Running a business comes with myriad expenses. Every operation taking place in your company, including the payment of invoices, is associated with a cost.
However, some expenses may not seem substantial on the surface, and many businesses ignore them. But later, these expenses multiply and result in massive bills that can hurt your wallet.
One such expense is the accounts payable (AP) cost per invoice. In this post, we talk about how you can calculate AP cost per invoice, along with some actionable steps to reduce it.
How to Calculate AP Cost per Invoice?
If you’re a B2B business, you likely spend a significant share of your revenue on paying invoices. However, the amount you pay in an invoice goes beyond the actual invoice amount. There are additional costs that can increase your accounts payable (AP) costs per invoice.
Here’s how you can calculate these additional costs.
1. Labor Costs
If you use a manual process for paying invoices, you’ll incur hefty labor costs. You’ll need to employ individuals to process the invoices manually, which is a complex and time-consuming task.
Here’s how you can calculate the labor costs associated with paying an invoice. Take the time the employee takes to process one invoice and divide it by his or her salary. The answer will be the labor costs you’re incurring on every AP invoice.
2. Physical Goods Costs
Well, you might see any physical goods associated with paying an invoice. But what about the paper checks, which cost 3 cents per unit; stamps, which cost 55 cents per unit, and envelopes, which cost 8 cents per unit.
Assuming that you use 150 units of each of these items per month, your total monthly physical goods cost will be more than $60. Of course, the more invoices you pay, the more costs you’ll incur.
3. Infrastructure Costs
Infrastructure is a broad term that includes all the devices, tools, and technologies you use to pay your invoices. It could be your online invoicing software, ERP software, fraud detection software, or any other solution that you use. It’d also include the expenses associated with printers, computers, electricity, and more.
4. Transaction Costs
When you pay invoices online, you need to pay a small transaction fee per invoice. All digital payment methods – credit cards, eCheck, wire transfers, and ACH transfers – include a nominal transaction fee.
While the fee may not seem considerable, it multiplies if you pay multiple invoices in one go. To calculate the transactional price, subtract the invoice amount from the total amount deducted.
What’s the Average Cost per Invoice?
The accounts payable cost per invoice can vary greatly depending upon the type and size of your business. The Institute of Finance and Management says that the average AP cost per invoice can be anywhere between $1 and $21. Ardent Partners came up with $11.57 as the average AP cost per invoice, including infrastructure, goods, and labor costs.
What’s more, these costs aren’t decreasing, which means companies are still having a hard time reducing their invoicing expenses.
Which Factors Increase Invoice Processing Costs?
Several factors collectively determine AP invoicing costs. However, here are a few factors that are likely to increase your cost per invoice.
- Manual Processes: If you’re still using manual invoicing procedures, you’re inviting additional costs. In this digital age, small and midsize businesses need to use online invoicing software for enterprises. If you rely on ink and paper, not only will your AP costs surge, but your efficiency will also reduce.
- Too Many PO Invoices: If you have myriad PO invoices bundled up, your AP cost per invoice will surge. It’s essential to ensure optimum invoice matching to reduce the number of PO invoices, along with eliminating the risk of poor visibility and errors.
- Paper-Based Approval Process: It’s 2021. If you still use a paper-based approval process, you’re doomed to fail or at least damage your business badly. When you rely on papers and cash registers, you slow down the approval process. It also makes the procedure time- and resource-intensive.
- Legacy, On-Premise Software: On-premise software solutions come with hefty licensing and installation costs. Even after that, you’ll need to spend money on maintaining and upgrading them. These costs can pile up and make your AP process more expensive.
How to Reduce AP Cost per Invoice?
Did you calculate your AP cost per invoice? Is it too high? Don’t worry. Follow these steps to reduce your AP expenses dramatically.
- Eliminate Paper: The invoicing technology available today allows you to remove ink and paper from your operations. By using a client payment tracker app, you can digitize the entire process.
- Implement a Robust Online Invoice Software Solution: Using an invoice solution like Moon Invoice can go a long way in reducing your AP costs. These solutions automate most parts of the process, thereby diminishing human involvement, time, and the risk of errors.
- Focus on Cost Savings: As discussed, AP costs may not seem significant, and thus, most businesses tend to overlook them. Don’t be that business. Keep looking for extra expenses and how you can reduce them.
- Simplify the Approval Process: We’ve talked about how a clunky invoice approval process can hurt your business. If you want to reduce your AP costs, ensure that you make the invoice approval process quick and seamless.
- Use a Cloud-Based Online Invoice Software for Enterprise: Legacy systems aren’t’ only costly. They’re inefficient and limit your operations to the office only. Replace your on-premise system with a robust cloud-based solution like Moon Invoice. It’s easy to install and cost-effective. You also get free automatic updates and customer support.
To conclude, companies that use manual, paper-based invoicing processes are likely to incur hefty AP costs per invoice. When you digitize and automate your operations, you cut down the cost of goods and labor, which reduces your overall AP expenses.
If you’re looking for reliable online invoicing software for enterprises, check out Moon Invoice.