What often goes unnoticed by many e-commerce owners…
The principal KPIs you as an e-commerce owner must consider are:
- Conversion Rate (CR)
- Average Order Value (AOV)
- Customer Acquisition Cost (CAC)
- Customer Lifetime Value (CLV)
- Return on Investment (ROI)
However, when it comes to making informed decisions, there are additional key performance indicators (KPIs) that you must prioritize. These metrics provide valuable insights into the financial well-being of your e-commerce business, with some specifically tied to your Account Payables. Here are 8 AP-related KPIs that can be crucial for your business:
1️⃣ Accounts Payable Days Outstanding
2️⃣ Accounts Payable Aging
3️⃣ Accounts Payable to Revenue Ratio
4️⃣ Cash Flow Coverage Ratio
5️⃣ Accounts Payable Turnover Ratio
6️⃣ Supplier Payment Terms Compliance
7️⃣ Discount Capture Rate
8️⃣ Accounts Payables Accuracy Rate
Key Performance Indicators for informed e-commerce decision-making and account payables management
Let’s explore 8 Accounts Payable related KPIs that can be crucial for your e-commerce business, helping you optimize your financial management and supplier relationships.
1. Account Payable Days Outstanding
Managing your AP efficiently is vital for maintaining healthy cash flow. The Account Payable Days Outstanding metric measures the average number of days it takes for your business to pay suppliers. By tracking this KPI, you gain insights into your AP management efficiency and its impact on cash flow. Lower AP days outstanding generally signify better cash flow management and improved financial health.
For a better understanding, here’s a numerical example to demonstrate the calculation:
Let’s assume:
- Accounts Payable Balance: €50,000
- Cost of Goods Sold (COGS): €500,000
First, we will determine the average accounts payable per day:
- Average Accounts Payable Per Day = Accounts Payable Balance / 365
- Average Accounts Payable Per Day = €50,000 / 365 = €136.99
Then, we can calculate the Accounts Payable Days Outstanding:
- Accounts Payable Days Outstanding = Accounts Payable Balance / (COGS / 365)
- Accounts Payable Days Outstanding = €50,000 / (€500,000 / 365) ≈ 36.5 days
In this example, the company’s Accounts Payable Days Outstanding is approximately 36.5 days. This means, on average, it takes the company around 36.5 days to pay its vendors after the goods have been received or services have been provided.
2. Account Payable Aging
Accounts Payable Aging is a financial metric that helps businesses track and analyze the distribution of their outstanding accounts payable balances based on the length of time the invoices have been unpaid. It provides valuable insights into the timeliness of payments and allows businesses to identify any overdue or aging payables that require attention.
3. Account Payable to Revenue Ratio
Evaluating the proportion of your AP relative to your business’s financial performance is essential. The Account Payable to Revenue Ratio compares your total AP balance to the revenue generated by your business. This ratio helps identify potential liquidity issues or heavy dependency on suppliers. Monitoring this KPI allows you to address any imbalances and optimize your financial strategies accordingly.
4. Cash Flow Coverage Ratio
The Cash Flow Coverage Ratio assesses your business’s ability to cover its AP obligations with operating cash flow. It compares the cash flow generated from operations to the total AP balance. A ratio greater than 1 indicates a healthy cash flow position to meet AP obligations, while a ratio less than 1 may suggest potential cash flow problems. By monitoring this KPI, you can proactively manage your cash flow and ensure timely payments to suppliers.
5. Account Payable Turnover Ratio
Efficiently managing your AP is crucial for maintaining a healthy cash flow and working capital. The Account Payable Turnover Ratio measures how quickly your business pays off its AP within a specific period. A higher turnover ratio indicates faster payment cycles, positively impacting your cash flow and working capital. Monitoring this KPI helps you identify areas for improvement, optimize AP processes, and build stronger relationships with suppliers.
6. Supplier Payment Terms Compliance
Maintaining good relationships with your suppliers is key to the success of your e-commerce business. The Supplier Payment Terms Compliance metric measures the percentage of AP payments made within the agreed-upon payment terms with suppliers. This KPI reflects your business’s ability to manage cash flow effectively and honor commitments. By ensuring compliance, you demonstrate reliability and trustworthiness, fostering healthier supplier relationships.
