Are you aware of the substantial costs your business incurs just to pay its bills? Every functioning part of an organization comes with a price tag, and accounts payable (AP) is no exception. It’s essential to gain a grip on this critical type of expenditure by calculating your AP cost per invoice. In this comprehensive guide, we will dive into the process of determining the cost of an invoice in AP, highlighting the various factors that contribute to it, and offering valuable insights into optimizing your AP efficiency.
Breaking Down the AP Cost Per Invoice Calculation
Calculating the cost of an invoice in AP process involves dividing the total costs incurred to pay them by the total number of invoices paid during a specific time period. This metric, along with other AP metrics, provides an accurate measure of a business’s AP efficiency. To do this effectively, you’ll need to consider the following cost components:
- Labor Costs
- Infrastructure Costs
- Physical Goods Costs
- Transaction Fees
Let’s explore each of these cost components in detail.
Labor Costs: The Human Element of AP
Labor costs encompass the expenses associated with employee time spent processing invoices. In most cases, at least three individuals are involved in invoice processing: the employee entering payment details, the approver, and the employee releasing the funds. To calculate labor costs, follow these steps:
- Identify the relevant employees responsible for invoice processing.
- Calculate an hourly rate for each employee. You can either use an average hourly rate for the entire AP team or calculate individual hourly rates if there’s a significant salary discrepancy.
- Determine the amount of time each team member spends on invoice processing tasks, such as communication with vendors, data entry, approval processes, fund release, and handling exceptions.
With this information, you can calculate the total labor costs for invoice processing during a given time period, such as 30 days.
Infrastructure Costs: Tools of the Trade
Infrastructure costs cover the expenses related to software platforms and tools your business uses to manage invoice processing. Examples include enterprise resource planning (ERP) platforms, fraud detection tools, and payment processors. To calculate infrastructure costs:
- Identify the tools and platforms used by your AP department.
- Determine the cost of each tool for the relevant time period (e.g., monthly subscription fees).
- If a tool is used by multiple departments, refine the cost by determining the portion attributed to the AP department’s usage.
Physical Goods Costs: The Tangible Side of AP
Although it may seem that invoice processing has little to do with physical goods, businesses that still rely on paper checks for payments will incur tangible costs. These expenses include the fees paid for paper, envelopes, ink cartridges, and stamps, as well as printer and printer maintenance costs. To calculate physical goods costs:
- Determine the number of invoices paid using paper checks.
- Calculate the costs associated with check printing, such as paper, ink, envelopes, and postage.
- Factor in the costs of printer purchase and maintenance, allocating a portion of these costs to AP process usage.
Transaction Fees: The Cost of Connectivity
Transaction fees are the costs incurred when making electronic payments, such as ACH transfers, eChecks, credit card payments, and wire transfers. These fees are typically easy to access by pulling a summary report of all transactions and associated fees for a specific time period, such as 30 days.
Crunching the Numbers: Calculating Your AP Cost Per Invoice
Armed with the data from each cost component, you can now calculate your AP process cost per invoice using the following formula:
(Total labor costs + total infrastructure costs + total physical goods costs + total transaction fees) / Total number of invoices per time period = AP cost per invoice
This calculation will provide you with a clear picture of your business’s AP efficiency and allow you to make informed decisions on reducing costs.
Best Practices for Lowering AP Cost Per Invoice
Knowing the real costs involved in paying invoices is just the beginning. By incorporating best practices, you can significantly reduce your AP costs:
- Utilize automation to minimize labor costs by replacing manual tasks with automated processes, thereby reducing the number of hours required for invoice processing.
- Consolidate AP functions into a single, lower-cost platform to decrease infrastructure costs.
- Phase out paper checks in favor of electronic payment methods to eliminate physical goods costs.
- Review payment methods and determine which vendors accept lower-cost forms of payment that can potentially earn cash-back rebates, such as virtual cards.
Final Thoughts: Embracing Efficiency and Savings
Calculating and reducing your AP cost per invoice may seem overwhelming, but by understanding the different cost components and adopting best practices, you can significantly cut down on labor and infrastructure costs. By switching to an automated AP process and favoring electronic payments, you can ensure timely, accurate invoice payments while keeping costs at bay.
Are you curious about how automation can drive down your AP cost per invoice? Use an ROI calculator for a customized report on your business’s estimated savings with AP automation. Embrace the power of automation and watch your business thrive.