Top 6 Metrics that Matter for Purchase-to-Pay Processes

For most companies today, “doing business” means managing an increasingly complex set of relationships and rules within a value chain which has grown to include more suppliers, distributors, partners, and other key players both locally and globally. And, while these relationships continue to grow in complexity, they have also become increasingly important to a company’s overall success.

When evaluating the effectiveness of your purchase-to-pay process, you’ll need to determine a set of objective metrics against which to track your progress. You may decide you only want four or five, or you may have more. The important thing is that each metric has a definition and is meaningful in the context of the company. In the words of famed management guru, Peter Drucker, “What gets measured gets improved.”

The metrics you choose will depend on what is important to your organization, and it will vary from company to company:

  • Is it cost reduction?
  • Is it speed of service?
  • Is it customer satisfaction?

Your business goals will determine whether your KPIs are quantitative, financial, actionable, directional, or practical.

1. Invoice matching rate:

Desired trend: stable and/or increasing

When calculating this KPI you are looking at the percentage of invoices that pass straight through the purchase-to-pay system the first time without delay or manual intervention.

This is often seen as one of the most important metrics 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.

2. On time payment rate:

Desired trend: stable and/or increasing

Failure to pay invoices on time is a sign of a defective 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 organizations achieve 95 percent 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.

3. Manual intervention rate:

Desired trend: decreasing

The whole point of adopting an automated purchase-to-pay system is that you eliminate the need to handle invoices manually, which makes this an important KPI.

When measuring, 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.

4. Amount of discounts captured:

Desired trend: increasing

Early payment and discounting is an effective way for buyers to generate returns on surplus cash, and for suppliers to improve cash flows. It requires the capturing of discounts on goods and services in exchange for the early supplier 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 able to take advantage of. You’ll then be able to work out how much your purchase-to-pay operations are saving or losing as a result.

5. Days payable outstanding (DPO):

Desired trend: depends on business objectives

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 DPO in order to increase working capital, which is why many large organizations are sitting on mountains of cash.

But some companies are realizing—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. If that is the case, then days payable outstanding would be an important KPI for your company.

6. Cost per invoice:

Desired trend: decreasing

If you are serious about cost reduction, then cost per invoice will be an important metric to analyze. It comprehends the expense of each invoice that is processed, 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 span of a year.

In summary, as the complexity of managing your business continues to increase, optimizing the metrics that matter will continue to be a challenge as well. However, there are technologies available on the market that can help. Adding dynamic B2B payments, combined with rich data capture for all remittance data, and a robust ‘track and trace’ archive for all transactions will enable companies to improve all metrics related to their purchase-to-pay process. In addition, value-added services that work as part of your purchase-to-pay solution—such as dynamic discounting, factoring, and supply chain financing—open up new opportunities to drive improvements across all financial metrics.

Overall, as you look to optimize your purchase-to-pay process, the metrics you choose to monitor will vary, but the six outlined above are a good place to start. Traxpay can help.

Subscribe to RSS

Leave a reply

Your email address will not be published. Required fields are marked *