Calculating the cost of processing an invoice is important for any organization using Accounts Payable. There are several factors to consider when calculating the cost of an invoice, and it may be difficult to accurately calculate the actual cost of processing due to unavailable metrics. While somewhat technical and mathematical, this blog aims to assist in calculating the true average cost of processing an invoice.
Calculating Labor Costs
Your AP team goes through several steps to process an invoice, including:
- Validating that all data on an invoice is correct and handling invoice exceptions
- Invoice data entry
- Seeking approval for invoices
- Answering supplier inquiries
While AP teams perform multiple steps to process an invoice, the true cost of an AP clerk can be evaluated in relation to invoice approvals, primarily factoring hourly rate and average approvals per hour:
Calculating the Cost of Invoice Approval
Oftentimes, and especially for higher-priced invoices, managerial approval is often required.
Calculating the Cost of Lost Early Pay Discounts
AP employees may end up in a situation where they must send several emails requesting approval. During this process, it is possible for invoices to slip through the cracks, or get lost, especially when doing manual invoice processing. When a company is not capitalizing on early pay discounts due to their AP process, it can be considered an invoice processing expense.
Calculating the Cost of Fraud
Without an invoice solution that detects items such as duplicate invoices or flags other outlier metrics, detecting fraud can be difficult in the AP department. In one of our previous blogs, ‘Tips for Identifying Fraudulent Invoices’ we discussed several methods in which fraud is conducted in the AP department. The Association of Certified Fraud Examiners (ACFE) estimates that the average company loses around 5% of its total revenue due to fraud. Manually processing invoices can make it very difficult to detect fraud, as doing so is a very tedious and lengthy process. While AP solutions can not point out red flags such as employees spending beyond their means, or acting erratically, EZ Cloud offers a completely customizable reports page that allows the user to configure when to flag invoices, such as configuring a custom standard deviation value for outlier payment amounts per vendor, payment frequency, etc. Without any form of fraud detection, companies should factor in 5% of total revenue into the total cost of processing an invoice.
Calculating the Cost of Management
This calculation is straightforward— With large AP departments, companies usually have additional managerial overhead to manage large departments.
The Total Cost of Processing an Invoice & Should You Automate AP?
Sometimes calculating the total cost to process an invoice can be difficult to calculate, as many of the metrics shown in the formulas above are not tracked and at times are generalized. For users having difficulty calculating true cost, we provide an estimate calculator on our site.
Ultimately, the recurring factor in each calculation for the total cost of AP is time, which is why EZ Cloud designed a machine learning extraction AP solution with tools to assist in AP and routing, and a completely customizable experience unique to each user.
Contact EZ Cloud today for a demo and learn how we can decrease the cost of every factor in your current invoice processing solution.