Accounts payable tracking and reporting are pivotal aspects of financial management. It's not just about keeping records; it's about understanding the financial health of an organization. With the right tracking and reporting mechanisms, businesses can gain valuable insights, optimize processes, and make informed decisions.
This article goes into detail about how important it is to keep track of and report on account payables and gives you a complete plan for how to do it.
Why Account Payables Tracking and Reporting is Important?
The most important thing for any organization is its financial health. The Accounts Payable (AP) department plays a vital role in ensuring smooth cash flow by handling vendor invoices, managing approval workflows, and ensuring timely payments. But how do you gauge the performance of your AP processes? That's where Key Performance Indicators (KPIs) come into play.
They provide invaluable insights into the efficiency, effectiveness, and performance of the AP process. By tracking and analyzing these KPIs, businesses can pinpoint areas for improvement, optimize processes, reduce costs, and ensure timely payments to suppliers.
Mastering Account Payables Tracking and Reporting for Financial Analysis
To truly master account payable tracking and reporting, one must understand the key metrics involved:
Days payable outstanding (DPO)
What are Days payable outstanding?: DPO is a financial metric that tells us the average time a company takes to pay its suppliers after getting their invoices. Think of it as a timer that starts when you receive a bill and stops when you pay it.
Why is it important? : DPO gives insights into a company's cash flow management. A higher DPO means the company holds onto its cash longer, which can be good for short-term cash flow. But if it's too high, suppliers might get upset, leading to strained relationships and potential late fees.
How to Track: Calculate DPO by dividing the total accounts payable by the cost of goods sold (COGS) and then multiplying the result by the number of days in the period.
Cost to process each invoice
What is Cost to Process Each Invoice?: This metric calculates the total expenses the Accounts Payable (AP) department incurs to handle a single invoice. It includes costs like salaries, software expenses, overheads, and any other related costs. Imagine it as the price tag for processing every bill you receive.
Why is it important?: Knowing the cost to process an invoice is crucial because it directly impacts a company's bottom line. If it's too high, the company might be overspending, which can eat into profits. On the other hand, a very low cost might indicate inefficiencies or missed steps in the process.
How to Track: Determine the total cost of processing invoices (e.g., labor, software solutions, overhead) and divide it by the number of invoices processed within the same period.
Top payment methods
What is Top Payment Methods?: This metric identifies the most common ways businesses pay their invoices, such as checks, wire transfers, credit cards, or ACH transfers. Think of it as understanding your most-used payment tools.
Think about your company as a busy market. The different payment methods you use are like gates that let people trade with each other. The slow lanes of wire transfers and credit cards are different from the slow gates of checks. Each has a story to tell.
Why is it important? : Knowing the preferred payment methods helps businesses streamline their payment processes and cater to suppliers' preferences. It's like knowing your friend's favorite restaurant when planning a dinner out.
How to Track: Record each payment method used for settling invoices and determine the percentage of total invoices processed with each method.
What is Payment errors? : These are mistakes made during the invoice processing or payment phase. Examples include paying the wrong amount, making duplicate payments, or missing a payment. It's like accidentally paying a bill twice at a restaurant.
Why is it important? : Errors can be costly, both in terms of money and reputation. Regular mistakes can strain relationships with suppliers and lead to financial losses.
How to Track: Record the number of invoices with errors and divide it by the total number of invoices processed to calculate the percentage of payment errors.
Invoices processed per employee
What is Invoices processed per employee? : This metric calculates the average number of invoices each member of the Accounts Payable (AP) team processes. It's like measuring the workload of each team member in terms of invoices.
Why is it important? : It's a direct reflection of the efficiency and productivity of the AP team. If each employee processes a high number of invoices, it might indicate a streamlined process. But if the number is too high, it could mean the team is overworked, which might lead to errors.
How to Track: Divide the total number of invoices processed by your AP department by the number of full-time equivalent (FTE) employees in the department during the same period
E-invoices as a percentage of total invoices
What is it? : This metric shows how many invoices are received electronically compared to the total number of invoices. It's like comparing emails to traditional letters.
Why is it important? : E-invoices are faster, more efficient, and often more accurate than paper invoices. A higher percentage indicates a move towards modern, efficient processes.
How to Track: Divide the number of e-invoices processed by the total number of invoices processed and multiply by 100 to obtain the percentage.
Percentage of supplier discounts captured
What is it? : This figure tells us how often a business takes advantage of discounts offered by suppliers for early or on-time payments. It's like using coupons at the store to save money.
Why is it important? : Every discount missed is money left on the table. By capturing more discounts, businesses can significantly reduce their costs. It's a direct way to save money without compromising on quality or quantity.
