As a business owner, you always want to know what areas of your company are working well and which areas need improvement. This can be difficult to gauge, especially with finances.
One way to track the efficiency of your finances is through accounts payable (AP) metrics. AP metrics can show you how quickly invoices are being processed, how much your company is spending on a recurring basis, and more.
In this blog post, we will explore five accounts payable metrics that you can use to track the efficiency of your AP department.
What Is Accounts Payable?
In short, accounts payable is where a bookkeeper records money the company owes. This can include vendor invoices or loan payments. Without records of what the company owes, the company can’t know how much income to generate to cover all costs. The AP process can be done manually or through AP automation software.
Key Accounts Payable Metrics
While there are a variety of accounts payable metrics that businesses can track to assess efficiency, these five are essential to understanding and improving financial health: days payable outstanding (DPO), straight-through percentage, percent of invoices paid late, invoice processing time, and average days to pay.
Each of these metrics offers insights into specific areas of accounts payable and, when used together, can provide a comprehensive view of efficiency. By tracking these metrics and benchmarking against industry averages, businesses can identify areas for improvement and take actions to optimize accounts payable.
1. Days Payable Outstanding
Accounts payable turnover measures how quickly a company pays its invoices. Days payable outstanding (DPO) is a variation of this metric that precisely measures how long it takes a company to pay its invoices. DPO assesses a company's ability to pay all invoices received on time.
A company’s accounts payable department calculates DPO by dividing its accounts payable by its average daily purchases. The lower a company's DPO, the better its financial health. For example, a company with a DPO of 30 days is in better financial health than a company with a DPO of 60 days.
2. Straight Through Percentage
The straight-through percentage of accounts payable is the percentage of invoices that are settled without requiring manual intervention. A high percentage indicates that the process is working well and that most invoices are being paid on time. A low percentage indicates that the process is inefficient and multiple late payments exist.
One way to fix a low percentage is to implement automation software that enhances workflow. Compared to manual entry, automated ap processes cut down time by leaving the gritty detail work to the software.
Calculating Straight-Through Percentage
There are a few ways to calculate the STP percentage. One way is to automatically take the number of paid invoices divided by the total number of invoices received. Another way is to take the total value of invoices paid automatically, divided by the total value of all invoices received.
3. Percentage Of Late Paid Invoices
According to a May 2022 study, nearly half of businesses’ invoices are not paid on time. Economic struggles from the COVID-19 pandemic and oncoming recession have led to a higher percentage of late payments.
Paper invoices and manual processes slow down the process, too, leading to late payments simply due to inefficient workflow.
This is detrimental to businesses for two reasons:
Strained vendor relationships
Discounts offered by vendors for on-time payments are a great way to save money, but consistent late payments rupture the line of trust between the two parties. A vendor may not extend the early payment discounts even with some on-time payments if there is a history of late payments from your company.
Vendors can go as far as cutting contracts or refusing to re-sign. Your company’s reputation is put on the line, and other vendors may refuse to work with you in the future.
Late Payment Fees
For startups, every penny counts. Late fees are based on a percentage of what is owed, typically ranging from 1% - 5%. Five late payments at 3% of a $5,000 payment equate to $750 in late fees. If the pattern continues through the year, you’re paying $9K in late fees alone.
4. Invoice Processing Time
A number of factors can affect invoice processing time, including the size of the company, the number of invoices received, and the type of accounting software used. Companies that use manual accounting methods will take longer to process invoices than those that use automated accounting software.
It can take three to four days to process a single invoice for high-functioning ap teams. When there’s a lag in efficiency, it can take upwards of 17 days. High processing times can mean your financial team is overrun with too many invoices or is struggling to balance daily tasks and invoice processing steps.
5. Average Days To Pay
Average days to pay refers to the number of days it takes to pay off an invoice. This doesn’t include the payment processing time. On average, US companies take around 58 days to pay invoices. It’s essential to know the industry average when deciding stipulations for vendor contracts. Don’t sell yourself short on time, especially if you don’t have a cash cushion in times of financial downturn.
Average days to pay directly relates to the percentage of late-paid invoices. When your days to pay are longer than the industry average, chances are you’re also running over the due date. Watching this metric with the late percentage will help you identify problem areas in the workflow process or if it's coming down to cash flow.
Calculating Average Days To Pay
The average days to pay is calculated by the total number of days to pay divided by the number of invoices closed.
For example, your company has closed five invoices this month.
Invoices one and two were paid in ten days, invoice three was paid in 15 days, and invoices four and five were paid in 12 days.
10 + 10 + 15 + 12 + 12 = 59
59/5 = 12
Tracking Accounts Payable Metrics In Real-Time
It is essential to track accounts payable metrics in order to manage cash flow and optimize working capital. Running manual accounts payable processes, while common, can cause more errors than an automated system.
Paper invoices can be misplaced. Human errors need to be found and fixed, which adds more tedious, time-consuming tasks to your bookkeeper.
Automating accounts payable has its benefits, but you’re still stuck waiting to see updated transactions. That’s why when we created Zeni, we bridged the time gap between receiving updated financial information and when the numbers are recorded.
Your accounts payable is an interactive section of your balance sheet, with every transaction in its individual bracket. Every vendor’s name is on the left, so you know you’ve paid with a single glance. Easily monitor all metrics mentioned above with our smart-powered bookkeeping software.