Are you aware of how effectively your business manages its accounts payable?
With accounts payable emerging as a strategic component for actionable intelligence in financial management, understanding and utilizing key metrics has never been more crucial.
In 2024, a significant shift is occurring in how businesses perceive and utilize accounts payable functions.
Senior leaders increasingly recognize their value, with two-thirds viewing accounts payable activities as highly valuable to their enterprise, a marked increase from just five years ago.
In this blog, we will explore the top accounts payable metrics essential for navigating the financial landscape of 2024. Expect to gain insights into leveraging these metrics for optimizing cash flow, enhancing supplier relations, and driving cost efficiencies in your business.
According to a survey by Ardent Partners, organizations that actively manage supplier relationships and focus on optimizing accounts payable processes can achieve an average of 16% reduction in invoice processing cost.
Tracking accounts payable metrics is essential for businesses to gain insights into their financial health and make informed decisions.
Metrics like days payable outstanding (DPO) help manage cash flow and ensure timely payments. Building strong relationships with suppliers is vital, and metrics aid in evaluating payment history.
Efficient accounts payable processes reduce costs and improve efficiency. Accurate metrics support strategic decision-making, enabling better terms, cost-saving opportunities, and vendor evaluation. Numbers and data play a crucial role in business stability, growth, and success.
Accounts Payables refer to the outstanding invoices or bills a company owes to its suppliers or vendors. It represents the company's short-term liabilities.
Accounts Payables (AP) are a fundamental aspect of a company's financial operations. It represents the money a business owes to its suppliers or vendors for goods or services received but not yet paid for.
Calculating Accounts Payables involves straightforward steps that we will outline below:
Gather Supplier Invoice Information: Collect all the invoices or bills received from suppliers or vendors for goods or services provided to the company. This includes details such as invoice numbers, invoice dates, and amounts owed.
Sum Up the Amounts: Add up the amounts owed from all the invoices to determine the total Accounts Payables.
Example: Let's say a company has received the following invoices from its suppliers:
- Invoice 1: $500
- Invoice 2: $750
- Invoice 3: $1,000
To calculate the total Accounts Payables:
Sum of Invoice Amounts: $500 + $750 + $1,000 = $2,250
In simpler terms, the company has $2,250 in Accounts Payables, representing the total amount owed to its suppliers.
Days Payable Outstanding (DPO) measures how quickly a company pays its suppliers. It helps assess the efficiency of cash flow management and payment practices.
Understanding DPO helps businesses identify opportunities to optimize payment processes, negotiate favorable terms, and improve cash flow management. A lower DPO indicates faster payment, which can enhance supplier relationships and potentially lead to discounts or improved payment terms.
To calculate DPO, follow these steps:
Determine the Total Accounts Payable: Sum up all the outstanding invoices that the company owes to its suppliers. This includes any unpaid bills or invoices awaiting payment.
Calculate the Average Daily Cost of Goods Sold (COGS): Divide the total cost of goods sold (COGS) by the number of days in the period under consideration. This provides an average daily COGS.
Divide Total Accounts Payable by Average Daily COGS: Divide the total accounts payable by the average daily COGS to find the average number of days it takes to pay suppliers.
Example: Let's say a company has $100,000 in accounts payable and an average daily COGS of $10,000. To calculate the DPO, divide $100,000 by $10,000. The result is 10 days.
In simpler terms, if a company takes 10 days, on average, to pay its suppliers after receiving an invoice, its DPO is 10.
Overdue accounts payable refers to invoices that remain unpaid beyond their due dates. It is essential to track these outstanding payments to ensure timely resolution.
Understanding overdue accounts payable is crucial for businesses to maintain healthy financial operations and supplier relationships.
When invoices remain unpaid past their due dates, it can impact cash flow and strain business partnerships.
By demystifying the concept and highlighting its relevance, we aim to empower businesses to manage their overdue payments effectively.
Calculating overdue accounts payable involves straightforward steps that we will outline below:
- Identify the Due Dates: Review the invoices that your business has received from suppliers and note down the due dates specified on each invoice. These due dates indicate when the payment is expected.
- Determine the Current Date: Take note of the current date, which serves as the reference point for calculating the number of days an invoice is overdue.
- Calculate Overdue Days: For each invoice, subtract the due date from the current date to determine the number of days the payment is overdue.
- Summarize the Overdue Days: Sum up the number of overdue days for all outstanding invoices to get the total overdue days for accounts payable.
Example: Let's say you have three invoices with due dates of June 1, June 5, and June 10. The current date is June 20. To calculate the overdue accounts payable:
- Invoice 1: June 1 - June 20 = 19 days overdue
- Invoice 2: June 5 - June 20 = 15 days overdue
- Invoice 3: June 10 - June 20 = 10 days overdue
The total overdue days for accounts payable would be 19 + 15 + 10 = 44 days. Timely resolution of overdue invoices not only ensures financial stability but also strengthens trust and collaboration with business partners.
