Calculating your accounts payables costs isn’t as difficult or as convoluted of a process as you think. There have been a few different reports published over the years that set an industry average somewhere between $5 & $20 and invoice & in our findings, that’s just simply too high. These numbers do make for great press though and perhaps drive people to the publishers’ ultimate goal of outsourcing, adopting A/P Automation software, etc.
$3.34 – $16.67 general payables processAberdeen Group (2010)
$8.78 average with little automationInstitute of Finance & Management (IoFM) (2012)
$10 average with little automationCFO.com (2018)
Don’t take a study’s word for it. Finding your own costs aren’t that difficult.
Payables Metrics to Gather
- How many clerks ‘process’ invoices (receive from vendor, get approvals, code into your accounting system and/or issue payments)
- What is their all-in employee cost per hour (salary/hourly + benefits + other)?
- How many hours per week do they work?
- How much of their time is dedicated just to payables (and not other processes)?
- How much do you pay a year in late fees to vendors?
- How much do you pay for their payables system access?
- How much do you pay a year for document retention (storage, filing cabinets, etc.)?
- How many invoices are being processed a week?
Payables Metrics NOT to Factor
- Payment supplies (check stock, postage, envelopes, etc.)
- Anyone other than a clerk’s salary
These may very well factor into your full payables cost BUT the numbers are either fixed (you’re going to be paying some sort of payment costs most likely) OR the numbers would be incredibly arbitrary (trying to factor in how much time a manager spends on approving).
Let’s stick just with what’s measurable.
Calculating Your Total Payables Cost
How to Use Your Total Payables Cost When Considering A/P Automation Software
You will need 3 things.
How Much Does A/P Automation Software Cost?
$1.50 / Invoice
$1.50 per invoice is a great ALL-IN target rate per invoice
Accepting the Fact That “Automation” Only Goes So Far
Regardless of what the sales person pitches you, your process is not going to be fully automated. Therefore, you’re not going to be able to remove the highest costs associated with your current accounts payable process which is the clerks cost.
For simplicity’s sake, we will only be able to reduce hours by 50% (which is generous, actual work reduction may not reach 50% until you’re 6-12 months into using your automation software).
Consider Implementation Costs
“Turn key” technology rarely exists for A/P Automation software. There will be some level of implementation costs from the Accounts Payable Automation software vendor. For our argument’s sake, we’ll say implementation costs will be an even $10k
Calculating our Total Costs with A/P Automation Software
*Don’t fall for the implied message that your current costs will be removed and always expect an A/P Automation software implementation cost!
Automating vs Manual Process
It’s easy to see that unless your organization is already a finely tuned payables machine & your processing costs are ~<$3, considering an A/P Automation solution is almost a no-brainer. There aren’t too many software categories out there where you can prove with a simple exercise like that that you will immediately be saving money.
We’ve outlined a full set A/P Automation features in our article ‘Defining Accounts Payable Automation Software‘.