This is the 6th post in the series: How Much Does It Cost to Process an Order?
1st post: http://www.p2insight.com/blog/how-much-does-it-cost-to-process-an-order
2nd post: http://www.p2insight.com/blog/how-much-does-it-cost-to-process-a-purchase-order-internally
3rd post: http://www.p2insight.com/blog/calculating-the-cost-to-process-a-po-externally
4th post: http://www.p2insight.com/blog/calculating-the-cost-to-expedite-an-order
5th post: http://www.p2insight.com/blog/calculating-the-cost-to-receive-an-order
I was tasked with analyzing the average costs of processing an order through its various stages from Purchase Order (PO) creation through to invoice closure.
I decided that my starting point would be the concept: time is money. I had to figure out:
This post discusses how I came to determine the average cost to process an invoice.
If you've been following this series, you know I like to find credible data from research studies conducted by other parties and then run with it.
Through the course of researching the costs of processing invoices, I found that - similarly to the cost of processing a PO - there are many different studies available that provide costs ranging from a few dollars to several hundreds of dollars per invoice.
What is interesting to note here is that I did see a few articles from different sources that reference a cost of $25 to process an invoice – but this seems to include the staffing cost of only a single A/P clerk, plus the costs of the office supplies associated with processing the order. To my mind this doesn’t accurately reflect the costs of the time and effort of everybody involved in reviewing and approving an invoice.
Number of hours to process an invoice
I found a study by Ardent Partners stating that a world class organization processes an invoice in 3.7 days, and a laggard organization takes 12.2 days.
Averaging this out, I come up with 7.95 days, or 63.6 hours (based on an 8 hour work day).
What does an hour cost?
I used the same average salary I have been applying throughout this series - $50,000 - for Accounts Payable staff, so again I’m working with $27.78 per hour per person.
Active working time spent on an invoice
It takes longer to process an invoice than it does a PO; makes sense to me, because a PO is an “ask” whereas an invoice is a verification that you got what you asked for, and that you were charged the correct amount.
But when looking at an average processing time of 10.5 hours for a PO, and an average processing time of 7.95 days (or 63.6 hours), I have to assume that delay plays more of a factor in processing invoices than it does in POs.
I decided to cut the 63.6 hours in half; so 31.8 hours per invoice – about 3 times longer to process an invoice than a PO.
Cost to process an invoice
31.8 hours * $27.78 = $883.40
I have to take my calculations further with processing invoices, because invoice exceptions can add a significant amount of time and complexity to the task, and exceptions are commonplace; a 2016 study by Ardent Partners indicates that the average invoice exception rate is 17.6%.
How much time is spent on invoice exceptions?
Similarly to how I determined the amount of time spent negotiating an order with a vendor, I split invoice exceptions into categories based on the complexity of the problem.
Starting with the exception rate of 17.6%, I converted that to 18 invoices with exception per 100 invoices processed. The following table illustrates how much time is spent processing those 18 invoices with exception:
From the table:
Total extra minutes spent on invoice exceptions per 100 orders: 2,430
This works out to 135 extra minutes, or 2.25 extra hours, per order with invoice exception (on average).
Cost to process an invoice with exception
Time to process an invoice (without exception): 31.8 hours
Additional time to process an invoice with exception: 2.25 hours
Total time to process an invoice with exception: 34.05 hours
Staffing cost per hour: $27.78
34.05 * $27.78 = $945.83
Following my logic and calculations, it costs:
$883.33 to process an invoice, and
$945.83 to process an invoice with exception.
What do you think about how I arrived at my conclusions?
Well, friends, I'm sorry to say my series of posts is complete. I have examined the costs of processing an order from the point where the request is made internally to the point where the invoices are reconciled.
But I'm not really done yet.
Because I can't just geek out half way on a topic, my next step will be to post the spreadsheet calculators I relied on throughout the process of writing this series. Then I'm going to go really far down the rabbit hole, and calculate the representative cost of processing 100 orders by smashing together all of the data and logic I applied throughout the series.
For those of you who are interested, your best bet would be to sign up to our newsletter, and I'll send you a notification when the next posts are released.