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By: Jacqueline Guarino on February 1st, 2017

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How to Create a Cost Per Invoice Benchmark

Invoice Processing  |  Accounting

A cost per invoice benchmark is important because it tells you how efficient you are. Industry leaders are paying just a few dollars, but laggards are paying $10, $20, or more. It’s expensive, inefficient, and with the right elbow grease, can become a strength for the company instead of a weakness.

Calculating your Cost per Invoice (CPI) benchmark may seem like a challenging and time-consuming task, but as we’ll discuss, an accurate CPI is well worth spending the time on to use as a tool to benchmark your AP department’s efficiency and help determine if you should look for ways to automate and improve your processes.

Often AP departments will simply calculate their CPI by dividing the total annual salary of their AP department by the number of invoices processed per year, but this leaves out several important factors that impact cost and does not give a clear picture of where you can start improving your processes.


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What a Cost Per Invoice Benchmark Tells You

Calculating your cost per invoice becomes a tool to assess not only what your cost is, but to measure how efficient your AP department us running in terms of efficiency and create a benchmark to measure future performance. The process of calculating the cost per invoice can also reveal what part of the invoicing process is the most time consuming or expensive. Additionally, outlying your entire process can reveal gaps in your AP process that could be costing you additional money.

 

What a Cost Per Invoice Benchmark DOESN’T Tell You

While CPI is a great piece of knowledge to have, it does not cover every aspect of your AP department, and all the factors that may influence costs. For example, the effect of undetected fraud are impossible to derive from a CPI; however, in compiling the information necessary to calculate your CPI, you may identify certain areas that are vulnerable to fraud or suspicious activity.

We’ve included some guidelines on the average time it takes to complete certain tasks in the AP process. However, the effect of human error at a specific level is impossible to know for certain and cannot be found through calculating the CPI. Human error is an inevitable, and while the exact frequency at which it happens is impossible to know for sure, it is certainly a factor to take into consideration.

Company culture, employee morale and job satisfaction are all factors in employee productivity as well. An over-burdened AP department can create unhappy and over-worked employees, which can lead to higher error rates and employee turnover, which in turn slows down productivity even further as new staff needs to get hired and trained. A CPI benchmark won’t measure your employees job satisfaction level, but the good news is that it can provide insight into your processes that leads to the utilization of automation tools.

A well-implemented AP automation system should take the burden off of the AP staff and allow them to spend more time on value-add activities such as forecasting and data management as opposed to tedious data management and approval follow-up.

 

How to Calculate Your Cost Per Invoice

As mentioned before, the simplified approach to calculating your CPI benchmark is to divide the total annual cost of the AP department (usually the salary total) and divide it by the total number of invoices processed annually. We’re going to suggest a much more detailed approach that we’ve found to be a true CPI benchmark that your company can utilize as a valuable tool rather than as just a rough estimate.

The first step in calculating your CPI benchmark is to document your process in as much detail as possible. Start with how invoices are received - are they mailed into different offices, are some of your vendors emailing them in or using EDI? Then map out every step along the way - who scans in the document, how is it routed for approval, how is following up on the approvals, how is the coding entered into your accounting system, etc. - all the way to the point where the invoice is paid.

Next, calculate the cost of each step individually by multiplying the amount of time spent on each task by the wage of the employees involved. Then, divide this by the number of invoices processed.  You can then calculate your potential savings by deducting the amount spent on manual tasks that can be replaced with an AP Automation system like manual data entry and approval follow-up and factoring in the cost of the system.

If you want to get a quick idea of what kind of ROI you might be able to achieve, you can use our simple ROI calculator to get started. If you are ready to jump into the details of your calculation, we’ve included some guidelines and cost estimates below based on a compilation of industry data to help you make as accurate a CPI benchmark as possible.

Step 1: Invoice Received

Invoices can come in a variety of ways, including:

  • Post
  • Email
  • Fax
  • EDI
  • EID (E-invoice)

Despite the variety of methods to send invoices electronically, 60%+ of invoices are still received via post, according to data from Paystream Advisors. You can estimate that it takes 1-3 minutes worth of staff time per transaction and $.40 - $1 per transaction mailed or couriered.