To calculate Supplier Payment Terms Compliance, you would need information on the total value of purchases made from suppliers and the percentage of purchases that were paid within the specified payment terms. Here’s a numerical example to illustrate the calculation:
Let’s assume: Total Purchases from Suppliers: €100,000 Purchases Paid Within Payment Terms: €80,000
- Calculate the percentage of purchases paid within payment terms: Payment Terms Compliance = (Purchases Paid Within Payment Terms / Total Purchases from Suppliers) x 100 = (€80,000 / €100,000) x 100 = 80%
In this example, the Supplier Payment Terms Compliance is 80%. This means that 80% of the total purchases made from suppliers were paid within the specified payment terms. The higher the compliance percentage, the better the company is at adhering to the agreed-upon payment terms with its suppliers.
7. Discount Capture Rate
Taking advantage of early payment discounts offered by suppliers can significantly impact your financial performance. The Discount Capture Rate KPI tracks the percentage of discounts captured by promptly paying suppliers. A higher capture rate indicates effective cash management strategies, maximizing cost savings and improving working capital. By monitoring this metric, you can optimize your payment processes and capitalize on opportunities for savings.
8. Account Payables Accuracy Rate
The account Payables Accuracy Rate measures the accuracy of the accounts payable process within a business. It provides insights into the level of accuracy in recording and processing payables, ensuring that the financial records reflect the actual obligations and liabilities of the company. Account Payables Accuracy Rate is essential especially for two reasons:
- Compliance and Audit Requirements: Accurate accounts payable records are essential for compliance with financial regulations and audit requirements. Both internal and external audits rely on accurate accounts payable information to assess financial controls, identify irregularities, and ensure compliance with accounting standards. Inaccurate accounts payable data can result in compliance issues, penalties, or even legal consequences.
- Cost Control and Efficiency: Accuracy in accounts payable contribute to cost control and operational efficiency. Errors in processing invoices or payments can lead to additional time spent on resolving discrepancies, rework, or late payment fees. By maintaining a high level of accuracy, you can streamline the accounts payable process, minimize errors, and reduce associated costs.
What’s the purpose of monitoring KPIs and AP-related KPIs?
As mentioned earlier, monitoring key performance indicators is a vital aspect of managing an e-e-commerce business as it provides valuable insights into your business’s performance and highlights areas of success and improvement. The benefits of relying on KPIs are several:
- First of all, you will be able to measure progress: having this data on hand can support you in setting and tracking your business goals and OKRs (Objectives and Key Results) more effectively. It allows you to easily keep an eye on your progress and make necessary adjustments to ensure you stay on track toward achieving your desired outcomes.
- Secondly, make data-driven decisions: while there is some room for relying on gut instincts in certain situations, consistently making decisions without any basis or supporting data can lead to unfavorable outcomes and potential challenges down the road.
- And lastly, help you in communicating with others: monitoring these data points provides a straightforward and effective means of communicating your results to others. By keeping track of these metrics, you can easily convey the outcomes and progress of your efforts in a clear and concise manner, facilitating better communication and understanding among stakeholders.
But if you want to improve your e-commerce and gain a competitive advantage over your peers, you cannot stop here, you should consider also AP-related KPIs. Tracking metrics such as Account Payable Days Outstanding, Account Payable to Revenue Ratio, Cash Flow Coverage Ratio, Account Payable Turnover Ratio, Supplier Payment Terms Compliance, and Discount Capture Rate, you gain insights into your cash flow position, financial health, and working capital management.
The importance of cash flow, working capital, and financial health cannot be overstated when it comes to the success of a business. Managing cash flow effectively ensures that a company has enough liquidity to cover its expenses and obligations. It allows for timely payments to suppliers, employees, and other stakeholders, and provides the necessary funds for growth and investment. Working capital, which is the difference between current assets and current liabilities, represents the resources available to a business for day-to-day operations. Sufficient working capital is essential for maintaining smooth operations, managing inventory, and meeting short-term financial obligations. Financial health encompasses the overall financial well-being and stability of a business. It involves evaluating various financial metrics, such as profitability, solvency, and liquidity. A strong financial foundation enables a company to withstand economic challenges, pursue growth opportunities, and attract investors and lenders.
Prioritize these KPIs, and unlock the financial insights needed to drive your business toward long-term success!
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Start by defining your business objectives, then choose specific KPIs that align with those objectives. By doing so, you can ensure that your goals are well-supported by the metrics you track.
If you want to improve your cash flow: monitor stock levels, identify when you need to order new stock, and fiind suppliers who'll provide you with stock only when you need it.
