Develop an Accounts Payable Scorecard to Drive Process Improvements
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As part of any transformation project, and certainly as part of ongoing monitoring and improvement, identifying and tracking relevant metrics is critical to managing processes. In a previous post, we covered metrics around direct procurement. In this post, we’ll cover common metrics for the Accounts Payable process.
Accounts payable (AP) performance metrics are crucial for monitoring the efficiency and effectiveness of your organization's financial processes. These metrics help you assess how well your AP department is managing its responsibilities and identify areas for improvement. All to often, if an A/P department tracks metrics at all, they will typically be basic metrics, such as the percentage of invoices paid within terms. Nothing wrong with that, but a truly useful scorecard will incorporate the type of metrics discussed below.
Here are some common accounts payable performance metrics along with descriptions of each:
Accounts Payable Turnover Ratio:
Description: This ratio measures how quickly your company pays its suppliers. It is calculated by dividing the total purchases from suppliers by the average accounts payable balance during a specific period. A higher turnover ratio indicates that you are paying suppliers more quickly.
Importance: A high turnover ratio can suggest good cash management, while a low ratio may indicate inefficiencies or problems with supplier relationships.
Average Days Payable Outstanding (DPO):
Description: DPO measures the average number of days it takes your company to pay its suppliers. It is calculated by dividing the average accounts payable balance by the cost of goods sold (COGS) per day.
Importance: A lower DPO indicates that your company pays suppliers more quickly, which can be positive if you want to maintain good relationships. However, a longer DPO can free up working capital.
Invoice Processing Time:
Description: This metric tracks the time it takes to process an invoice from the moment it is received to when it is paid. It includes the time for approval, coding, and payment processing.
Importance: A shorter invoice processing time helps prevent late payments and may lead to better terms with suppliers.
Accuracy of Payments:
Description: This measures the percentage of payments made without errors or discrepancies. It includes checking for correct amounts, payment to the right supplier, and adherence to agreed-upon terms.
Importance: High accuracy reduces costly errors and disputes with suppliers.
Early Payment Discount Capture Rate:
Description: This metric calculates the percentage of early payment discounts offered by suppliers that your company actually captures by paying invoices ahead of their due dates.
Importance: Maximizing early payment discounts can save your company money, making this metric vital for cost management.
Supplier Satisfaction Score:
Description: This is a qualitative metric that assesses how satisfied your suppliers are with your accounts payable processes and interactions.
Importance: Happy suppliers may offer better terms, prioritize your orders, and provide more responsive support.
Aging Reports:
Description: Aging reports categorize outstanding payables by the length of time they have been unpaid (e.g., 30 days, 60 days, 90 days). This helps identify overdue invoices and potential issues.
Importance: Aging reports are essential for managing cash flow and identifying overdue payments that need attention.
Percentage of Electronic Payments:
Description: This metric tracks the proportion of payments made electronically (e.g., ACH transfers or wire transfers) versus paper checks.
Importance: Electronic payments are often faster, more secure, and cost-effective, making this metric relevant for efficiency and cost reduction.
Late Payment Rate:
Description: The late payment rate measures the percentage of invoices paid after their due dates.
Importance: A high late payment rate can damage supplier relationships and may result in penalties or strained business partnerships.
Accounts Payable Cost per Invoice:
Description: This metric calculates the average cost incurred by the AP department to process a single invoice, including labor, technology, and overhead expenses.
Importance: Reducing the cost per invoice helps improve overall AP efficiency and reduce operational expenses.
Conclusion
Monitoring and analyzing these accounts payable performance metrics regularly can help your organization identify areas for improvement, optimize cash flow, enhance supplier relationships, and streamline your financial processes. It’s critical that once a scorecard is finalized, it must be introduced the the Accounts Payable staff so that they understand the metrics that are being tracked. And for better or worse, the metrics should be published regularly, likely monthly, so that everyone understands the progress towards the goals, and that the process has transparency and trust.
Questions:
Does your organization currently have a scorecard for A/P?
If so, what are the key metrics you’re tracking?
If you don’t have a scorecard, what is preventing your organization from developing and using a scorecard?
