Top 10 KPIs in purchase to pay
Article02.03.2012 Comments (1)
When evaluating the success of your purchase to pay operations, you'll need to establish a set of key performance indicators against which to measure your progress. You may have four or five, or you may have substantially more. The important thing is that each KPI has a definition and is meaningful.
The indicators you choose will depend on what is important to your organisation. Is it cost reduction? Is it speed of service? Your business goals will determine whether your KPIs are quantitative, financial, actionable, directional or practical.
Susie West, CEO and founder of sharedserviceslink.com, has listed her top ten KPIs for purchase to pay this year, insisting that this is where her focus will be in 2012.
Cost per invoice
If you're serious about cost reduction, then cost per invoice will be an important KPI. It refers to the expense of each invoice that you process, from the moment it leaves the supplier to the time the payment is made.
Measuring this KPI usually involves taking the sum of all salary and IT costs incurred during the receipt of the invoice, right through to payment, and dividing it by the number of invoices coming in from third party providers over the space of a year.
First time match rate
When calculating this KPI you are looking at the percentage of invoices that pass straight through the purchase to pay system first time without delay or manual intervention.
This is often seen as one of the chief KPIs for purchase to pay, since a high first time match rate will feed through into other areas, potentially resulting in better productivity, lower costs per invoice and a greater number of invoices paid on time.
Payment on time
Failure to pay invoices according to the terms agreed by procurement is a sign of an ineffective purchase to pay operation. The higher the percentage of invoices paid on time, the more impactful your operation will be. Research from the Hackett Group shows that world-class organisations achieve 95 per cent payment on time.
When measuring this KPI you'll need to look at how many different payment terms you have and work out the average payment term. It makes sense to reduce the number of terms you have across any particular region.
Productivity per FTE
This stands for productivity per full-time equivalent - a unit that indicates the workload of each employee in your organisation. In relation to purchase to pay, it means the number of purchase invoices processed per FTE each year.
Automating your processes will reduce the need for manual handling, so your productivity per FTE should rise correspondingly. However, you may need to look at this KPI in conjunction with others, such as cost per invoice, as it measures the effectiveness of your processes but not the cost.
The whole point of adopting electronic invoicing and automated purchase to pay systems is that you eliminate the need to handle invoices manually, which makes this an important KPI.
In measuring it, you need to take into consideration that it does not just refer to the percentage of invoices that are electronic. It also refers to those that pass straight through your system, or in other words achieve a first time match rate.
Discounting is an effective way for buyers to generate returns on surplus cash and for suppliers to boost their cashflow. It involves the provision of discounts on goods and services in exchange for the early receipt of payment.
When measuring this KPI you need to look at how much of your spend has discounts enabled and how much of this you are taking. You'll then be able to work out how much your purchase to pay operations are saving or losing as a result.
Number of suppliers per 1,000 invoices
Maintaining a lean master vendor database is important when running an efficient procure to pay operation as it helps to keep down duplicates.
This in turn provides procurement with the leverage they need to agree better contracts. Indeed, if you are using a small number of suppliers to procure a large volume of your goods and services, you'll be in a better position to negotiate.
Spend under purchase order
This KPI feeds into cashflow forecasting, which is important if you're a small or medium-sized organisation relying on a steady stream of capital to keep you afloat.
Measuring it should give you an overview of what your true liabilities are, which in turn should determine what your days sales outstanding and days paid outstanding should be.
Days paid outstanding
This is an efficiency ratio that measures the average number of days a buyer takes to pay its suppliers. In recent years firms have been stretching out their days paid outstanding in order to boost working capital, which is why many large organisations are sitting on mountains of cash.
But some companies are realising, especially in such a low interest rate environment, that it makes more sense to take advantage of discounts for early payment than to keep hold of their cash for longer. Days paid outstanding could therefore be an important KPI for your organisation.
Percentage of invoices in query
Analysing this KPI could enable you to identify which parts of your purchase to pay operations are helping or hindering the process and make changes accordingly.
You'll have an overview of the entire system from the raising of the purchase order and the sending of the goods receipt note, to approval and payment of the invoice.
What you may notice is that many of these KPIs are interlinked, so it makes sense to look at them as a whole as well as individually in order to continually improve your performance.
For example, if you have a high percentage of touchless invoices, then it follows that your first-time match rate and your payment on time rate will be high.
Conversely, the lower your first-time match rate, the lower your productivity, the higher your cost per invoice, and the lower your invoices paid on time.
As Susie explains, the top KPIs for purchase to pay will alter from company to company, but the ten outlined above are an excellent place to start.