Switching to accounts payable automation will help you improve your fiscal accuracy and create considerable cost savings. Like any other form of automation, AP automation saves time and makes compliance and monitoring far easier. On top of it all, you make cooperation a lot easier and data more transparent.
As soon as you implement AP automation, you’ll see some benefits. Here are the top 5 KPIs that will help you see the actual progress that you’re making.
What Are KPIs?
The first question worth asking is what KPIs are, to begin with. The abbreviation KPI stands for Key Performance Indicators. These metrics are crucial for establishing the actual performance of your AP automation.
Think of it in terms of movies. KPIs are the number of tickets sold and hours watched on streaming services. It’s important to distinguish these from vanity metrics like the number of views or likes the trailer got on YouTube.
So, here are the top 5 metrics that matter the most when it comes to AP automation.
- Days Payable Outstanding (DPO)
The DPO is a financial ratio showing how long your company takes to pay the bills and invoices. This is the main reason why you need to go with AP automation. As soon as the bill arrives, the payment will be made if there are enough funds in the account.
Remember that automating your DPO ratio is about more than speed. Paying on time improves your reputation and makes you more credible in the eyes of your partners. It also eliminates the chance you’ll face any late fees or penalties.
Sure, lower DPO is not always a good thing. For instance, while the money is in the account, it can be used in several productive ways. It can improve your cash flow or increase your working capital. In other words, a higher DPO can indicate your company’s financial proactivity.
Ideally, you want the DPO of your company to be in balance.
- Average cost per invoice
The average cost per invoice is the cost of processing a single invoice through your organization. A company with a paper-based invoice process will take more time and spend more money per invoice. Once you start measuring the average cost per invoice, you’ll know exactly how much money you’ve saved since you started.
So, what are the costs that you would deal with? Things like mailing, late payments, systems and equipment, printing, audit cost, etc. In other words, there are so many ways in which you can skim a dollar here and there. The net result will be heavily in your favor; over the years, the difference may be significant enough to make a difference.
To give you a clue of how big of a difference we’re talking about, a company with little automation pays an average of $10.95 per invoice. The top performers (heavily automated) pay an average of $2.25 or less. Now, count how many invoices you pay in a month and a year.
- Number of payment errors
An incredibly important thing to keep in mind is that payment errors hurt more than just your finances. Sure, it’s a common mistake, but it may negatively impact your relationships with vendors, employees, customers, and partners. They may also affect your credit in the most unpleasant of ways. All of this can be avoided with the cunning use of project automation.
Keep in mind that late payments (those that slip through the system) will result in late payment fees. In other words, you’re facing an additional cost that was completely avoidable. Since most of these late and missed payments are caused by human error, automating the process will eliminate this eventuality.
Every time you streamline something, you automatically improve your organization’s communication funnel. This creates less room for miscommunication and makes it less likely that someone will forget to convey an important message.
- Payment methods
Keeping track of how much you pay via each payment method is essential. Checks, credit cards, ACH, etc., are just some of the payment methods that most enterprises employ. The thing is that it’s easy to lose track of your finances when your payments are spread so thin.
This will also help you determine if you use the most cost-effective methods. For instance, electronic payments are pretty cheap compared to checks. If the percentage of electronic payments is low, this is something that you can work on quite effectively.
Then, you can calculate the amount of money you’ve saved since you’ve switched to more electronic payments. As a result, you get a clear KPI of how effective this switch to AP automation has been.
- Percentage of discounts captured
In many scenarios, there will be an early payment discount. However, this is often too tight of a window of opportunity for you to recognize every time. With AP automation, this happens automatically, which means that every time there is a discount, you’re bound to capture it.
Now, if you want an exact number of discounts captured, turn this into a percentage game. Divide the number of discounted early payments by the number of discounts on offer. Then, multiply this by 100 to get an exact percentage.
Sure, you could manually count all the discounts you’ve managed to capture, but this defeats the whole purpose of automation. The critical thing is that whenever there’s a potential to save a dollar or two, you won’t miss an opportunity. Moreover, since these are discounts on payments that you would have made either way, it will sometimes feel like making money out of thin air.
Wrap Up
Once you have all these KPIs listed, it will be easy to figure out exactly how much money you’ve saved since switching to AP automation. What you won’t track as easily is the number of working hours you’ve saved, the number of potential errors you’ve prevented, and the amount of frustration you’ve saved your staff from. Some of these are hard to quantify, while others enter the realm of speculation. Either way, switching to AP automation is always a good move.
