Calculating your cost per invoice
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Calculating your cost per invoice
The cost it takes accounts payable (AP) departments to process one invoice is a key performance indicator (KPI) for any business. In the State of ePayables in 2019 report, Ardent Partners reported the all-inclusive AP benchmark cost to process a single invoice is slightly over $10. With that said, various experts have found that processing paper invoices can range anywhere from $12-$30. Because there isn’t a single perfect benchmark, it’s important to understand how your company compares within your own industry as well as taking a cross-industry view.
As you build your invoice processing data, be sure to pinpoint the characteristics and differences of your own industry in comparison to others. For instance, some industries process a lot more invoices than others. It’s also important to recognize which companies and industries have implemented accounts payable automation technology in their company processes which has enabled them to reduce or even eliminate inefficiencies within an AP department.
A high cost for a single invoice can often be caused by manual processes such as large numbers of paper or PDF invoices, invoice scanning, and manual data entry, as well as a high rate of invoice disputes with vendors, poor employee productivity, and insufficient employee training or oversight.
So, where do you start calculating cost per invoice?
In order to understand how much invoice processing is costing your business, companies need to account for the entire invoice processing cycle from start to finish. Remember, the type of invoice matters when gathering this data; it’s also important to consider all financial factors such as IT support, staff salaries and benefits, software fees, and additional overhead costs.
Knowing how long it takes to process an invoice from when it’s received to when it’s archived allows teams to measure their average receipt-to-pay time and identify process inefficiencies. Teams can pinpoint what tasks are the most time-consuming and tackle issues that create slowdowns and late payments.
Essentially, you’ll want to calculate the total expenses incurred by the AP department and divide that by the total number of invoices processed over the same period of time.
To start, AP departments need to assess their current costs by asking the following questions:
- How long does it take to process & mail an invoice?
- How many hours are spent reviewing each invoice?
- How many hours are spent finding & correcting data entry errors?
- What is the cost to ship, scan, & store each invoice?
- How many hours of productivity are lost in the invoicing process?
- How much money is lost on early payment discounts or late payment fees?
Here are some things to take into consideration:
Direct costs are often costs associated with physical goods. If you’re still using paper checks for payments, you’re definitely incurring tangible costs that can add up quickly. Direct costs include the purchase of paper, envelopes, printer ink cartridges, mailing labels, and stamps. You’ll also want to assess other subtler direct costs, such as investments in cabinets, scanners, and monthly estimates on the cost of printers and printer maintenance. You’ll want to divide these costs against the number of invoices processed over a specified timeframe.
Indirect costs include the employee and staff time it takes to process an invoice. Breaking down invoice processing tasks and using a time-tracking tool over a set period of time will help you gather this data. Some of the metrics you’ll want to track include:
- Communication with vendors to discuss invoice processing & payment methods
- Invoice payment entry
- Error reduction methods, such as 3-way matching
- Error correction time
- Payment review and approval
- Time spent releasing funds
- Dealing with exceptions such as late & erroneous payments
You’ll also want to include the cost of paying people to organize, stuff, seal, address, stamp, and mail the bills. Additionally, it’s important to assess invoice lag time that creates a negative cash flow. It can take time for a client to receive, review, and pay a bill through the mail. If you’re waiting on a check to pay an expense, you’re liable for a late fee charge and will want to include late payment charges in your calculations.
Manually processing invoices consumes time which prevents companies from capitalizing on early payment discounts offered by many vendors. The Aberdeen Group found that capturing early payment discounts alone can save companies an annualized 11% or more per year.
Once you’ve gathered data on tasks and the time associated with them, you’ll want to calculate an hourly rate. Consider dividing the hours tracked by an average monthly salary or hourly rate for your staff.
As you generate your invoice processing data, you’ll want to build in the cost of any software platforms used to manage invoice processing, such as fraud detection tools, payment processors, and enterprise resource planning (ERP) platforms. By calculating the total amount your business pays for each tool and dividing it by your window of assessment time, you can further define your invoice processing costs.
If you outsource your invoices to a scanning company, you must consider all the hours it takes to prepare invoices for shipping and account for all shipping fees, along with the hours of staff productivity time potentially being lost while your department waits to receive the scanned images, which can sometimes take up to 7-10 days.
How can you save time and money per invoice?
So, you’ve done the analysis and may come to realize there is work needed in order to meet industry standard benchmarks and reduce invoice processing costs. One simple and recommended practice is moving from manual invoice processing to an automated AP software solution.
Cloud-based automation cuts invoice processing time by 50%, refocuses manpower time previously spent on manual data input, eliminates mistakes, ensures on-time payments, improves working capital management, and optimizes performance. Invoices are processed faster, manual data entry and coding errors are reduced, there are no lost or misplaced invoices, approval cycle times are minimized, and payables are routed automatically and instantaneously.
Using AP automation, you can also capture data and report on KPIs that help assess your department’s performance. AP automation can also help track accounts payable metrics that will provide a truer projection of your company’s cost per invoice. These metrics include invoice volume, invoice processing time, and invoice cycle time. Not only does AP automation track cycle times, but an automated process can also help teams improve, and even accelerate, their workflows.
In a nutshell, if you want to save money and time, you’ll want to move to an automated system.