October 18, 2023
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6 minutes
While streamlining revenue-generating processes is common practice, the often-overlooked AP process presents a significant opportunity to enhance your organisation's financial health and resource allocation.
If it’s been a while since you last assessed your AP efficiency, you’d be surprised at how much money and time you could be wasting due to overly complex processes.
Overpayments, double payments, late payments and even fraud can siphon thousands of dollars from your bottom line annually. Additionally, employees spend precious time chasing invoices, searching for purchase order details and manually seeking approvals – time that could be better spent on strategic tasks.
However, before we can improve efficiency we first need to evaluate current performance.
How Do You Evaluate Accounts Payable Performance?
To gauge the effectiveness and efficiency of your accounts payable processes, you must measure your progress using concrete and quantifiable metrics.
These metrics provide an objective assessment of your accounts payable performance, highlighting areas of strength and opportunities for improvement. By tracking these metrics you can make informed decisions to optimise AP accounts payable processes, reduce costs and enhance vendor relationships.
Here are some key metrics to consider:
1. Average Cost Per Invoice
Formula: Total AP Costs ÷ Number of Invoices Processed = Average Cost per Invoice
The average cost per invoice is a pivotal metric that outlines the expenditure associated with processing a single invoice.
This figure encompasses various elements, including labour costs (hours worked and personnel involved), accounts payable infrastructure costs (tools and software), paper cheque and envelope expenses, and postage fees.
You can analyse these costs to identify areas for cost reduction, such as adopting paperless workflows to minimise expenses.
2. Average Time Spent on an Invoice
Formula: Time Spent Processing Invoices ÷ Number of Invoices Processed = Average Processing Time per Invoice
The average time spent on processing an invoice signifies the level of your AP department’s efficiency and highlights workflow bottlenecks.
Prolonged processing times can escalate labour costs and hinder operational agility. However, by understanding this metric, you can pinpoint areas for improvement, optimising the overall efficiency of your accounts payable process.
3. Captured Discounts
Formula: Number of Discounts Captured ÷ Number of Discounts Offered = Discounts Captured as a Percentage of Discounts Offered
This metric reveals the percentage of early payment discounts your AP department secures in comparison to those offered by vendors.
It highlights missed opportunities and potential savings that could have been realised through timely payments. Analysing this metric sheds light on potential hindrances to capturing more discounts, such as resource limitations. It also emphasises the benefits of adopting automated AP solutions to ensure timely payments.
4. Error Rates
Formula: Number of Incorrect Payments ÷ Number of Invoices Paid = Rate of Error
The error rate metric helps track the frequency of payment errors within a specific timeframe.
Payment errors, including incorrect, duplicate, or overpayments, can erode your company's financial health over time. By keeping the error rate low, you can help safeguard your financial resources and credibility.
While this metric gives you an overview of your error rate, identifying the root cause of errors is essential to implementing corrective measures and preventing future errors.
5. Days Payable Outstanding (DPO)
Days Payable Outstanding calculates the average number of days it takes for your company to settle its payables with suppliers, serving as a critical indicator of cash flow management.
A higher DPO can provide short-term liquidity benefits, but it may also strain supplier relationships if payments are consistently delayed.
In general, maintaining a balanced DPO ensures effective cash management and healthy supplier partnerships but it’s possible to increase or decrease your DPO depending on your long-term goals.
6. Vendor Spend
Tracking spend by vendor provides valuable insights into the significance of various supplier relationships.
Understanding which vendors contribute the most to your business allows for a more strategic approach to accounts payable. Once you identify these vendors, you can focus on strengthening these relationships to enhance operational efficiency.
How to Improve Your Accounts Payable Efficiency
Elevating your AP efficiency involves a multifaceted approach that combines process refinement, technology adoption, and strategic vendor management.
Here's a five-step plan to help you do just that:
1. Set a Benchmark
If you don’t understand the level of your current AP efficiency, it’s incredibly difficult to know if the changes you implement are making a difference.
That’s why you must begin by establishing a benchmark for your accounts payable performance by utilising the quantifiable metrics above along with others that you deem important for your organisation.
The key here is to pick metrics that you’ll consistently analyse for an extended period of time so you can see exactly how you’re improving.
2. Review Your AP Processes
Process optimisation is key to improving your efficiency and often a few small changes can go a long way towards reducing complexity.
One way to do that is by consolidating your AP processes into a centralised system – particularly if you have multiple locations or lines of business. A centralised approach streamlines invoicing, bill receipts, payment processing, and purchase orders.
This often results in better resource allocation and more consistent adherence to best practices as all information is available in one central hub.
Another way is to build processes around vendor relationship building as good rapport can improve flexibility in payment terms and unlock potential discounts. Stronger relationships also result in your staff being more aware of vendors with stringent payment timelines so you can avoid late fees and continue a positive relationship.
3. Skip the Paper with AI-Powered Document Processors
One of the easiest ways to enhance your AP efficiency is by digitising all your paper-based invoices.
This eliminates the need for manual tracking and collaboration, and prevents staff from losing precious documents which can significantly lengthen document and invoice processing. Creating a digitised document trail makes invoice status and payment information readily accessible so you can track the status of payments in real time.
However, one of the biggest benefits of using AI-powered document processors is the solutions’ speed and accuracy. Through the use of AI, you can save entire minutes per invoice or document you process – plus countless hours of rectification when errors occur.
4. Automate Menial Tasks
It’s also possible to use AI to automate different AP process once you digitise your documents.
Consider automating approval workflows for routine invoices or setting thresholds for automatic approval. For example, you can use AI to automatically match invoices with POs to avoid errors by eliminating unnecessary human involvement.
5. Measure Your Success
Step five brings you back to your all important AP metrics and is all about regularly reviewing your benchmarks and comparing them against your current results.
It’s a good idea to pick regular assessment intervals based on size of your company. The bigger it is the more regularly you’ll have to review your data because any deviations from your goals can have a sizeable impact on your AP efficiency.
This ongoing evaluation allows you to identify areas that still need improvement and ensures that your efforts are producing tangible results.
All That’s Left is to Rinse and Repeat the Process
With this simple five-step plan you can transform your accounts payable processes, turning them into a strategic asset for your organisation rather than another task on your to-do list.
In the grand scheme of things, efficient AP processes have significant downstream benefits such as improvements in working capital constraints, stronger vendor relationships, reduced costs, and better overall financial health.
However, a key part of this five-step plan is AI-powered AP solutions because, without them, you’ll still be relying on outdated manual processes which do more to harm than good for your company.
If you’re serious about increasing your accounts payable efficiency, Affinda’s Accounts Payable Suite is the solution you’re missing.
At the centre of our AP suite is industry-leading AI that outperforms other solutions that have been around for over 30 years – and that’s why we’re trusted by brands like McKinsey, Intuit, and more.
Find out for yourself with a free trial of Affinda and starting increasing your accounts payable efficiency today.
