matters: Good sustainability and ESG metrics show that the business is trying to reduce its carbon footprint and paper use, which enhances its commitment to eco-friendly practices and reputation. In the long run, this may also attract environmentally-conscious investors and stakeholders.

On top of the above metrics, all businesses should also be tracking basic accounts payable KPIs to ensure the efficiency and accuracy of their processes.

Total Number of Invoices Received and Processed

Consistently monitoring the volume of invoices your business receives can give insight into the current workload, assess resource allocation, and plan accordingly.

Average Cost per Invoice

Average Cost per Invoice = Total AP Operating Costs / Number of Invoices Processed

This metric gives a snapshot of the costs relating to processing a single invoice - this includes labour, software, and administrative expenses. The lower the average costs, the more optimised the AP process and the better the allocation of resources.

Invoice Processing Error Rate (Exception Rate)

Exception Rate = (Number of Invoices with Errors / Total Invoices Processed) x 100

This performance metric looks at the rate of errors, for example, incorrect amounts, duplicate payments, incorrect payments, missing documentation, and, in the case of a cross-border business, also currency mismatches or tax compliance issues. Tracking duplicate payments is crucial to prevent substantial financial losses and improve team morale. Reducing error rates and keeping them below 2% is paramount for accurate financial reporting and maintaining a strong reputation and vendor relationships.

Discounts Captured vs. Discounts Offered

This metric measures how much the business takes advantage of early payment discounts. Tracking the percentage of discounts captured versus offered can reveal missed opportunities for savings.

Days Payable Outstanding (DPO)

DPO = (Average Accounts Payable / Cost of Goods Sold) x Number of Days in Period

It's a measure of the average time it takes for a company to pay suppliers. High DPO can be good for cash flow; however, it may put vendor relationships at risk if all payments are made close to the deadline or late.

In order to efficiently measure accounts payable processes and use AP KPIs as strategic drivers of value and growth, businesses should follow these best practices:

Define Clear KPI Goals and Benchmarks - Each KPI should be followed by a specific and measurable target or goal, as it will help the financial or AP team align their efforts with broader goals. The best way to come up with those is to look at past performance data or industry standards.

Invest in AP Automation and Analytics Tools - Implementing accounts payable automation tools with embedded analytics can simplify the tracking of the KPIs. With real-time insights, businesses can be more agile and responsive to any issues that arise and continuously improve the process.

Prioritise Compliance and Risk Management - With the compliance and regulatory landscape changing rapidly, it is important to regularly perform compliance, tax, and regulatory reviews to ensure adherence to requirements and protect the business from penalties and reputational damage.

Encourage Supplier Adoption of Electronic Invoicing - Moving to digital invoicing has multiple benefits. It reduces processing times, improves accuracy, cuts costs, and meets ESG/sustainability objectives. If you want to take it a step further, you may want to look into e-invoicing.

Review KPIs in Alignment with Company Goals - Setting KPIs and targets is only part of the work. All metrics should be regularly assessed in line with the broader business and financial objectives, like cash flow or sustainability, to ensure AP adds strategic value.

Accounts Payable and finance departments can turn from operational and cost centres into strategic assets if the right set of accounts payable metrics are chosen and monitored. Real-time monitoring, predictive analytics, and automation metrics can deliver actionable insights into how efficient and streamlined the process is, as well as potential areas for improvement, while compliance and ESG indicators ensure alignment with regulatory and corporate social responsibility goals.

All those metrics enable finance teams to make data-driven decisions, reduce costs, and support broader organisational success. Embracing a metrics-driven approach in AP not only streamlines day-to-day processes but also builds a foundation for long-term strategic growth and value creation.

How do you measure accounts payable performance?

The performance of accounts payable can be measured by monitoring key KPIs such as invoice processing time, cost per invoice, and days payable outstanding (DPO). These accounts payable performance metrics give valuable insights into the efficiency and accuracy of AP processes and highlight areas for improvement.

What are the KPIs for accounts payable?

The main AP KPIs include total number of invoices received/processed, average cost per invoice, days payable outstanding (DPO), automation rate, exception rate, and discount capture rate. These accounts payable metrics shed light on efficiency, accuracy, and cost-effectiveness.

How do you monitor accounts payable?

Accounts payable can be monitored through real-time dashboards and regular KPI reviews, which provide insights into invoice processing times, error rates, and payment statuses. Continuous tracking allows businesses to identify and address issues proactively.