Skip manual data entry when it comes to preparing invoices. Choose the best automated invoice processing software to save time and money for your...
The True Cost of Invoice Payments
Finance team employees spend almost 50 hours of their time processing invoices. Find out how automation can reduce the cost of invoice payment processing.
Business owners should ensure that invoice payments won’t take a huge toll on the performance of their finance team. Invoice automation can reduce the work by 80%. But how much is the true cost of invoice payments? Is it worth spending on cloud payment software and assigning invoice payment tasks to invoice automation platforms?
The steps to manually processing an invoice payment
Before considering the automation of invoice payments, you should understand how the process is accomplished manually. Processing an invoice payment takes time and here are the steps involved:
Step 1: Receiving invoice from supplier or vendor
Right after an order is fulfilled, the vendor issues an invoice. Sometimes, invoices are sent before delivery to make sure that every detail in the document is agreed upon by the vendor and the buyer.
Step 2: Reconciling the invoice information
Your finance team should now make sure that the entries in the invoice match your orders. For instance, some prices may have changed or some items may have been replaced. The invoice information must be the same as the purchase order. Some billing errors are inherent to your supplier’s quality of service which needs to be checked all the time.
Step 3: Entering the invoice information in your ledger
Once the information is verified, the finance team will now manually enter the data into your system. Whether it’s a spreadsheet or a logbook you’re using, the invoice information should be recorded as a basis for payments.
Step 4: Filing the invoice copy in the systemStep 5: Sending the invoice for approval
After logging all the invoice details, someone from the team will not be filing the invoice copy into the system. The invoice will be scanned and filed into your folders and the physical copy will be collected and kept in filing cabinets.
Step 5: Sending the invoice for approval
After everything is recorded and filed, the invoice should now be sent for approval before disbursing the payment. Approving officers can be composed of 2-4 people depending on the size of the company. This process may take days or weeks because approving officers may not be available or may have a lot of approvals to make at the same time.
Step 6: Making the payment
Companies can either make the payments right away or schedule the payments based on policies implemented. Making the payment happens after the invoice is approved. The accounting team can choose the payment method and will then keep a record of the payment details.
How does manual invoice processing impact your business?
If you’re still determined to stick to manual invoice processing, then maybe it is time to realize how this process is impacting your business:
Manual invoice processing costs you more
There is no standard cost of manual invoice processing because the amount depends on the company’s policies and workflow. However, in a study, these numbers are what companies keep spending in their manual invoice processing:
- $25 – average spend on manual processing for one invoice
- $53.50 – average spend to correct an arrow in an invoice
It is time-consuming
From receiving the invoice to having it paid, manual invoice processing is time-consuming. Each step could consume an average of 2 days. On average, the processing can take a total of 10-15 days depending on the company’s accounts payable efficiency. Recently, a report revealed that it takes an average of 57 days for a company to receive payments and much longer for cross-border transactions.
It is prone to human error
Mistakes are inevitable especially when your finance team is dealing with a lot of billing tasks. Human error is normal and companies tend to suffer the cost. Once errors are made, the finance team repeats the entire manual invoice processing, causing more days of work, more time consumed and more money spent
It requires more manpower
Manual invoice processing requires more hands for each step to be accomplished. The finance team should assign one member to receive invoices and verify the information. Another team member should take the job of entering the data and keeping the records on file. In general, around 5 people should handle the processing for one invoice alone.
Difficult to track information
Manual processing will not make data easily accessible. If you need a previous invoice for reference on pricing, the finance team will need a few days to retrieve the physical records.
How to calculate invoice processing cost?
Invoice processing costs vary from one company to another because there are several factors you need to consider.
How much labor is involved in processing one invoice and what salaries are we looking at? To know this, you can follow the formula below:
Hourly rate of employee x time spend = Cost per invoice
If an employee receives a salary of $10 per hour and spends 50 hours in a month for one invoice:
Multiply the cost per employee on the number of employees involved in manual processing:
Based on the estimate above, an invoice payment will cost your company around $1,500 when processed manually. In calculating the labour cost, here are the variable involved:
- Time consumed to process the invoices
- Time consumed to review the invoices
- Time consumed to evaluate and detect errors
Storage and shipping costs of physical invoices
Your physical invoices may incur fees when sent through courier. The shipping costs will differ depending on your supplier’s location. Physical storage is another cost if you need to manually file the physical invoices for future references.
Penalties and consequences of late payments
Your company may incur penalties and may lose discounts when payments are late. Worse, you may even lose the chance of getting another credit line because your payment methods and processes are unreliable. Some suppliers may not grant you a credit opportunity if you have not been settling your debts on time.
How does AP automation help reduce cost?
Small and medium enterprises may not have realised yet how AP automation can help them save time, money, and opportunities to manage their liquidity in several ways:
Reduce labor costs
Instead of paying the salaries of 3-5 people in the finance team, you can now pay an average of 2 people to handle the entire process. AP automation allows you to upload the invoice and the automated system will generate and record the details for you. Your finance team can easily evaluate and reconcile the details in a few hours and send them for approval immediately.
The automated data generation from scanned invoices will no longer be subject to human errors. Again, if there are inconsistencies, correction and verification are easily addressed through a single dashboard.
Once the invoices are verified and entered into the system, approving officers need not review everything manually. Approving officers can sign and confirm the release of payment at the same time without them waiting for their turn to do so.
Since labor costs are reduced, finance teams can now be reassigned to other accounting tasks which will improve their productivity. Employees no longer need to spend hours and days entering data, verifying them, reconciling orders, and having them approved for payment.