Cleared bills refer to bills that have been paid and recorded in the financial system. Understanding cleared bills is essential for businesses to ensure accurate financial records and reconcile outstanding payments.
When bills are cleared, it means they have been successfully paid and accounted for in the financial system.
Calculating cleared bills involves straightforward steps that we will outline below:
- Gather Bill Information: Collect the necessary information about the bills you want to track. This includes the bill amounts, payment dates, and any relevant identifiers (such as invoice numbers or bill references).
- Identify Cleared Bills: Review your payment records and identify the bills that have been paid in full. These are the bills that no longer have outstanding amounts to be paid.
- Calculate Total Cleared Bills: Sum up the amounts of all the bills that have been cleared to determine the total cleared bills.
Example: Let's say you have five bills with amounts of $100, $200, $150, $300, and $250. Among these, you have cleared the bills with amounts of $100, $150, and $250. To calculate the total cleared bills:
- $100 (cleared)
- $200
- $150 (cleared)
- $300
- $250 (cleared)
The total cleared bills would be $100 + $150 + $250 = $500.
Total vendors refer to the overall count of unique suppliers with whom a business has established a relationship.
The term "vendors" refers to the individuals or companies from whom a business purchases goods or services. Understanding the total number of vendors is essential for businesses to manage their supplier relationships and assess their supplier network.
By demystifying the concept and highlighting its relevance, we aim to empower businesses to manage their supplier base effectively.
Calculating the total vendors involves straightforward steps that we will outline below:
Gather Supplier Information: Compile a list of all the suppliers your business has engaged with during a specific period or overall. This list should include the names or identities of each unique supplier.
Identify Unique Suppliers: Review the list and identify the unique suppliers. Remove any duplicates, as you want to count each supplier only once.
Count the Unique Suppliers: Simply count the number of unique suppliers remaining on the list to determine the total vendors.
Example: Let's say your business has engaged with the following suppliers:
- Supplier A
- Supplier B
- Supplier C
- Supplier A (duplicate)
- Supplier D
To calculate the total vendors:
- Supplier A
- Supplier B
- Supplier C
- Supplier D
The total number of vendors would be 4.
The Accounts Payable (AP) Aging report is a valuable tool for businesses to assess their outstanding payment obligations and track the aging of their accounts payable.
It provides a snapshot of how long invoices have been unpaid, allowing businesses to manage their cash flow and prioritize payments effectively.
The AP Aging report summarizes the outstanding invoices based on their due dates and the number of days they have been unpaid. Calculating the AP Aging report involves straightforward steps that we will outline below:
- Gather Invoice Information: Compile a list of all outstanding invoices, including the invoice numbers, invoice dates, due dates, and amounts owed.
- Determine Current Date: Identify the current date, which serves as the reference point for calculating the aging of the invoices.
- Calculate Aging Periods: For each invoice, subtract the due date from the current date to determine the number of days it has been outstanding. Categorize the invoices into aging periods, such as 0-30 days, 31-60 days, 61-90 days, and so on.
- Summarize Aging Periods: Add up the amounts owed for each aging period to obtain the totals for each period.
Example: Let's consider a list of outstanding invoices with the following details:
- Invoice 1: Invoice date - June 1, Due date - June 15, Amount - $500
- Invoice 2: Invoice date - June 5, Due date - June 20, Amount - $750
- Invoice 3: Invoice date - May 20, Due date - June 5, Amount - $1,000
If the current date is June 30, we can calculate the aging periods as follows:
- Invoice 1: 15 days outstanding (0-30 days)
- Invoice 2: 10 days outstanding (0-30 days)
- Invoice 3: 40 days outstanding (31-60 days)
The Top Vendor List represents the vendors that have the most significant impact on a business's operations, purchases, or other defined criteria.
The Top Vendor List is a valuable tool for businesses to identify and evaluate their most significant suppliers. It provides insights into the vendors that contribute significantly to a company's operations, purchases, and overall success.
Calculating the Top Vendor List involves straightforward steps that we will outline below:
Gather Vendor Information: Compile a list of all the vendors your business has engaged with during a specific period or overall. This list should include the names or identities of each vendor and any relevant information, such as the total amount spent with each vendor or the number of transactions.
Determine the Criteria: Define the criteria that will determine the "top" vendors based on your business's objectives. This could include the total amount spent, the frequency of purchases, or any other relevant metrics aligned with your business goals.
Rank the Vendors: Using the defined criteria, rank the vendors in descending order, starting with the vendor that meets the criteria to the highest extent. The vendor at the top of the list will be considered the top vendor.
Set the Number of Top Vendors: Decide the number of vendors you want to include in the Top Vendor List based on your business's needs and goals.
Example: Let's say your business has engaged with several vendors, and you want to identify the top three vendors based on the total amount spent with each vendor. Your list includes the following vendors and the corresponding amounts spent:
- Vendor A: $10,000
- Vendor B: $8,000
- Vendor C: $12,000
- Vendor D: $5,000
To calculate the Top Vendor List based on total amount spent, you would rank them as follows:
- Vendor C ($12,000)
- Vendor A ($10,000)
- Vendor B ($8,000)
These top three vendors would make up your Top Vendor List.
