How much does it cost to process an invoice?

It’s an interesting question and one that many business leaders don’t take the time to ask. Many businesses take the approach that the cost of an invoice is the value of the figure on the bottom of the last page. Unfortunately that is just the amount that comes out of your bank account, it is not the cost I’m talking about. I’m talking about what it costs you over and above the value of the invoice to process, approve, code and pay that invoice.

There have been many studies done over the years to look at this very question however those studies tend to be varied and broad in scope. They are studies run in different countries, in different currencies, across a variety of disparate industries and ultimately the numbers are averaged several times over until the result that comes out is hard to equate to the operation of your business. Having information doesn’t really help unless it’s specific enough to be meaningful and unless you understand the steps in the calculation so that you can truly understand what it is you are measuring. If the goal is to make the number smaller then you need to know what levers to pull to have desired effect on the end of the equation.

So, we need to rephrase the original question to “How much does it cost my business to process an invoice…?”.

Most of the studies and reports agree that there are 3 main types of cost that contribute to the cost of an invoice.

Direct Costs
These are the obvious ones that are easy to measure. For example, the cost of printing the invoices. If your process involves a piece of paper collecting approval signatures, then that cost is visible and measurable. Or perhaps if your invoices move between sites for approvals (yes, this still happens) there can be postage costs involved. Maybe your invoices are physically received by each local branch / store and couriered to head office for processing, or perhaps they use a sticker / barcode process that requires boxes of preprinted stickers to be available on hand.

Purchase Orders are an often-overlooked cost of processing an invoice. If you are raising PO’s with those ‘carbon-copy in triplicate’ PO books, then this is a direct cost to your business. Not to mention the costs around getting all the copies back to the accounts team for processing and reconciliation.

These are just a few examples of direct costs. How many does your business have…?

Indirect Costs
These are the costs that are visible, and you know about them, but perhaps it’s hard to measure them at a ‘per document’ level. One of the main indirect costs is time. How long does it take to process an invoice? Most of the studies focus on the duration of the payment cycle from when the invoices are received until when it is paid, but to measure the indirect cost of time more accurately you need to understand how long it takes a staff member to perform the tasks needed for each invoice. Not the time elapsed while it is sitting in an in-tray (although this is important too), but rather how long that document is active in their hands. How long does it take to reconcile an invoice against both a PO and a delivery docket? How long does it take to apply and/or correct the GL coding? And what happens when an invoice goes missing or an urgent payment is needed. This leads to an extreme jump in the labour associated with the processing of an invoice.

This type of cost is indirect because it is more about efficiency of process rather than the investment of time.

Another example would be to think about how your invoices are stored. What is involved in retrieving a particular invoice from a few years ago? Does it mean applying to get the document box retrieved from offsite storage or does someone have to? What does this mean in terms of your retention and disposal compliance and how will it affect an audit process? You may be aware that you pay an external storage company for archiving your documents, but those costs are consolidated monthly by document box rather than document. Not to mention the monthly fluctuation of the cost of retrieving an entire box to locate one document only to have to re-ship it back again afterwards. Not only is this cost variable depending on how many invoices you need to pull each month, but it’s likely also increasing as the number of boxes you send keeps growing.

Hidden Costs
These are the costs you aren’t always aware of. Delays in invoice processing can have a knock-on effect that is rarely measured. This can range from things like having to pay late payment fees or missing out on early payment discounts, through the double handling of an invoice when the vendor re-sends it because it hasn’t been paid within their payment terms period. Sometimes if an invoice is sent twice it may get paid twice before the duplication is detected. Ultimately the overpayment is resolved but at what cost? How much time does it take for the accounts staff to identify the issue and make the arrangements for the credit / refund?

While this far from a complete list of every factor in determining the cost of processing an invoice, most studies seem to stop at these 3 cost categories. However, I have flashbacks to the classroom of Year 10 Economics Studies and my teacher telling me that the ‘Opportunity Cost is the loss of other alternatives when one alternative is chosen’. I would argue that Opportunity Cost should be factored in as well.

Opportunity Cost
For AP processing, Opportunity Cost could be the time that your AP staff spend manually keying data into your finance system that could be utilized on more productive tasks. How many high value finance department tasks are waiting to be completed until a resource becomes available?

Opportunity Cost could be the uses you have for that storage room if it weren’t filled with filing cabinets of 7-10 years of invoices. Maybe you can employ more staff without needing to rent extra space. Perhaps it could be that you don’t?

Ultimately you need to ask, ‘What aren’t we doing because our process is designed this particular way?’

The good news regarding Accounts Payable costs is that it is easy to make significant cost reductions in this process. Ellby specialise in Business Process Automation (BPA) and Digital Transformation. If you would like our help in uncovering your true cost of processing an invoice, please contact us to arrange an initial meeting.