Making the most of the Accounts Payable Department (Part I)

Sep 23, 2016 | Invoice Management

Effective management of working capital, defined as current assets minus current liabilities, is one of the oldest practices of financial management. Following this practise the maxim was developed that short-term needs should be financed with short-term cash; and long-term needs should be financed with long-term sources. The underlying goal for the business is therefore essentially to reduce operational risks and costs of financing. This is measured in organizations with the accounts payable KPIS we are going to be talking about in the following paragraphs.

Although Accounts Payable departments in companies play a key role in achieving this business objective, many organizations neglect to take initiatives to ensure both the long-term effectiveness, and efficiency of its Accounts Payable department. Some leading companies have recognized the value in transforming the Accounts Payable process and have taken definitive accounts payable KPIS to increase the productivity of these departments.

Accounts payable KPIS

Regardless of whether your company operates in a decentralized or centralized environment, it is important that your Accounts Payable Department performs to its full potential and contributes effectively to reducing your operational risks and the costs of your financial activities.

But ... how can you determine whether it is achieving maximum performance?

A good starting point is to review benchmarking studies and surveys that have been made by experts associated with the Accounts Payable function. More than 12% of Spanish companies, and nearly 75% of companies with 5,000 or more employees have done the exercise of evaluating and comparing the operating performance of its Accounts Payable department.

The correct use of the results of these studies and surveys has proved beneficial in streamlining processes and transforming the productivity of the Accounts Payable department for numerous companies. These studies, with data from other companies, can be used to explore and compare the performance of your Accounts Payable department. If your results are far from those reported in the studies, then it may be a good time to identify the reasons for these shortcomings and implement the necessary corrective measures to improve operational performance.

6 Accounts payable KPIS to measure efficiency

There are a variety of performance parameters within Accounts PayableKPIS that can be identified and measured so that they can be improved. It is important to identify the metrics that are measurable within the operations and determine those few that support the strategic priorities of the company and its operating culture.

In this series of three articles that we will publish throughout the month, we will delve into the main KPIS of accounts payable department, which are:

► Process costs
► Automation
► Error rates
► Fraud and double payment
► Financial controls
► Provider satisfaction

Let's look at the first Accounts payable Key performance indicatr of the series:

1. Process costs

The cost of processing a vendor invoice is the most basic metric, but in many cases, one of the most difficult to evaluate. The challenge is to obtain an objective comparison of the process steps included in the cost calculation. Some studies include the costs associated with invoice handling, scanning, certification, archiving, matching, ... This is where Benchmark studies can be particularly useful given their ability to employ a consistent definition in their cost analyses. Even with such consistency, different cost studies show a wide range of operational results. One benchmarking study estimates the cost of processing a vendor invoice in the range of EUR 3 to EUR 15 per invoice, while another study puts the cost between EUR 5 and EUR 19 per invoice. However, following the respondents' answers, the studies highlight that the average cost to process a vendor invoice is approximately EUR 6. Interestingly, there is very little correlation between the cost of processing a supplier invoice and the size of the company.

Other useful accounts payable KPIs are the number invoices processed per employee per year and the number of days required to process a provider invoice. Best practices suggest that in high performing Accounts Payable departments an employee can process 20,000 invoices with purchase order a year. Departments in these same high performing departments, the average processing time per provider invoice is about 3 days. This compares with 6 days required to process an invoice which is the average objective set by the companies surveyed.

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