By regularly evaluating the Top Vendor List in a human-centric way, businesses can identify their key suppliers, strengthen relationships, negotiate favorable terms, and optimize their procurement strategies.
New vendors refer to suppliers or individuals with whom a business has recently established a business relationship during a specific period. Engaging with new vendors can bring fresh opportunities and partnerships to businesses. Keeping track of new vendors is important for maintaining a comprehensive supplier network and exploring potential growth avenues.
Identifying and tracking new vendors involves straightforward steps that we will outline below:
- Define the Time Period: Specify the time frame within which you consider vendors as "new." This could be a monthly, quarterly, or yearly period, depending on your business's needs and frequency of engagement with vendors.
- Gather Supplier Information: Collect a list of all the suppliers your business has engaged with during the defined time period. This list should include the names or identities of each supplier.
- Identify New Vendors: Compare the list of suppliers from the defined time period with your existing vendor list. Identify the suppliers that are not present in your previous records. These are the new vendors.
- Track and Maintain New Vendor Information: Keep a record of the new vendors, along with relevant information such as their contact details, offerings, and any notes about the nature of your engagement with them. Regularly update this information as you continue to work with the new vendors.
Average bill processing time represents the average duration it takes for bills to be processed by a company.
The average bill processing time is a crucial metric that measures the efficiency of a company's bill payment process.
It provides valuable insights into the time it takes for bills to be processed, from receipt to final payment.
Calculating the average bill processing time involves straightforward steps that we will outline below:
Gather Bill Processing Information: Collect data on the time it takes to process each bill from the moment it is received until the final payment is made. This includes recording the timestamps of important milestones, such as bill receipt, verification, approval, and payment.
Determine Time Duration: For each bill, calculate the duration between the receipt and final payment. This can be done by subtracting the receipt timestamp from the payment timestamp.
Summarize the Time Durations: Add up the time durations for all bills processed during a specific period.
Calculate the Average: Divide the total time durations by the number of bills processed to calculate the average bill processing time.
Example: Let's consider five bills processed by a company:
- Bill 1: Received on June 1, Payment made on June 10 (9 days)
- Bill 2: Received on June 5, Payment made on June 8 (3 days)
- Bill 3: Received on June 10, Payment made on June 15 (5 days)
- Bill 4: Received on June 3, Payment made on June 6 (3 days)
- Bill 5: Received on June 8, Payment made on June 12 (4 days)
To calculate the average bill processing time:
- Sum of Time Durations: 9 + 3 + 5 + 3 + 4 = 24 days
- Number of Bills Processed: 5
Average Bill Processing Time = 24 days / 5 = 4.8 days
In simpler terms, the average bill processing time for this company is approximately 4.8 days.
Related Read: Streamlining Accounts Payable: The Power of Automated OCR Invoice Processing
The Accounts Payables Turnover Ratio measures how frequently a company pays its suppliers in relation to its total purchases.
The Accounts Payables to Turnover Ratio is a valuable financial metric that helps businesses assess their payment efficiency and liquidity. It measures the relationship between a company's accounts payable and its overall purchasing activity.
Calculating the ratio involves straightforward steps that we will outline below:
Determine Total Purchases: Identify the total amount of purchases made by the company within a specific period. This includes the cost of goods or services acquired from suppliers.
Calculate Average Accounts Payable: Calculate the average accounts payable by adding the beginning accounts payable balance to the ending accounts payable balance and dividing it by two.
Divide Total Purchases by Average Accounts Payable: Divide the total purchases by the average accounts payable to calculate the Accounts Payables to Turnover Ratio.
Example: Let's say a company made $500,000 in total purchases during a year. The beginning accounts payable balance was $100,000, and the ending accounts payable balance was $150,000. To calculate the Accounts Payables to Turnover Ratio:
- Total Purchases: $500,000
- Average Accounts Payable: ($100,000 + $150,000) / 2 = $125,000
Accounts Payables to Turnover Ratio = $500,000 / $125,000 = 4
In simpler terms, this means that the company pays its suppliers four times within the given period, relative to its total purchases.
Efficient accounts payable (AP) management is critical for maintaining and improving a company's cash flow.
Monitoring the essential AP key performance indicators (KPIs) is crucial for effective AP management.
Companies should establish targets for each KPI and develop strategies to achieve them. It is important to analyze these KPIs collectively to gain a clear and accurate picture of the company's AP performance.
To empower your team and save valuable time, consider integrating comprehensive accounts payable automation software.
By implementing tools like Constant, you can efficiently manage routine and repetitive tasks, allowing your team to focus on customer interactions, dispute resolution, and higher-priority responsibilities.
Book a demo with Constant today to experience the benefits of automated accounts receivable reconciliation.
