Trying to determine the true cost of customer invoice processing is actually much more difficult than you might think. This is due to the fact that most of us don’t consider all of the related costs. The majority of estimates simply add some basic indirect costs onto the obvious direct costs. However, there are many more factors at play when calculating the true cost of the customer invoicing process.
After comparing estimates from various sources of information we found that the lowest cost for a paper-based process was £8.17, while the highest was £19.40! The wide variation in costs is due to a number of factors such as industry, company size, number of invoices, geographical location etc. However, each estimate shows that significant savings possible by automating invoice processing.
Please note that sending invoices as email attachments does not count as electronic invoicing. It saves on the direct postage costs, but this represents only a fraction of the true cost of invoicing.
The following diagram shows comparisons between paper-based invoicing and electronic invoicing from three different sources.
The savings range from 59% to 88% which tallies with the results of other surveys internationally.
Know your Direct, Indirect and Hidden Costs
In order to accurately calculate your invoicing costs you must know exactly what costs are associated with the invoicing process in the first place. There are many costs that are frequently not taken into account.
In order to get a better understanding of the true cost of invoicing, costs have been grouped into three categories; direct costs, indirect costs and hidden costs.
Let’s begin by looking at direct costs, which is what most businesses think of when asked to estimate their invoicing costs. Examples of direct costs include:
- Invoice preparation
- Insertion of invoices into envelopes
These are the most obvious and visible costs related to invoice processing and can be quite easily calculated.
These costs are associated with invoicing but as they do not involve preparation and sending of invoices, they are often not included when calculating the cost of invoicing. It can be difficult to apportion some of these indirect costs to the invoicing process because of underlying assumptions made about the need for some or all of the costs listed below. Indirect costs can include:
- Queries and their resolution – this can affect many functions in an organisation including finance, credit control, operations, distribution, sales and customer service
- Account reconciliation
- IT development and operation
- Credit notes – preparation, approval, issuing, allocation, delay in payment until credit note issued
These costs are not obviously related to sending invoices and can be very difficult to even associate with thìs process but they can include:
- Additional working capital finance costs due to the length of time taken to get paid
- Payment processing errors
- External debt collection agency costs
- Higher credit insurance costs or less cover
- Higher invoice financing/factoring costs
- Management time spent reviewing/addressing invoicing issues
Clearly from the items listed above, the costs of issuing invoices is far higher than most people realise!
Reallocation of Labour
Most of the costs associated with the invoicing process relate to labour and much of it is wasted and could be reallocated to far more productive activities.
Invoice preparation may be streamlined but is unlikely to be eliminated unless order processing and similar tasks are automated.
However, there are other activities that can be significantly reduced and staff resources freed to focus on preventing customer debts from escalating, expanding sales or concentrating on customer retention. Examples of these unproductive tasks include:
- Dealing with requests for copy invoices
- Chasing purchase orders
- Pursuing the sales team to resolve pricing queries
- Contacting hauliers/couriers for copies of delivery dockets
- Reconciling accounts
Most of these tasks can be automated which can drastically reduce costs associated with invoicing (as outlined above savings of 40% to 88% are achievable.
People are often mistaken in thinking that sending an invoice as an email attachment is ‘electronic invoicing’. Yes it removes the postal cost but does not in any way address the other costs associated with processing invoices. Requests for copy invoices still come in and the excuse of ‘lost in the post’ is replaced by ‘caught in the spam folder’ or ‘never got the email’.
‘Rethinking Invoicing’ has the potential to significantly reduce the cost of invoicing without business disruption. In fact many of your customers will welcome getting their invoices on-time in a consistent manner. With all of these benefits, why are so many businesses still sending invoices by post and email?
How does your invoicing process compare to your competitors, customers and suppliers? Why not participate in the Credit Management Benchmark and find out.