For startups, every rupee counts. Whether you are just starting out or even expanding in order to sustain your business, it’s best to follow the principle that a rupee saved is a rupee earned.
In this article, we'll answer this question as we unveil the true cost of manual invoicing in 2024 and explore how Accounts Payable (AP) automation software can be your aide in not only drastically slashing processing costs, but it will also empower your accounting team with improved workflow efficiency, freeing them up to focus on more strategic tasks that drive growth.
Invoice Processing Cost Vs Cost per Invoice To calculate the cost of processing an invoice manually or through manual invoicing in 2024, we must understand the terms associated with the cost of an invoice.
Invoice Processing cost refers to the total expenses incurred while an invoice is being processed by your Accounts Payable department. It’s calculated by adding up various direct and indirect costs incurred in the process.
The cost per invoice in Accounts Payable (AP) is a metric that reveals how much it costs your company to process a single invoice. It's calculated by dividing the total expenses incurred by your AP department over a specific period (Invoice Processing Cost) by the number of invoices processed during that same timeframe.
Invoice Processing Costs= Labour Costs + Infrastructure Costs + Physical Goods Cost + Transaction Fee
Cost Per Invoice= Total Expenses in AP (Invoice Processing Costs)/ Number of Invoices
Industry Benchmarks in Cost per invoice The ideal cost per invoice varies across industries. However, benchmarks exist to provide a general guideline.
Potential Savings in Invoice Processing Studies show that automation significantly reduces processing costs. For instance, with low invoice volume, processing a single invoice can cost around $13 with automation compared to nearly $16 without it. This translates to substantial yearly savings, especially for companies processing a high volume of invoices.
Calculating the Cost Of Processing an Invoice Four major costs are considered while calculating the total cost of an invoice:
1.) Labour Costs
2.) Infrastructure Costs
3.) Physical Goods Costs
4.) Transaction Fees
1.) Labour Costs Labour costs are the cornerstone of calculating invoice processing expenses.
Step 1: Identifying Your Invoice Processing Workforce
The initial step involves pinpointing the individuals involved in your startup's invoice processing workflow. This team typically encompasses:
Accounts Payable Clerks: These personnel handle the data entry of invoice details into your accounting system.Approvers: This role ensures the accuracy of invoices by verifying them against purchase orders or contracts. Approvers may include department heads, accounting managers, or even the CFO.Payment Processors: Responsible for releasing the authorised funds to vendors after final approvalStep 2: Calculating the Hourly Rate
There are two primary approaches to calculating the hourly rate depending on your team's salary structure:
Average Cost Approach: If your accounts payable (AP) team has a relatively uniform salary range, you can calculate an average monthly salary and divide it by the standard monthly working hours.Individual Cost Approach: When there's a significant disparity in salaries within the AP team, consider calculating an hourly rate for each employee involved in invoice processing.Step 3: Quantifying Time Spent on Invoice Processing
Accurately gauging the time dedicated to invoice processing by each team member is crucial. Here are some strategies:
Leveraging Time Tracking Tools: If your startup already utilises time-tracking software, extracting data related to invoice processing tasks becomes a breeze.Manual Time Tracking: In the absence of dedicated time-tracking tools, consider breaking down invoice processing tasks into smaller components. Each team member can then manually track the time spent on these tasks over a predetermined period. Here's a breakdown of typical invoice processing tasks to consider during time tracking:
Vendor Communication: Establishing communication channels with new vendors to discuss invoicing procedures and preferred payment methods.Invoice Reception and Data Entry: Receiving invoices from vendors and meticulously entering the details into your accounting system.Fraud and Error Prevention: Implementing measures like two-way matching (verifying invoice details against purchase orders or receiving reports) to mitigate errors and potential fraud before authorising payments.Payment Generation and Approval Workflow: Initiating the payment process for the invoice routing through the designated approval channels.Payment Authorization: Approving the payment for disbursement to the vendor.Payment Release: Releasing the authorised funds to the vendor.Exception Handling: Addressing any discrepancies in the process, including erroneous or delayed payments.Example
Let's assume your startup has a dedicated Accounts Payable Clerk with a monthly salary of ₹32,000. Dividing this by the standard of 160 working hours per month translates to an hourly rate of ₹200 (₹32,000 / 160 hours = ₹200/hour).
