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How much does it cost to process an invoice?

Accounts Payable AutomationBest practices
Dooap Inc.

Despite automation rallying calls from Gartner, Forrester, IDC, and almost every major business analyst company, the majority of companies have yet to bridge automation and accounts payable. As businesses continue to seek sound investments and bounce-back opportunities for the post-crisis financial ecosystem, digital transformation, digitization, and agile are all buzzwords driving innovation.

However, most AP departments still stand as a paradox. Invoices are tied to liquidity. Yet AP departments are often the last business function to receive tech injections to increase throughput and function. In fact, 80% of firms in recent surveys still use paper checks to pay invoices.

The truth is, accounts payable is still drenched in cumbersome manual processes. Employees still walk to the mailroom, manually pour over data, spend precious time and resources matching and reconciling data, manually seek out approvals, and sit down to write paper checks. In a world where cloud has penetrated business models, data lakes have disrupted marketing, and digitization has become baked in virtually every facet of sales, AP is stuck in the past.

So how much is all of this manual pour over costing businesses? Is the cost of processing an invoice high enough to justify investment in full-scale automation solutions? And is the digitization and digital transformation of AP departments a viable IT investment for mid-sized companies and large enterprises?

Why the Cost of Processing an Invoice Matters

Accounts payable acts as a neural network of liquidity. Not only does AP directly influence the workflows of adjacent departments such as accounting and finance, but it helps generate the cash flow and vendor relationships that virtually every department relies on to remain functional. So, it's only logical that AP has a major stake in the projected budgets for almost every function.

So when the Total Cost of Ownership (or TCO) of invoice processing is high, it trickles down into the pores of your entire financial ecosystem. Obviously, lower invoice processing costs are immediately valuable on the surface. Lower costs mean more money in your pocket. In fact, if the investment in automation costs less than the returns on invoice processing — which it almost always does — invoice automation is undeniably valuable. But there are also other hidden "costs" such as vendor relationships, late fees, missed early discounts, and cashflow lag that can eat away at profits and disrupt workflows in seemingly unrelated departments.

In a nutshell, the cost of processing invoices matters because it directly impacts your entire business. But understanding the costs of manual processing also helps you know whether or not investing in IT solutions for AP makes sense in your specific business ecosystem. To help uncover all of these costs in detail, let's look at the standard manual invoice processing workflow.

The Core Components of an Invoice Processing Workflow

As a forewarning, we're demonstrating a "typical" traditional invoice processing workflow. However, there are certainly exceptions to this rule. For businesses that have yet to adopt high-level automation and digitization, invoice processing workflows may be overly complicated and filled with unnecessary steps. For the purposes of this, we're focusing on the elemental steps of the invoice processing framework.

  1. The invoice is generated by the supplier
  2. The supplier sends the invoice via EDI networks, mail, or email
  3. The invoice is received by AP and data is entered and checked for authenticity
  4. The invoice is matched and reconciled
  5. The invoice is sent for approval
  6. A check is written
  7. The check is mailed to the supplier with an invoice

The Costs Associated With Each Invoice Component

By breaking down the invoice costs into buckets, you can better identify just how deeply ingrained invoice processing is in your overall business ecosystem. It's important to remember that there are additional costs such as office supplies, space for paperwork, filing, security, compliance, and more that add to these costs, but we consider those to exist throughout all layers of your AP system. However, automation solutions will reduce (or eliminate) these costs in addition to the costs listed below.

1. Invoice is Generated

While it may seem a little bizarre to incur costs before the invoice is ever sent to your department, it's actually common. Errors on the supplier side can lead to inaccurate or duplicate invoices. Surveys show that around 63% of businesses have received duplicate invoices from suppliers. Worse yet, 33% of those businesses actually paid those invoices. Obviously, this is an issue that should be caught during your reception or approval process, but the thread leads back to suppliers.

If you still deal with paper-based invoices (the majority do), you also have mail frictions to consider. Mail gets lost. And, when invoices are lost in the mail, it creates trust frictions between you and your vendors — not to mention tensions surrounding early payment discounts and late payment fees. These are all cost buckets. And they're difficult costs to quantify.

Degraded vendor relationships due to overpayments, duplicate payments, and lost mail can lead to supply chain pain points that create headaches across your business ecosystem. The costs of these headaches can range from inconsequential to egregious. It depends on the nature of the vendor, the degradation of the relationship, and how integrated that vendors product or services are in your workflows.

2. Supplier Sends the Invoice

With 44% of invoices still being processed on paper and 72% being delivered via "snail" mail, locating invoices isn't always easy. 49% of employees admit that they have difficulty locating documents on a daily basis. In fact, the average worker spends upwards of 30% of their day searching for information according to IDC. In addition, 33% of employees struggle with document versioning, and 43% face issues with approval and sharing.

The simple truth is that paper-based workflows sap revenue. And that revenue is semi-tangible. If the average AP clerk makes around $42,000 per year, the amount of time they spend merely looking for the right invoices could be as high as $12,600 per year. And, when you factor in the intangible costs (i.e., lack of productivity for other business objectives, missed discounts, etc.), those costs can quickly rise.

3. Invoice is Received, and Data is Entered and Recorded

Once an AP professional has the right invoice, they need to systematically record all of that invoice data into their ERP. Depending on the ERP, data generation may be easy, or it may be incredibly time-consuming. Either way, manually inputting data introduces errors. Around 3.6% of manually entered invoices contain an error. Even in best-in-class enterprises with sophisticated policy frameworks and complex manual oversight, best-of-breed manual data entry benchmarks stand at a 1% error rate.

