This is a revised version of 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 is a revised version of the post that discusses how I came to determine the average cost to process an invoice. You can read the original here, if you're interested.
Why the revision?
Long story short: I didn't like my own post.
When I was doing the research for the series originally, I was trying to find studies from different procurement organizations that addressed how long it takes to process an order at any of the different stages in the process. I found a few that discussed processing invoices, and while each study ultimately presented different data, all of them indicated that processing an invoice takes weeks.
I ran with it. But on reviewing the series after it had all been released, it was apparent that the logic behind the invoicing post was inconsistent with the logic applied to the rest of the series: the invoicing post took elapsed time into account, whereas the other posts in the series were based on active working time.
So I'm re-releasing this post, revised to use active working time instead of elapsed time as the basis for evaluation.
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 hundred 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.
But that works with elapsed time, and I need active working time. I couldn't find any studies that discussed the time it takes to process an invoice in terms of active working time. So here I'll attempt to figure it out myself.
Steps involved in processing an invoice
Presumably, by the time the invoice is sent for processing, the previous steps in the process have been followed and issues have been resolved. So most invoices should process relatively quickly. The steps themselves are straightforward:
So the perfect world invoice process takes maybe 20 minutes if all paperwork is in order, any issues with the order have already been completely resolved, and all items have been received as ordered.
I'm going to round that 20 minutes to 30. Partially for simplicity's sake, but also because some orders may be larger and it'll take longer to review the paperwork, and some orders may have had problems along the way that have since been resolved and the associated paperwork has to be reviewed in detail for the payment can be approved.
Cost to process an invoice
I'm going to apply the hourly rate established earlier in this series to determine the cost of processing an invoice:
1/2 hour * $27.78 = $13.89
A lot of things can make invoice processing take longer.
Incomplete or incorrect paperwork, incorrectly routed invoice documents, partial receipts, returns, order changes, delays, additional feedback required from interested parties, duplicate payments, etc.
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): 1/2 hour
Additional time to process an invoice with exception: 2.25 hours
Total time to process an invoice with exception: 2.75 hours
Staffing cost per hour: $27.78
2.75 * $27.78 = $76.39
Following my (revised) logic and calculations, it costs:
$13.89 to process an invoice, and
$76.39 to process an invoice with exception.
What do you think about the revised numbers? I think this makes a lot more sense than what I had written previously; the elapsed duration involved in processing an invoice would understandably be fairly long, but the active working time... not so much.
Now that the numbers make more sense and the same logic has been applied consistently to all posts, I'll be able to compile my findings into one document and spreadsheet. Stay tuned, I'll publish that soon.