Furthermore, through time tracking (manual or via software), you can determine that the Accounts Payable Clerk spends an average of 10 hours per week processing invoices (10 hours/week * 4 weeks/month = 40 hours/month).
By multiplying the hourly rate by the total time spent processing invoices, you can estimate the monthly labour cost associated with this function: ₹200/hour * 40 hours/month = ₹8,000/month
By following these steps and referencing the sample data set provided, you'll be well-equipped to calculate your startup's labour costs associated with invoice processing.
2.) Infrastructure Costs Beyond the labour element, invoice processing also carries infrastructure costs. This refers to the expenses associated with the software platforms that power your invoice processing workflow. These platforms serve as the backbone of the operation, streamlining tasks and ensuring accuracy.
Step 1: Identifying Your Software Arsenal
The digital tools that contribute to your invoice processing infrastructure can include:
Enterprise Resource Planning (ERP) Platforms: These comprehensive systems manage various aspects of your business, often including accounts payable functionalities.Dedicated Accounts Payable Software: Designed specifically for invoice processing, these solutions can offer advanced automation and control.Payment Processors: Platforms facilitating secure and efficient vendor payments. Fraud Detection Software: Tools that safeguard your startup from fraudulent invoices.Step 2 : Calculating the Cost of Your Software Engine
Since most invoice processing software operates on a subscription basis, these costs are recurring expenses. To calculate your infrastructure costs, follow these steps:
Identify All Applicable Software: Make a comprehensive list of all software programs your startup utilises for invoice processing.Pinpoint Subscription Fees: Determine the monthly or annual subscription cost for each software tool.Allocate Shared Costs (Optional): For software used by multiple departments (like an ERP), estimate the portion of the cost attributable to the accounts payable function. This might involve consulting usage data or contacting the software vendor for clarification.Divide by Time Period: Divide the total cost (including any allocations for shared software) by the chosen time period (e.g., monthly or annually) to arrive at your infrastructure cost per designated timeframe.Example:
ERP System: Monthly subscription fee of ₹10,000
Dedicated Accounts Payable Software: Monthly subscription fee of ₹5,000
Payment Processor: Transaction fee of ₹2 per invoice (assuming an average of 100 invoices processed monthly, this translates to ₹200 per month)
Total Monthly Infrastructure Cost:
ERP + Accounts Payable Software + Payment Processing Fees = ₹10,000 + ₹5,000 + ₹200 = ₹15,200
3.) Physical Goods Cost While the digital revolution has transformed many aspects of business, some companies may still rely on paper-based invoice processing. In such scenarios, physical goods costs emerge as a hidden expense to consider.
This section unveils the potential physical goods expenses associated with traditional invoice processing and equips you with methods to calculate them for your startup.
Step 1.) Identifying Physical Goods Associated with Invoice Processing
If your startup utilises paper checks or maintains physical copies of invoices, be mindful of the following physical goods that contribute to invoice processing costs:
Paper: The cost of purchasing paper for printing invoices and checks.Envelopes: The cost of envelopes for mailing physical invoices and checks.Ink Cartridges: The cost of replacing ink cartridges used for printing invoices and checks.Stamps: The cost of postage for mailing physical invoices and checks.Printers and Printer Maintenance: While the initial cost of a printer might be considered a sunk cost, don't forget to factor in the ongoing maintenance expenses associated with keeping it operational.Step 2.) Calculating Physical Goods Costs
For startups that haven't fully embraced automated invoicing, calculating physical goods costs involves considering the following steps:
Identify Applicable Costs: Make a comprehensive list of all physical goods used in your invoice processing workflow (paper, envelopes, ink, stamps, etc.).Track Usage: Monitor the usage of each physical good over a designated period (e.g., monthly). This might involve keeping track of inventory or implementing a system for employees to report usage.Determine Cost per Unit: Find the cost per unit for each physical good (e.g., cost per ream of paper, cost per box of envelopes, etc.).Calculate Total Cost: Multiply the usage quantity of each physical good by its corresponding cost per unit.Optional: Allocate Printer Costs (if applicable): If your startup utilises a dedicated printer for invoice processing, you can optionally allocate a portion of the printer's maintenance cost to the invoice processing function. This allocation might be based on estimated usage compared to other printing tasks within the company.By following these steps, you'll gain insights into the physical goods expenses potentially lurking within your startup's invoice processing operations.
