You’re leaving money on the table if you’re not measuring your company’s ability to process invoices.
Successful companies focus on optimizing things that affect their bottom line. This spans everything from products to supply chains, manufacturing processes to services, and sales metrics to company reputation. A sole focus on these major considerations may keep a company afloat but broadening the effort can reap significant rewards.
Invoice processing is a Key Performance Indicator[1] – or KPI – that is worth investigating as companies expand their optimization effort.
Whether you’re scrutinizing your accounts payable (AP) or your accounts receivable (AR) processes, the proof’s in the pudding: automation matters. Consider a benchmarking survey conducted by cfo.com, in which researchers isolated the annual accounts payable (AP) processing costs of 997 companies and calculated the cost per invoice for each company.[2]
The survey revealed a remarkable gap between top and bottom performers, with bottom performers spending upwards of 2.5x more per invoice (Figure 1). Top performers, which comprised 25% of the data set, managed to process 75% more invoices than other survey participants.[3]
Labor costs measured in the survey were significant – 62% of total invoice costs. The data hint that further cost savings can be achieved through reductions in manual intervention to correct errors. There are myriad opportunities for these errors to appear in a manual AP process: errors in purchase orders, invoices, invoice disputes, shipping and receiving documentation, overpayment, late payment, duplicate payments, etc. arise more frequently through manual processes such paper invoicing, scanning, data entry, and can be exacerbated by insufficient training and poor oversight.[4] The manual intervention required to rectify these errors is time-consuming and drives costs significantly.[5]
To calculate these hidden costs, bear in mind the range of costs in processing a single invoice noted in Figure 1. You’ll want to account for the entire lifetime of the invoicing process while also considering the costs of IT support, salaries and benefits, software costs, and other overhead. Studying the invoicing process will reveal how long it typically takes while highlighting inefficiencies. Calculate total AP expenses over a set period, then divide that amount by the number of invoices processed in the same period:[6]
Current Costs
- Time to process and mail an invoice
- Time spent reviewing an invoice
- Time spent correcting errors
- Costs to ship, scan, and store each invoice
- Productivity time lost in the invoicing process
- Money lost on early payment discounts and late payment penalties
Direct Costs
- Checks
- Paper goods
- Printer ink
- Mailing labels
- Stamps
Indirect Costs
- Communication time with vendors to discuss invoices
- Invoice payment entry
- Error reduction methods, e.g. 3-way matching
- Payment review and approval
- Time spent releasing funds
- Time managing late or erroneous payments
- Wages spent on organizing, stuffing, sealing, addressing, stamping, and mailing
- Negative cash flow resulting from invoice lag time
- Time for a client to receive, review, and pay by mail
Infrastructure Costs
- Storage cabinets
- Scanners
- Printers
- Computers
- Software (fraud detection tools, payment processors, ERP)
It’s clear that invoicing costs – whether they are AP or AR – account for a healthy portion of overall operating costs. It’s certainly worth considering a trusted and effective accounting automation platform to push costs down. Bold Group’s SedonaOffice and AlarmBiller are integrated solutions that can help you manage those costs along with many other business and accounting processes. Contact Bold Group today to learn more.
Bibliography
- “An SMB Buyer’s Guide to AP Automation « CPO RISING – THE SITE FOR CHIEF PROCUREMENT OFFICERS & LEADERS IN SUPPLY MANAGEMENT.” Accessed November 14, 2019. https://cporising.com/2014/08/28/an-smb-buyers-guide-to-ap-automation/.
- “Calculating Your Cost per Invoice – Know What You Spend | Goby.” Accessed November 14, 2019. https://www.gobyinc.com/calculating-your-cost-per-invoice/.
- “Metric of the Month: Accounts Payable Process Cost.” Accessed November 14, 2019. https://www.cfo.com/expense-management/2015/06/metric-month-accounts-payable-process-cost/.
[1] “Calculating Your Cost per Invoice – Know What You Spend | Goby,” accessed November 14, 2019, https://www.gobyinc.com/calculating-your-cost-per-invoice/.
[2] “Metric of the Month: Accounts Payable Process Cost,” accessed November 14, 2019, https://www.cfo.com/expense-management/2015/06/metric-month-accounts-payable-process-cost/.
[3] “Metric of the Month: Accounts Payable Process Cost.”
[4] “An SMB Buyer’s Guide to AP Automation « CPO RISING – THE SITE FOR CHIEF PROCUREMENT OFFICERS & LEADERS IN SUPPLY MANAGEMENT,” accessed November 14, 2019, https://cporising.com/2014/08/28/an-smb-buyers-guide-to-ap-automation/.
[5] “Calculating Your Cost per Invoice – Know What You Spend | Goby.”
[6] “Calculating Your Cost per Invoice – Know What You Spend | Goby.”