Step 2: Indexing

The cost to scan and index an invoice averages about $.50 per invoice, which does not include the cost of the actual scanning hardware and software. This cost can be cut in half by utilizing an AP Automation system that has OCR to automatically index each invoice for you, bringing the cost down to just $.25 per invoice.

Step 3: Coding

To calculate the cost of coding, you can estimate a medium administrative wage spending one minute per invoice.  Or:

Hourly Wage/Number of invoices per hour = GL Coding Cost

Step 4: Approvals

You can use the same formula to calculate the cost of your approval step(s) using the wage of a higher salary. Or:

Hourly Wage / # of Invoices Per Hour = Approval Cost

Step 4: Retrieval

Being able to find your documents later is sometimes the most time-consuming part of a process. Estimate that on average, your retrieval costs range in the $.50- $1/invoice vicinity if you are working in a manual environment.

Step 5: Other Costs

The misfiling, or worse, loss of invoices can incur additional costs. A lost document ends up costing you $120 on average which adds up quickly considering that 3% of documents are lost and almost 5% are misfiled.

Other costs can happen from human error or extenuating circumstances. For example, a product needs to be returned or a warranty fulfilled - this adds complication and takes much longer to process than a simple invoice. A missed payment or an invoice containing an error that goes unnoticed can also result in a low down of productivity and possible fees or damaged vendor relations.

Audits can also be time-consuming and distracting, especially if documents are not well-organized and difficult to retrieve. We find that most companies have a separate estimate of their audit costs and this can be factored in as well. A good AP Automation system simplifies the audit process and makes it much easier and less time-consuming for an AP department to be compliant and show evidence of their controls and proper handling.

Storage is another consideration. Depending on your IT infrastructure and what you are using to store documents electronically (e.g. a local server compared to a hosted document management system) this price can vary to a fraction of a penny.

Industry Standards

Depending on the industry that your business is in, there will be some variance in the benchmark for a low or high CPI. Some factors that are industry-specific are processes, company culture, and the types of spend. For example, retailers and manufacturers have the lowest costs mainly because the majority of their spend is on bulk, which tends to utilize more POs and automation. For other industries, like finance companies, whose spend is mainly on indirect goods and services, less invoices are part of a PO process and thus less automation is utilized, resulting in a much higher cost.

A low cost is still an average, and the actual cost of an invoice can sometimes range from $1.25 - $25.00 even when the average cost is just $2.00, as was the case for one company. Invoices at the high end of the cost spectrum are usually non-PO invoices for indirect spend, require a manual approval, and are often exceptions, and rarely processed vendors. Thus, the industry that your business is in can have a large impact on your cost of processing invoices.

This table from Kofax shows common industry benchmarks:

Industry

1st Quartile

Median

3rd Quartile

Accommodation and Food Services (Hospitality)

$1.89

$3.57

$6.67

Educational Services

$2.73

$5.00

$11.11

Finance and Insurance

$3.52

$6.60

$13.44

Health Care and Social Assistance

$2.99

$3.85

$6.94

Information/Media/Publishing

$3.84

$10.05

$25.00

Manufacturing

$2.00

$4.26

$8.48

Professional, Scientific or Technical Services

$6.00

$12.22

$17.50

Public Administration (Government)

$4.17

$6.67

$8.33

Retail Trade

$1.17

$3.56

$8.00

Utilities

$3.00

$6.05

$10.52

Wholesale Trade

$2.06

$2.73

$4.00

All Others

$2.29

$4.00

$8.33

The first benchmark you create using your own data will give you a good place to start, which you can compare to your industry’s. After that, you should start using your own benchmark against itself, in a comparable time frame.

 

What You Should Do Next

Most businesses can benefit from reduced expenses. If you think (or know) your organization’s CPI benchmark is too high, there are several ways you can find to reduce it. A few ways that cause the CPI to decrease are from:

  • Increased controls
  • Streamlined processes using automation
  • A single platform that consolidates versions, signatures, approvals, etc.

See how BlumShapiro reduced their AP processing time by 40%, and lowered their cost per invoice as well.

 

BlumShapiro reduced AP processing time by 40%

About Jacqueline Guarino

Jacqueline supports Uplevl clients through partnering closely with development, sales, and marketing to identify and deliver solutions to meet customer needs.