Examples:
Paper: Assume your startup processes 200 invoices per month, with 75% paid via paper checks. You use 10 sheets of paper per invoice (including copies).Paper cost per ream: ₹500 (per 500 sheets)Monthly paper usage: 200 invoices * 0.75 * 10 sheets/invoice = 1500 sheetsMonthly paper cost: (1500 sheets / 500 sheets/ream) * ₹500/ream = ₹150Envelopes : Assuming the same scenario as paper usage, you also utilise envelopes for mailing checks.
Envelope cost per box: ₹200 (per 100 envelopes)
Monthly envelope usage: 1500 sheets (from paper usage) = 15 envelopes (assuming 100 sheets per ream)
Monthly envelope cost: (15 envelopes / 100 envelopes/box) * ₹200/box = ₹30
Ink and Toner: For simplicity's sake, let's assume the cost of ink and toner cartridges is already factored into your printer maintenance cost (addressed in step 5).
Stamps: Assuming the standard postage rate for a letter is ₹5:
Monthly stamp cost: 15 envelopes * ₹5/envelope = ₹75
Total Monthly Physical Goods Cost
Paper + Envelopes + Stamps = ₹150 + ₹30 + ₹75 = ₹255
Optional Step 5: Allocating Printer Costs
Let's assume your monthly printer maintenance cost is ₹200, and based on usage estimates, 25% of printed pages are for invoice processing. In this case, the allocated printer maintenance cost for invoice processing would be ₹200 * 0.25 = ₹5.
4.) Transaction Fee While labour costs often dominate the invoice processing expense conversation, transaction fees are another crucial factor to consider. These fees represent the cost associated with using various electronic payment methods for settling invoices with vendors.
Step 1.) Understanding Transaction Fees
Transaction fees can be structured in two main ways:
Fixed Fees: A set fee charged per transaction, regardless of the invoice amount.Variable Fees: A fee that fluctuates based on the invoice amount (often a percentage of the total).The specific type of fee structure and the fee amount itself will vary depending on the chosen payment method. Common electronic payment methods that typically incur transaction fees include:
ACH Transfers: Electronic bank transfers that may involve a per-transaction fee.eChecks: Electronic versions of paper checks, often with lower transaction fees compared to traditional checks.Credit Card Payments: While convenient, credit card payments generally involve the highest transaction fees due to processing costs borne by the merchant.Wire Transfers: Expedited electronic fund transfers that often incur significant transaction fees.Step 2.) Calculating Your Transaction Fee Costs
To determine your transaction fee costs associated with invoice processing, follow these steps:
Identify Payment Methods: List all electronic payment methods your startup utilises for settling invoices with vendors.Gather Transaction Data: Obtain transaction data (including associated fees) for a designated period (e.g., 30 days). This data can often be retrieved from your bank statements or payment processing platform.Categorise and Total Fees: Categorise the transaction fees based on the corresponding payment methods used (ACH, eChecks, credit cards, wire transfers). Then, calculate the total fee amount for each category.Example
Let's imagine your startup utilises the following electronic payment methods for invoice processing:
ACH Transfers: You process 50 invoices per month via ACH transfers, with a fixed fee of ₹2 per transaction.eChecks: You process 25 invoices per month via eChecks, with a fixed fee of ₹1 per transaction.Credit Cards (for rush payments only): You rarely use credit cards for invoice payments, but for this example, let's assume 5 invoices per month with a variable fee of 3% per transaction (average invoice amount of ₹10,000).Step 1: Categorise Transaction Fees
ACH Transfers: 50 transactions/month * ₹2/transaction = ₹100/montheChecks: 25 transactions/month * ₹1/transaction = ₹25/monthCredit Cards: 5 transactions/month * 3% * ₹10,000/transaction (average invoice amount) = ₹1500/month (assuming a flat 3% fee for all credit card transactions this month)Step 2: Total Transaction Fee Costs
Total Monthly Transaction Fee Costs = ₹100 (ACH) + ₹25 (eChecks) + ₹1500 (Credit Cards) = ₹1625/month Cost of Processing an Invoice Manually in 2024 While calculating the various costs, you must have started noting patterns, patterns relating to manual inefficiencies in the form of an additional Labour cost and a somewhat unnecessary seeming physical goods cost. American Productivity & Quality Center (APQC) :
The cost to process an invoice from $1.42 per invoice for top performers (companies in the 25th percentile) to $6.00 per invoice for bottom performers (companies in the 75th percentile).
