According to The Accounting Coach, "the accounts payable process or function is immensely important since it involves nearly all of a company's payments outside of payroll. The accounts payable process might be carried out by an accounts payable department in a large corporation, by a small staff in a medium-sized company, or by a bookkeeper or perhaps the owner in a small business.
Regardless of the company's size, the mission of accounts payable is to pay only the company's bills and invoices that are legitimate and accurate. This means that before a vendor's invoice is entered into the accounting records and scheduled for payment, the invoice must reflect:
- what the company had ordered
- what the company has received
- the proper unit costs, calculations, totals, terms, etc."
Needless to say, matching up all of the paperwork and making sure the invoice is accurate before it's paid is a time-consuming process. When it comes to A/P Processing, no matter how little the invoice, making sure it’s paid means a lot to your business’s credibility. And, processing every invoice, no matter how large or how small it is, costs money in back-office fees, in addition to the deduction from your checking account for the payment.
For companies who want to cut costs, one of the first places to look is the highly manual, paper-driven AP department, where lengthy invoice and payment processing times are costly challenges.
Simply search “invoice processing costs” on Google, and you’ll find any number of benchmark studies with estimates ranging from lows of $4.00 per invoice to highs of $26.00 per invoice. Taking these bench-marking studies into account, as well as the estimates our own clients have provided, we calculate the median range for all companies to be in the $6.00 to 10.00 range per invoice, assuming all goes well. Lost invoices, late payments, over-payments or underpayments raise the cost of processing one invoice to as much as $120.
Surprisingly, invoice processing costs do not vary by company size. The per-invoice processing costs are about the same for small companies, as well as for large companies.
Why Does It Cost So Much?
Manual processes that require receiving, shuffling, filing, retrieving, copying and processing of paper invoices are costly, both in amount of time it takes and in the number of people required to perform the tasks. Paper is a major source of A/P inefficiency. Streamline accounting to improve efficiency.
This is true regardless of the various software accounting packages and invoice management solutions available and in use in most offices today. This is because there are so many documents involved in the A/P process. There may be documents from multiple departments such as:
- Bid Requests
- Purchase Orders
Compiling all of the bits of paper, seeking the required approvals, processing and mailing the payment is, a best a lengthy process, at worst it is time consuming, costs too much and is prone to error.
How Does A/P Paper Dependence Affect Your Company?
Most business owners are so involved in the “Big Picture” that they have very little knowledge of the day-to-day workings of the A/P department, other than the requirement for their occasional signature on a check approval. Here’s an experiment we suggest to business owners:
Go to the A/P department yourself, and ask to see the invoice from a particular vendor that was paid last month (for even more fun…ask to see one from last year!) You will probably be told that someone will look for it and bring it to you, but we suggest that you wait…tell the unlucky employee you need to see it right now. (Be kind…this is a BIG request!)
The process of finding the invoice will go something like this:
- Go to the filing cabinets.
- Try to locate the vendor file, hoping it’s not been misfiled.
- If it can’t be located physically, the next step will be to look it up in the financial system, which may require getting another employee involved.
- Maybe the original invoice was filed with the PO, let’s get the buyer involved in the search.
- Maybe it’s in the invoice drawer, but it got stuck to another vendor invoice and is in a different drawer.
Whatever happens when you make your request, we bet it’ll take anywhere from 5 minutes (really fast!) to 35 minutes or more (oops!) before you have the original invoice in your hand.
Now you know why, when the auditors come in yearly the A/P department racks up hours of overtime. Oh, yes… and that’s yet another cost of A/P processing.
It’s bad enough for small businesses, but for large, publicly traded companies, not being able to produce the documentation auditors require can translate into…you guessed it….more A/P costs in the form of fines, sometimes amounting to thousands of dollars!
How to Stop the A/P Bleed
If your A/P department is bleeding you dry…download our white paper “Paperless A/P: The Way to Cut Costs and Increase Efficiency” below and see what you can do to cut costs in this critical department.