How to Track: Take the count of invoices that have utilized discounts and divide it by the count of invoices eligible for discounts. Then, multiply the result by 100 to determine the percentage.
Average time to approve an invoice
What is it? This measures the time it takes for an invoice to get the green light for payment. It's like the time between ordering a meal and getting it served.
Why is it important? : A shorter approval time can lead to faster payments, which can improve relationships with suppliers. It's essential for keeping suppliers happy and ensuring smooth business operations.
How to Track: Determine the duration required to approve each bill, and then compute the mean duration for all the bills processed during that time frame.
Accounts payable expense as a percentage of revenue
What is it? : This metric compares what a business spends on its AP process to its total earnings. It's like comparing your monthly grocery bill to your monthly income.
Why is it important? : If the AP expenses are too high compared to the revenue, it's a sign that the business might be overspending or not managing its finances efficiently.
How to Track: To calculate the percentage, take the total accounts payable expenses, divide it by the revenue from the same timeframe, and then multiply the result by 100.
Invoices processed per year
What is Invoices processed per year? : This tells us the total number of invoices a business handles within a year. It's like counting how many bills you pay in a year.
Why is it important? : Knowing this number helps businesses understand their workload and efficiency. A sudden increase might mean more business, but it could also indicate inefficiencies or backlogs.
How to Track: Count the total number of invoices your company has processed throughout the year.
Percentage of invoices processed straight through
What is it? : It's a way to see how many of your company's invoices go through the payment system smoothly, without anyone having to step in or fix issues.
Why is it important? : If a lot of your invoices are processed this way, it means your system works really well! It's quick, makes fewer mistakes, and saves everyone time.
How to Track: Divide the count of invoices handled by the overall number of invoices, then multiply by 100 to determine the percentage.
Invoice cycle time
What is Invoice cycle time? : Invoice Cycle Time tells us the time taken from when a business gets an invoice to when it's paid. Imagine it as the journey of an invoice from start to finish.
Why is it important? : Think of it like this: if you can speed up this journey, you'll have better cash flow, fewer late fees, and happier suppliers. Keeping an eye on this time can help businesses spot where they can do better.
How to Track: Determine the duration for each phase of the Accounts Payable procedure (such as receiving, approving the invoice, and making payment) for every single invoice. After that, compute the mean duration for all the invoices handled during a specified timeframe.
Summing Up on Account Payables Tracking and Reporting
Regular tracking and reporting are a must-have if businesses want to keep their finances in good shape. The metrics and practices discussed are your business’s vital signs, showing how healthy your financial processes are. With regular check-ups and a keen eye on these vital signs, businesses can spot issues early, take action, and keep their financial health in good shape.
Ambit offers a comprehensive suite of services, including bookkeeping, invoice processing, and financial reporting, to help businesses streamline their accounting processes. Let the experts handle your financial needs while you focus on growing your business.
FAQ’s on Account Payables Tracking and Reporting
How do you keep track of accounts payable?
Keeping track of accounts payable (AP) means keeping track of all short-term debts that need to be paid to creditors or sellers but haven't been yet. For double-entry bookkeeping to work, every entry into the general ledger needs to have a debt and a credit that balance each other out.
A credit is made to accounts payable when an invoice is received, and a debit is made to a cost or asset account in the same amount. Over time, the accounts receivable balance on the company's balance sheet shows the total amount of money that is still owed to vendors.
How do you Analyse accounts payable?
To analyze accounts payable, review the total AP balance on the balance sheet to understand short-term obligations. An increase in AP indicates more goods or services are being purchased on credit, while a decrease suggests timely payment of obligations. The ratio of AP to the company's total expenses or revenue can also provide insights into its financial health.
Additionally, comparing AP to accounts receivable can give a sense of the company's liquidity and cash flow management.
What is the accounts payable reporting method?
When you use the accounts payable reporting method, you list all the money you owe vendors or suppliers for goods or services you've gotten but not yet paid for. The balance sheet of a business shows these debts as a present liability.
In this way of reporting, you also have to write down how the money was paid, like in cash or on credit, and keep track of how long it takes to clear these debts. When records are kept correctly, they show the company's financial responsibilities correctly.
What does the accounts payable account track?
The accounts payable account keeps track of the short-term bills that a company owes to creditors or sellers. This includes any payments that are due for things or services that have been bought but not yet paid for. It's easy to see how much the company pays its short-term lenders and providers with this account.
This is a big part of a company's current liabilities on its balance sheet. It also helps the business keep good relationships with its suppliers and keep track of its cash flow.