Have you ever stopped to consider the real cost of processing an invoice in your business?
Invoice processing costs vary widely, for instance, the average cost to process a single invoice is $13.11, as reported by Medius, while Adobe estimates it to be between $15 and $40.
This significant variance in costs raises an important question: What factors contribute to these expenses, and more importantly, how can you accurately calculate and perhaps even reduce these costs in your own business?
A staggering 82% of finance departments are overwhelmed by the sheer volume and diversity of invoices they need to process daily. This not only highlights the complexity of the task but also underscores the potential for inefficiency and unnecessary expense.
In this blog, we'll discuss invoice processing steps, the formula for cost of processing an invoice, key influencing factors, and the impact of invoice volume.
Invoice processing, a crucial component of accounts payable, involves several key steps. Each stage contributes to the overall cost of processing an invoice, impacting your business’s financial efficiency. Understanding these steps is essential for identifying areas where you can optimize and reduce costs.
- Invoice Receipt: The process begins when your business receives an invoice from a vendor or supplier. Invoices can arrive in various formats, including paper, email, or electronic submissions.
- Invoice Verification and Data Entry: Once received, invoices undergo verification. This step ensures that the details on the invoice, such as amounts, vendor information, and purchase orders, are accurate and correspond to the goods or services received. Data entry is then performed, where the invoice details are entered into the accounting system. This step is often labor-intensive and prone to errors in manual processes.
- Approval Workflow: Once verified, the invoice is routed for approvals. Depending on the organization's size and structure, this might involve multiple levels of authorization. Delays in this step, especially in manual processing systems, can contribute to increased costs.
- Payment Processing: Once approved, the invoice is scheduled for payment according to the payment terms agreed upon with the supplier. This step may involve different payment methods, such as checks, electronic funds transfer, or credit card payments.
- Record Keeping and Archiving: After payment, the invoice is archived for record-keeping. Efficient storage and retrieval systems can reduce the costs associated with this final stage of invoice processing.
Each of these steps involves labor, resources, and time, all of which contribute to the cost of processing an invoice. Identifying bottlenecks or inefficiencies in these steps can be key to reducing overall costs.
Calculating the cost of processing an invoice is critical for identifying efficiency gains and cost-saving opportunities.
Here's the formula:
Cost Per Invoice = Total Accounts Payable Department Expense/Total Number of Invoices Processed
To break it down:
Total Accounts Payable Department Expense: Sum up all expenses associated with your accounts payable department. This includes labor costs, technology expenses, overhead, and any other relevant costs.
Total Number of Invoices Processed: Count the total number of invoices your business processes over a given period, typically a month or a year.
Dividing your total expenses by the invoice count reveals your average cost per invoice.
For instance, if your department's annual spend is $50,000 for processing 10,000 invoices, the cost per invoice equates to $5.
$50,000/10,000 = $5 per invoice
This figure acts as a benchmark, offering insights into the operational efficiency of your accounts payable system. A cost above the norm suggests possible inefficiencies, while a lower cost points to streamlined procedures.
Several factors contribute to the cost of processing an invoice. Understanding these components is essential for accurate calculation and effective cost management:
Labor Costs: The most significant component, labor costs encompass the time spent by employees in processing invoices. This includes receiving, verifying, approving, and recording the invoices.
Technology and Infrastructure Costs: Investment in invoice processing software, hardware, and other related IT infrastructure plays a crucial role in the overall cost.
Physical Goods and Supplies: For businesses still using paper-based processes, costs of paper, printing, and postage for invoices add up.
Overhead Costs: These include indirect costs like utilities, rent, and equipment maintenance related to the Accounts Payable department.
Error Correction and Compliance Costs: Expenses incurred in rectifying invoice processing errors, as well as compliance and audit-related costs, can impact the overall expense.
Late Payment Penalties and Interest: Late payments can lead to additional charges, influencing the cost per invoice.
Opportunity Costs: Inefficient invoice processing can lead to missed discounts for early payments and can tie up resources that could be better used elsewhere.
Each of these factors can vary greatly depending on the size and nature of the business, the volume of invoices processed, and the efficiency of the Accounts Payable processes.
Recognizing and understanding these factors is essential for any business looking to optimize their invoice processing and reduce associated costs.
Related Read: How to Reduce Invoice Error Rates: A Guide to Better Invoicing
The volume of invoices a business processes significantly impacts the associated costs. Generally, the more invoices processed, the higher the total cost – but the cost per invoice often decreases due to economies of scale.
For small businesses processing fewer invoices, the cost per invoice can be higher due to lower volumes not justifying the investment in automation or dedicated staff.
Conversely, large businesses with high invoice volumes can leverage technology and specialized teams, resulting in a lower cost per invoice, but higher overall costs.
However, high volumes can also lead to complexities and increased chances of errors, potentially raising costs if not managed efficiently.
Automation becomes crucial here, as it can handle high volumes more effectively, reducing the time and errors associated with manual processing.
Suggested Read: Reduce Invoice Costs with These 5 Proven Accounts Payable Strategies
Constant's AP Automation offers a transformative approach to managing accounts payable (AP), enhancing efficiency and reducing costs. Here’s how Constant’s solution streamlines the process:
Seamless Integration with AP Inbox: Constant connects with your organization's AP email inbox, utilizing advanced technology to scan and process bills, ensuring secure and efficient data handling.
Efficient Bill Extraction: Leveraging Optical Character Recognition (OCR), Constant efficiently extracts bill information from emails, with options for manual corrections to ensure accuracy.
Streamlined Approval Workflow: The platform supports a multi-level approval process, from initial review by an AP executive to multi-level approvals, ensuring thorough scrutiny and alignment with company policies.
Prompt Acknowledgment of Bills: Upon bill approval, Constant sends automatic acknowledgments to vendors, enhancing trust and ensuring compliance. This acknowledgment is a critical step in maintaining good vendor relationships, as it confirms the receipt and impending processing of their invoices.
Organized Bill Queuing for Payment: Approved bills are queued for payment with clear status indicators, providing transparency and control over the payment process.
Customizable Expense Categorization: With Constant, businesses can tailor expense categories to their unique needs, ensuring accurate financial reporting and analysis.
Payment Confirmation and Record Update: Users can update payment details in Constant, ensuring accurate financial records and easing reconciliation processes.
Integration with Accounting Systems: Constant seamlessly integrates with popular accounting tools like Zoho Books and QuickBooks. When bills are marked as paid in Constant, the corresponding record is automatically updated in the accounting system, eliminating the need for manual data entry.
Automated Vendor Notifications: Post-payment, vendors are automatically notified, providing them with detailed transaction information.
Constant’s AP dashboard serves as a one action desk for all your accounts payable operations. It presents a detailed, yet clear, overview of your AP operations, enriched with actionable insights and essential metrics.
This comprehensive platform significantly minimizes manual labor and time expenditure in invoice processing, simultaneously elevating accuracy and strengthening vendor relationships.
By integrating Constants automation into your invoice processing, you're not just cutting costs; you're elevating your entire operational efficiency. This isn't merely an upgrade — it's a strategic investment that empowers businesses of every scale.
Interested in experiencing how Constant can transform your accounts payable process? Schedule a demo today and witness how our AP Automation enhances efficiency and cost savings it offers.
