How to calculate the costs of purchase invoice processing?

Every time we meet with financial administrators about automating their processes, they all have had one goal: to automate routine manual tasks. These tasks are usually posting and routing of invoices and manual purchase order matching.

Clearly finance managers have understood that making experts do repetitive routine tasks is not sustainable. It is mind-numbing and takes up a huge amount of resources people could use for more valuable work.

In order to fix the situation, you need to know a few numbers first.

Do you know how much your purchase invoice process costs?

Financial administrators are the elite of number crunchers. They know the company numbers inside out, backwards, forwards and front to back. Some people have even been able to tell us the company’s level of automation and the amount of manual work without blinking an eye.

But at the same time some companies have given us blank stares when asked how automated their posting and routing of invoices is or how long they take to handle invoices. They have not had any idea.

Once we start to go even deeper into the numbers, most companies have absolutely no idea how much the purchase invoice handling process costs them. To increase automation, financial administrators and management should absolutely know what affects costs.

Why doesn’t financial management know the cost of processing an invoice?

This is not because financial admins don’t know how to figure out those numbers. Not at all! If someone can, it is them.

The reality is that they just don’t have the time to make those calculations. They spend their time on repetitive manual work and supporting business units. And for the most part, nobody is asking finance to make those calculations. Companies are generally more interested in the business units’ processes than whatever might take place in the background.

In many bigger companies purchase invoice handling takes place in business units. For example, a large corporation can have 500 people who post and route invoices and 50 people who review and accept them. Investigate the costs, we first need to understand how much these 550 people use time to post, route and accept invoices.

When the posting and routing of invoices has been “outsourced” to business units, the hope has usually been this would make the organization more effective. The truth, however, is that handling invoices is much more expensive in business units than in financial administration.

This can be because there are differences in pay costs. Since business units route invoices less than financial administrators, they also have fewer skills and less experience to get them done correctly right away. So, mistakes happen more often there.

By the way, did you know that every purchase invoice processed completely manually costs the company around € 10 or even more?

To summarize: the better a company knows their purchase invoice costs the better the willpower to automate routine tasks. That’s how high the costs can be.

This is how you calculate the costs of your purchase invoice process

To calculate exactly what it costs you to handle purchase invoices, you will need to know the following information: 

• Number of purchase invoices annually (pcs)
• The amount of purchase order invoices (% / pcs)
  • Reconciliation of order and payment purchase invoices (%)
  • Time spent on the manual reconciliation of order and payment purchase invoices per invoice
    • People handling manual reconciliation of order and payment purchase invoices and their incidental expenses
  • The level of automation of non-PO invoices
    • Posting – the percentage of purchase order invoices that are automatically posted (%) 
    • Routing – the percentage of purchase order invoices that are automatically routed to reviewers and acceptors (or ends up in accounting without routing) (%) 
  • Does posting and routing take place in business units or accounts payable? 
  • Purchase invoice system used and its monthly costs
    • Ordered extra work from purchase invoice system partner
      
• Invoice related jobs done in accounts payable
  • Initial review of the invoice and the information on it, fixing potential mistakes and lack of information
  • (Posting)
  • Routing
  • Final review of the purchase invoice
  • Fixing posting information and communicating those to the business
  • Communication to partners and business
  • Other possible tasks: check-in the invoices, scanning, sending invoices to accounting etc. 
  • The average time spent on all the listed activities per invoice
• The tasks done by business units in handling purchase invoices
  • Reviewing the invoice
  • Posting the invoice
  • Communication to accounts payable about possible flaws or missing informations
  • Accepting the invoice / Laskun hyväksyntä
  • Possible further rerouting of invoices
  • The average time spent on all the listed activities per invoice

• The salaries of people working in accounts payable
• The average salaries of people reviewing invoices and their incidental expenses
• The average salaries of acceptors of invoices and their incidental expenses

It can seem like a daunting list of information. But it is always better to understand the big picture first, before you start to automate the process.

Also, once you have done the calculations, it will make your life easier. You will see exactly how much it costs for your company to handle purchase invoices. Based on our experience, you’ll be surprised how big the final number is.

On average the cost of handling one invoice is about 5 to 10 euros. Does that sound a little or a lot to you?

For us it sounds too much. Technology that is already readily available you would get that number way down, by several euros.

Now that’s worth it.