It’s not difficult to calculate the true cost of processing an invoice. It’s important to understand that not all costs are the same.
Some are considered hard costs, or costs that are directly involved in the invoice processing workflow such as AP staff labor costs while soft costs are indirect costs involved in invoice processing such as the monthly subscription cost of your accounting software application.
To properly calculate the cost of invoice processing, you’ll need to examine your current process from labor costs to ancillary costs such as envelopes, ink, and even check stock, calculating costs for the following areas:
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Labor Costs
Labor costs will be where you spend the most money processing invoices and can involve the following tasks completed by the accounts payable department:
- Receiving the invoice from the vendor or supplier
- Completing three-way matching on the invoice
- Routing the invoice for approval
- Entering the invoice into the accounting software application
- Generating the AP report
- Approving payment for invoices due
- Processing payments which can include printing checks or paying via ACH transfer
- Attaching all relevant documents to the check or payment stub
- Stuffing checks into envelopes and attaching postage
- Filing all invoices in the vendor file
Using a manual invoice process will drive up the cost of processing an invoice, with these costs reduced as you add more AP automation.
Of course, AP staff may not be the only ones that need to have their labor hours included. Accounting managers, controllers, and purchasing department staff should also have any relevant time included in the labor calculation.
A sample labor calculation may look like this:
Position |
Hourly Wage |
Monthly AP Hours |
Total Cost |
AP Clerk |
$20 |
100 |
$2,000 |
Senior AP Clerk |
$25 |
20 |
$500 |
Accounting Manager |
$30 |
10 |
$300 |
Total |
|
130 |
$2,800 |
Now that you know the total labor cost for AP, you’ll divide the cost by the number of invoices processed for the month. In this instance, we’ll say that 125 invoices were processed for the month.
$2,800 / 125 = $22.40
That means that the labor cost for processing each invoice is $22.40. You may also want to include approval time in the calculation, which would drive up the per-invoice cost considerably.
Next, we’ll calculate the next two categories.
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Cost of Infrastructure
Along with direct costs such as AP staff, there are also infrastructure costs that need to be considered when calculating your invoice processing cost.
For example, if you’re using accounting software to process AP and pay bills, you’ll want to include the cost of the application.
Let’s say the software has a cost of $125 monthly, with a usage of around 25% per month, you would calculate the cost as follows:
$125 x 25% = $31.25
When you calculate your per invoice cost, you’ll need to include this total.
-
Payment Costs
Whether you pay bills by writing checks or by ACH transfer, there is a cost involved.
If you run checks and mail them to your vendors and suppliers, you’ll need to factor in the cost of checks, the cost of postage, and the cost of envelopes.
Though the cost is less, even ACH transfers normally incur a minimal cost.
Using the totals above, we’ll calculate the cost of processing the invoices for payment, with 105 payments paid by check, while the other 20 were paid by ACH transfer.
Item |
Per-unit Cost |
Number of Invoices |
Total Cost |
Paper Checks |
$0.03 |
105 |
$3.15 |
Envelopes |
$0.05 |
105 |
$5.25 |
Postage |
$0.63 |
105 |
$66.15 |
ACH Transfers |
$0.35 |
20 |
$7.00 |
Total |
|
125 |
$81.55 |
To get your total per-invoice cost, you would add your labor cost, infrastructure costs, and payment costs, and then divide that total by the total number of invoices processed.
$2,800 labor costs + $31.25 infrastructure costs + $81.55 payment costs = $2,912.80/ 125 = $23.30.
That means that it is costing you at minimum $23.30 to process every invoice received in accounts payable.
It’s important to keep in mind that other related costs or soft costs such as rent, utilities, insurance, printer ink, computers, and possible storage costs are not included in this calculation, which means that processing a single invoice is likely much more.
Add to that the other hidden costs, such as time spent investigating checks that have not been cashed, correcting errors, and investigating invoice variances, and your bottom line can be severely impacted by the costs involved in processing invoices manually.