Accounts payable metrics for a small business, grouped by what each one protects

Payables is measured, when it is measured at all, by one number: how much is owed. That number is on the balance sheet already. What it cannot tell you is whether the figure is complete, whether it is being paid on the terms that were agreed, or whether the same invoice is in it twice.

The measures below answer those three questions. They are grouped by what each protects: the reports, the cash, and the supplier relationships. All figures in the examples are invented.

What to take away

Measures that protect the reports

Invoices received but not entered, at month end. Count and value everything sitting in an inbox, a tray or an approval queue that has not reached the ledger. This is the cut-off measure: every one of these is a cost the month does not yet show. The expense recording guide explains why the cost belongs in the month the goods arrived regardless of when the invoice is keyed.

It requires looking somewhere other than the ledger. If there is no queue to look in, because invoices are entered whenever someone gets to them, that absence is the finding.

Invoice date to entry date, in days. Compute per invoice. Report the count over a threshold you set yourself rather than the average, because the average is dominated by the many that are keyed the same day and hides the ones that sat on a desk for six weeks.

Entries dated into a period already closed. Should be zero. If it is not, the period is not really locked, and every report issued from it has since changed.

The payables roll forward. Opening balance, plus invoices entered, less payments, less credit notes, should equal the closing balance. A difference means something reached the control account by a route that bypassed the supplier ledger: a manual journal, a payment posted to a cost line instead of against the invoice, or a supplier balance edited directly.

Measures that protect the cash

Statement reconciliation differences. For each supplier who sends a statement, agree it to your ledger and record the differences by type. The four types are: on their statement but not in your ledger (a missing invoice), in your ledger but not on their statement (a duplicate, or an invoice sent to the wrong entity), a payment you made that they have not applied, and a credit note they issued that you have not recorded.

An invented example. A supplier's statement shows 6,400 owed. Your ledger shows 4,900.

Three differences: one timing item that will clear itself, one missing cost of 1,800 the month does not show, and one duplicate of 200 that the next payment run would have paid twice.

Count these by type each month. A supplier whose statement never agrees is either badly run or telling you something about your own intake process.

Duplicate payments caught, and duplicate payments made. Two separate counts. The first is a measure of the control working; the second is a measure of it failing. Recovering a duplicate payment from a supplier is slow and sometimes impossible, so the second number costs real money every time it is not zero.

Payments made without a matching invoice. Count them. A payment with no invoice behind it is either a prepayment that has been recorded as a cost, an urgent payment that skipped approval, or something worse. The document behind the payment is what makes the entry defensible a year later, and the federal tax agency's list of records a business is expected to hold is a fair description of what counts as one.

Early payment, in days and value. For each payment, compare the date paid with the due date on the invoice. Paying thirty days early on a large invoice is an interest free loan to the supplier, made by whoever set up the payment run. Whether that is worth it depends on the discount offered, if any, which is why the measure is only useful per supplier and against the terms actually agreed. If you want to see terms written out in full rather than assumed, the rules the federal government pays its own suppliers under spell out when payment falls due and what an early payment discount has to be worth before taking it makes sense.

Late payment, the same way. Value paid after the due date, by supplier. This is the measure that predicts a supplier putting the account on hold, and it is worth reading alongside what it does to the timing of outflows in the cash flow statement.

Measures that protect the relationships

Invoices awaiting approval, by age. An invoice stuck with an approver is a supplier who is going to be paid late without anyone in finance having decided that. Age the approval queue the same way you would age receivables, and name the approver on each item.

Queries raised by suppliers, by cause. Where did the invoice go, why was it short paid, when will it be paid. Recorded with a cause, the list points at a stage of your process. Recorded as a count, it is just a measure of how annoyed people are.

Suppliers with no terms on file. Count the suppliers whose payment terms have never been recorded, so that every payment to them is being made on a guess or a default. Each one is an opportunity to either pay later with permission or to find out that you are already late.

A measure that misleads here

Total payables as a share of costs, compared with anyone else. It moves with your supplier mix, your terms and your month end timing, and there is no outside figure it can honestly be compared with. Compare it with your own last twelve months and nothing else.

The monthly routine

Take the readings in this order. The whole set is under an hour once the first month's baseline exists.

The balance those readings support is the one that appears on the balance sheet, and the process they measure is described in the accounts payable overview. Whether your system can produce these readings without a spreadsheet is a fair question to put to it, and one of several covered in the guide to accounting software.

Common questions