How do you calculate your cost per invoice?

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How do you calculate your cost per invoice?
By Pam Miller

A common metric used to determine how well AP is functioning is the cost to process an invoice. Yet determining this number can be so challenging that many AP departments have not done the calculation, or they have just made a rough estimate by simply dividing the number of invoices processed annually by the total annual salaries of all those in AP.

Christopher Elmore, author of The 8 Pitfalls of Accounts Payable Automation, recently offered this easy process for arriving at a meaningful cost-to-process-an-invoice number.

  • Map the process. Mapping is likely to be the hardest step. You have to thoroughly understand the process and all the exceptions. Follow the invoice through the entire process. Start with the mail — opening and distributing it. Then go on to what happens next, then next after that, until the payment is made. Don't forget what happens to the invoice after payment is made — steps such as filing, or researching, when the (almost) inevitable questions arise.
  • Identify the people involved in the process. How many people does it take to accomplish each step that you listed as you mapped the process? Think about all the people involved and not just those in AP. The coding and approval steps, for example, are likely to be done by many people in many departments within your organization.
  • Determine how much time those people devote to each step in the process. Don't get bogged down in the details here. You will need to compute a likely average. Ask the people who code or approve for an estimate of how much time they spend per invoice.
  • Determine what each of those people is paid per hour. Or, figure by the minute, if that makes more sense in terms of how long each task takes. It may be necessary to come up with some category averages. Since many levels of employees approve invoices, you may need to consult HR or payroll for an average salary for department heads or C-level executives.
  • Do the math. Multiply the number of people by the amount of time spent on each task by their average salary to come up with a dollar value that represents the investment of time and money in all of these steps. Again, keep it simple. Don't let things like loaded costs, IT support time, or other factors complicate this process. Those factors are real, but trying to include every single one of them is what often makes people avoid making the cost per invoice calculation in the first place.

Once you have this dollar figure, divide it by the total number of invoices processed annually. Voila! You have now calculated the cost per invoice for your AP department!

Use your CPI to  move forward with automation

Now that you know your cost per invoice, the next logical question is: "How does my AP department stack up?" Many studies are undertaken to determine what the average cost is across various organizations. And while all the usual caveats apply–what was counted and what was omitted from the calculation, as well as geographic variations–the most frequent number that is cited for mid-market organizations is (drum roll, please) $22, according to Elmore. He states that this is a number small-to-midsize organizations can use to benchmark against.

Is this a perfect calculation? No.

But will it help you get a handle on your current costs? Yes.

Cost per invoice gives you a starting point when trying to determine the benefits of automating part or all of your AP process. To do that, simply refer back to the process map you created. Remove the steps that automation will take out of the process. You can then remove the time and labor dollars spent on those tasks and come up with a new cost-per-invoice calculation. This will help you get started on the return on investment calculation that is a necessary prerequisite to building the business case for any contemplated AP automation project.

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