In other words, you can expect a minimum of 1 error per every 100 pieces of data entered. Given that the average invoice contains many unique fields, you're dealing with a consequential number of invoices with errors. Once an invoice is submitted with an error, things can go one of two ways.

  1. The error is caught during the approval process and re-routed back to AP for remediation.
  2. The error isn't caught, and your business deals with overpayments, underpayments, or misguided invoice entries.

Transcription and transposition errors (e.g., incorrectly coded lines, manual key-in mistakes, etc.) lead to sluggish workflows, bottlenecks, and a hodgepodge of other business problems. Let's continue the trend; there are direct and indirect costs associated with these errors. On the surface, missed payments, duplicated payments, and redundancies are calculable costs. But tarnished vendor relationships, incomplete budget forecasts, and error-filled invoice data used to process complex business intelligence are all semi-incalculable — but incredibly expensive.

4. Invoice is Matched & Reconciliated

Matching discrepancies happen. In fact, finding matching discrepancies is often a value lever of AP departments. It helps you identify fraud, reconcile vendor mistakes, and microscope invoice problems. But when discrepancies are missed, things can go awry. Every AP department has exceptions and exceptions threshold. However, this threshold is higher for manual departments. Typically, exceptions are due to errors on the invoice side, not due to PO errors. When the invoice process is highly manual, these exceptions create significant bottlenecks that drain company resources and employee time.

A significant chunk of these exceptions happens during this process. The matching and reconciliation process is your error catcher. When your error-catching process is manual, you run into two significant barriers:

  1. Errors during the matching and reconciliation process often means errors on submitted invoices.
  2. Catching errors on the matching and reconciliation process means that you have to repeat the time-intensive manual data entry process.

It's a lose-lose. If you find a supplier error at this stage, you've already spent time inputting data into your systems. Suddenly, you're forced to track down vendor information — which we all know can be a painful process. If you miss any invoice errors, overpayments and underpayments are significantly more likely to happen, unless the approver discovers the discrepancy during a quick review.

4. Invoice is Sent to Approver

When it's time to approve an invoice, where do your employees turn? Do you have a formalized system in place? Is it easy to reach the approver whenever and wherever they are? Chances are, it's not. The average invoice touches six people during the approval process. With varying schedules, locations, and timezones, touching base with all of these individuals is cumbersome. According to research, it takes the average corporation 10 to 25 days to approve an invoice. This spells out obvious friction. The typical invoice due date is 30 days. Typically, early discounts take place at 15 days. If you spend 25 days on only the approval process, you're most likely going to be late, and you're certainly going to miss any"early bird" discounts.

The costs in this bucket are massive. Not only are you spending a significant amount of your AP department's time chasing down approvals, but now six other individuals are involved — all of which suffer from productivity and time issues. Add on missed payment penalties, missed out early discount opportunities, and soured relationships, and the costs for the approval process can be the most damaging out of all of the buckets.

5. Check is Written

Once the invoice is approved, checks are written. We run into many of the same manual frictions in this bucket. Checks take time to ship and arrive at destinations, they can get lost in the mail, and they take time to fill out. Costs in this bucket are wasted time, missed discount opportunities, and late penalties.

6. Payment is Sent to Supplier

Finally! The invoice is sent to the supplier. Once you've made it this far, you get to deal with the following statistics:

  • 78% of businesses admit to paying suppliers late
  • 90% of businesses regularly receive calls from suppliers chasing down late payments
  • 53% of businesses are unable to provide answers to suppliers when they do call

So How Much Does it Cost to Process and Invoice Manually?

It depends. Some sources speculate that the TCO of invoice processing is somewhere between $15 and $40 per invoice, while other figures peg the number closer to between $12 and $30. It varies from organization to organization. To calculate the costs yourself, you would need to include both the tangible costs and intangible costs. These include:

  • Errors
  • Labor for both AP staff and other business units
  • Damaged vendor relationships
  • Impact on the supply chain
  • Paper and office supplies
  • Space
  • Employee time waste
  • Productivity
  • Mail costs
  • Reconciliation costs
  • and more

It's nearly impossible to accurately discover the real number. But it's certainly not insignificant.

How AP Automation Can Reduce Costs Across Each Invoice Bucket

AP automation solutions like Dooap cut costs across every component of the invoice processing lifecycle. According to research by AMI-Partners, AP automation saves companies an average of $13 per invoice. If we extrapolate that out to thousands of invoices, the savings are massive. For example, let's say that your organization processes 30,000 invoices manually. AP automation could save you $390,000 per year. Of course, those broad estimates often don't include many of the hidden intangible costs that accrue outside of the AP department (i.e., supply chain disruptions, lost vendors, etc.)

Not only does AP automation eliminate cumbersome manual processes by digitizing and automating your AP workflows, but it simplifies approvals, minimizes errors, and improves relationships with suppliers by helping you pay earlier and with more accuracy at scale. And, since the invoice is completely digital, you have an easy-to-follow audit trail that enables you to comply to local, regional, and federal standards.

Do you want to learn more about how AP automation can revolutionize your invoice processing workflows? Download our free eBook, "The Road to AP Automation."

Dooap is an accounts payable automation solution for Microsoft Dynamics 365 Finance and AX 2012. Contact us to learn how we can help you streamline your AP operations to save you time, money, and headaches.

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