Just a few years ago, in 2018, this range was $2.00 to $9.00 per invoice. This improvement, most likely, points to the rising adoption of automation and smart technologies in business processes. As a fast-emerging trend in India, AP automation could significantly decrease the cost of processing an invoice in India as well.
Reduction Strategies 1.) E- Invoicing Traditional paper-based invoice processing can be a drain on resources, riddled with hidden costs and inefficiencies. Imagine the wasted hours spent printing, sorting, mailing, and filing physical invoices. Factor in the expenses associated with paper, envelopes, postage, and printer maintenance. Then consider the delays caused by manual data entry and the potential for errors that necessitate rework. These inefficiencies translate into a double whammy – wasted labour hours and unnecessary material costs.
Fortunately, a powerful solution exists to revolutionise your invoice processing: electronic invoicing (e-invoicing). E-invoicing streamlines the entire process, transforming it from a paper-laden burden into a digital engine of efficiency and cost savings. Here's how e-invoicing tackles both labour and material costs:
Reduced Labour Costs: E-invoicing automates many manual tasks associated with traditional processing. Data entry becomes a breeze, eliminating the need for dedicated employees to painstakingly key in invoice details. Additionally, the streamlined digital workflow minimises the time spent chasing approvals, managing paper trails, and resolving discrepancies.Lower Material Costs: By embracing e-invoicing, you say goodbye to the physical costs of paper, envelopes, postage, and printer maintenance. No more overflowing filing cabinets or wasted resources on physical copies that are prone to getting lost or damaged. E-invoicing promotes a paperless environment, saving your startup money while contributing to environmental sustainability.E-invoicing doesn't just reduce expenses; it empowers your startup with greater control and visibility. Digital records are readily accessible, facilitating faster invoice processing, improved cash flow management, and enhanced decision-making capabilities.
2.) Automated Workflows Reducing invoice processing costs requires a holistic approach, with a keen eye on every step of the operation. One area ripe for optimization: the approval process. Traditional approval workflows can become bogged down by delays, hindering efficiency and adding unnecessary costs.
Here's how streamlining your approval process can significantly impact your invoice processing bottom line:
The first step is gaining a clear understanding of your current invoice approval workflow. Map out each stage, identifying who is involved, what actions are taken, and the average processing time for each step. By creating a visual representation, you'll expose potential bottlenecks – points where invoices get stuck and processing stalls. These bottlenecks might be due to:
Unclear Approval Hierarchies: Are invoices routed to the appropriate approvers with the necessary spending authority? Inefficient routing can lead to delays while invoices wait for the right person's sign-off.Lack of Automation: Is manual data entry or physical handoffs slowing down the process? Automating invoice workflows where ever possible can significantly expedite approvals.Redundant Approvals: Do multiple people need to approve the same invoice? Streamlining the approval chain by eliminating unnecessary steps can save valuable time.Optimising the Approval Workflow: Once you've identified bottlenecks, it's time to refine your approval process. Here are some strategies to consider:
Define Clear Approval Rules: Establish spending limits that dictate which invoices require specific approvals. This reduces unnecessary steps for low-value invoices.Leverage Automation: Utilise technology to automate tasks like data extraction, routing invoices to appropriate approvers, and sending notification reminders.Promote Transparency and Communication: Ensure clear communication channels exist between all stakeholders in the approval process. This reduces the need for clarification and facilitates faster decision-making.The Cost-Saving Impact of Streamlined Approvals
By streamlining your approval process, you'll experience a domino effect of positive outcomes:
Reduced Processing Times: Faster approvals mean invoices are paid quicker, potentially leading to early payment discounts from vendors.Lower Labour Costs: Automating tasks and eliminating redundant steps frees up employee time for more strategic efforts.Improved Cash Flow: Faster invoice processing translates to more predictable cash flow management.Streamlining your invoice approval process isn't just about efficiency; it's a strategic move toward cost savings and a more optimised financial operation for your startup.
