For B2B distributors, having clear visibility into accounts payable (AP) performance is crucial for identifying issues, optimizing processes, and controlling costs. But many organizations lack access to the right AP metrics and data to provide this visibility.
This article will explore the 5 most critical AP metrics distributors should be benchmarking to boost efficiency, cash flow, and savings along invoicing and payment processes.
#1 Invoice Cycle Time
The invoice cycle time measures that complete lifespan of an invoice - from when it arrives at your door to when payment is issued. It's essentially the total processing time for accounts payable to review, approve, and settle an invoice obligation with a supplier.
For distributors dealing with thousands of invoices monthly from dozens or hundreds of vendors, elongated cycle times create major bottlenecks.
The longer it takes to process invoices from start to finish, the more it disrupts cash flow forecasting and working capital management.
By tracking average cycle times across your invoice volumes, you can identify where delays are occurring - whether it's during data entry, resolving exceptions, routing for approvals, or ultimately cutting checks.
Benchmarking cycle times consistently above 30 days, for example, would indicate processes are too sluggish.
The key benefit of optimizing this metric? You can proactively shrink cycle times to accelerate invoice processing and payments. Paying suppliers quicker allows you to capture more early payment discounts for savings while avoiding costly late fees and penalties.
How to Track Invoice Cycle Time:
- Use AP automation to timestamp each major invoice milestone - received, approved, paid
- Calculate cycle time for each invoice as days between received and paid dates
- Analyze averages, trends over time, and pinpoint bottleneck processes driving long cycles
#2 Early Payment Discount Capture Rate
This metric evaluates how well your AP processes are positioned to capitalize on early payment discount opportunities from suppliers. For manufacturing and distribution companies with high invoice volumes, the potential savings from discounts like 2/10 net 30 can be substantial.
However, studies show most companies actually miss out on over 95% of these discounts offered by suppliers! The reasons are largely process-oriented - lack of visibility, approval bottlenecks, poor prioritization of discounted invoices, etc.
By tracking your early payment discount capture rate, you pinpoint how much you are leaving on the table. A capture rate below 20% indicates significant opportunities to restructure workflows for faster invoice handling of discounted invoices.
Even a 5% increase in this metric could translate into millions of dollars in annual savings for a high-volume distributor. With pressures to reduce costs, having AP practices that systematically capture more discounts is a no-brainer profitability boost.
How to Track Early Payment Discounts:
- Invoice details should indicate if an early payment discount is offered and terms
- Calculate total potential discount $ amount based on invoices with discounts
- Track the actual $ amount of discounts captured by making payments per terms
- Capture rate = Discount $ captured / Potential discount $ offered
#3 Dispute and Exception Rates
Inevitably, a portion of supplier invoices received will have discrepancies, lack proper coding/approval, or have other exceptions that require investigation and resolution before payment can proceed. While exceptions are unavoidable, high dispute rates are a big red flag regarding process inefficiencies.
By calculating dispute rates, you measure what percentage of invoices hit snags requiring costly human intervention and inquiry cycles with suppliers.
For companies with dispute rates over 20%, for example, it indicates underlying issues like inaccurate data, lack of PO matching, approval breakdowns, and more. High disputes correlate with protracted cycle times and higher processing costs from rework efforts.
The goal is to optimize processes that validate invoices upfront - through improved vendor master management, automated 3-way PO/receipt/invoice matching, intelligent data capture, etc. Driving down dispute rates enables more "touchless" straight-through processing for faster payment and reduced overhead.
How to Track Dispute and Exception Rates:
- Flag all invoices placed on hold or sent to exception queues within AP system
- Track reason codes for disputes (pricing, duplicate, PO mismatch, etc.)
- Calculate dispute rate = (# of disputed invoices / total # of invoices)
- Analyze dispute reason code trends to identify root causes
#4 Late Payment Penalties
While delayed payment to suppliers may sometimes be unavoidable, late payments that incur costly penalties or interest fees are simply burning money. These penalties quickly add up for organizations with high invoice volumes and protracted cycle times.
By tracking both the amount and percentage of late payments made (those paid after the agreed-upon due date), you quantify the real costs of process bottlenecks and inefficiencies. Even a seemingly small 2% late payment rate can translate into millions wasted annually for a billion-dollar distributor.
Moreover, a high late payment ratio damages your standing and relationships with suppliers. Penalized organizations may lose chances to negotiate better payment terms or discounts in the future.
Optimizing this metric isn't just about recapturing penalty fees. It's about regaining control of payment cycles, fortifying cash flow management, and improving vendor relationships - all critical factors for streamlined supply chain operations.
How to Track Late Payment Penalties:
- Note invoice due dates and payment dates in AP system
- Sum total $ amount of interest/fees charged for late payments after due date
- Calculate late payment % = # late payments / total payments
- Quantify potential savings from reducing late payments
#5 Invoice Processing Costs
While often an overlooked metric, understanding your all-in invoice processing costs is eye-opening for most AP departments. These costs encompass all labor hours, technologies, supplies, storage and other expenses required to manage the invoicing lifecycle.
For companies still heavily anchored in manual processes and paper invoices, the costs per invoice can be shockingly high - often $12 to $15 or more for each invoice processed. Automating processes can reduce these costs by 60-80% or more.
By calculating total AP operating costs compared to your invoice volumes, you derive the true per-invoice processing overhead. You can then estimate potential savings from streamlining efforts like invoice automation, OCR data capture, cloud-based approval workflows, and more.
Driving down invoice processing costs is a universal goal, freeing up resources that could be reinvested elsewhere. More importantly, lowering these costs through efficiency improvements creates compound value - faster cycle times, better discount capture, fewer late payments, and more.
How to Track Invoice Processing Costs:
- Analyze all costs for AP department - labor, software, systems, consumables, etc.
- Divide total AP operating costs by number of invoices processed annually
- Results in all-in $ cost per invoice processed
- Model potential savings by reducing manual touchpoints through automation
The Bottom Line?
The potential for realizing substantial cost savings and working capital improvements makes adopting an AP metrics mindset a must for finance leaders.
Leverage your accounts payable function as a strategic asset rather than just a cost center. Continually monitor your performance against these metrics, set ambitious improvement goals, and take action to transform AP into a finely-tuned machine.
Integratz specializes in comprehensively benchmarking key AP performance areas. Armed with this data analysis, we then engineer tailored solutions leveraging advanced automation tools to eliminate bottlenecks and wasteful processes.
If you've struggled with the problems outlined in this article, find a time to connect with us here. We'll map your unique challenges and requirements to spotlight the areas for maximum savings and efficiencies.
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