3.) Automated Invoice Processing The realm of invoice processing, once a territory dominated by manual labour and paper trails, now has a powerful ally: automation. Automating invoice processing isn't just a trend; it's a strategic move that unlocks a treasure trove of benefits for businesses.
The Pitfalls of Manual Processing
Traditional invoice processing methods often resemble a labyrinth – a convoluted path riddled with manual tasks and time-consuming inefficiencies. These inefficiencies can manifest as:
Data Entry Drudgery: Employees spending countless hours meticulously keying in invoice data, a process prone to errors and wasted effort.Paper Trail Paralysis: Physical invoices shuffling through departments, creating delays and the potential for lost or misplaced documents.Error-Prone Processes: Manual data entry and human oversight can lead to errors in invoice processing, necessitating rework and further delays.Automating Your Way to Processing Power
By embracing automation, you can transform this labyrinth into a high-speed processing pipeline. Here's how automation injects efficiency into your invoice processing:
Optical Character Recognition (OCR) to the Rescue: OCR technology acts as a digital eye, automatically extracting data from invoices. This eliminates the need for manual data entry, reduces errors, and streamlines the process.Machine Learning Muscle: Automated systems can leverage machine learning to categorise invoices, identify discrepancies, and even learn from past processing experiences, further enhancing accuracy and efficiency.Workflow Automation for Seamless Processing: Automated workflows can route invoices for approval, trigger notifications, and automate data entry into your accounting or ERP system. This eliminates manual intervention and creates a smooth, uninterrupted processing flow.Reaping the Rewards of Automated Processing
By automating your invoice processing, you'll witness a significant shift in your financial operations:
Reduced Labour Costs: Freeing employees from manual tasks allows them to focus on higher-value activities, minimising labour costs and maximising human expertise.Faster Processing Times: Automation expedites data extraction, routing, and approvals, leading to faster invoice processing and improved cash flow.Enhanced Accuracy: Eliminating manual data entry significantly reduces errors, improving the accuracy and reliability of your financial data.Greater Control and Visibility: Automated systems provide real-time insights into your invoice processing pipeline, enabling better control and informed decision-making.Automating your invoice processing isn't just about efficiency; it's about empowering your business with a turbocharged processing engine. This translates to cost savings, improved financial control, and a foundation for growth in today's dynamic business landscape.
Mysa for AP Automation Mysa provides a comprehensive solution to the challenges of manual invoicing, reimbursement handling, and payment processing. Leveraging advanced data extraction techniques, the platform automates the intake of invoices and reimbursement requests, extracting crucial details such as invoice numbers and amounts. A clear workflow guides these documents through review, approval, and accounting stages, with flags for potential issues.
Mysa simplifies the creation and execution process, ensuring security with features like daily limits and 2FA authentication. It also enables payment reconciliation and sends notifications for transparency. With the added benefit of Good for Accounting (GFA) practices, Mysa ensures accuracy and compliance throughout the financial processes.
By automating these tasks, Mysa helps businesses save costs and improve efficiency. Its user-friendly interface and robust features make it a valuable tool for optimising financial processes and driving growth.
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