How much does it cost to process an invoice? This question has been asked for years in various A/P benchmarking studies and there have been as many answers as there have been studies. Today the cost to process an electronic invoice varies from $1.00 to $5.00 depending on who publishes the data.

One of the problems in publishing invoice cost data is the predictable reaction from management when they see such data. Immediately you are put on the defense to explain why your cost for processing an invoice is higher than that contained in the benchmarking report.

You may spend countless non-productive hours explaining the need to analyze and understand the elements included or excluded in calculating that cost. It is the old “Apples and Oranges” comparisons.

I believe the emphasis for any accounts payable organization should be to focus internally and understand what your costs are and what process improvement priorities should be implemented to improve your cost structure. A major cost for accounts payable organizations that should be quantified is the cost associated with rework. In a perfect world A/P would just pay the invoice, a claim that is made by the clients we support that all we do is “Just Pay the Bills.” Rework results from a multitude of errors, a major one being the inability to successfully match the invoice to the PO and receiving document. This results in the need to investigate and resolve such discrepancies, which negatively impact our cost.

More and more A/P departments are becoming part of a “Shared Services Organization,” which are established as cost centers and bill their clients for services. Some of these organizations even operate as profit centers.

Whether a Shared Service approach is in your future plans or you have no current plan to bill for your services, it is important that you understand your process costs. It’s no secret that as an overhead function you are constantly under pressure from management to reduce your costs. Being in a position to identify your costs and the cost causers will hopefully reduce the arbitrary cost reductions mandated by your management.

Fortunately today the cost identification tools such as Activity Based Costing have been significantly improved, being more accurate and actionable. Cost information is available faster and requires less ongoing maintenance.

Having A/P financial and operational performance data at the product or service level can have a positive impact and result in more effective internal controls, since you will know what things cost and can manage these costs more effectively. It will allow you to focus on the work and not the worker.

Additionally, having A/P cost data will facilitate the following:

• Process improvement priorities are enhanced by knowing where the greatest return for the least investment can be achieved.
  
  
• Outsourcing decisions are enhanced by having confidence in the numbers to develop a business case.
  
  
• Benchmarking is more feasible when more accurate cost data is available to benchmark your costs more intelligently.

Traditional costs systems measure “How much did we spend”, where ABC systems measure “What we do with what we spend”

A/P is ideally suited for applying Activity Based Costing since the functions, although interrelated, are unique activities such as invoice processing, check printing, and vendor file maintenance.

Understanding your costs and the ability to provide your clients with lower cost product alternatives (EFT vs. check) which they agree to implement will result in your ability to:

Tom Nichols, president of Process Management Improvement, Inc., provides research, AP process improvement consulting, training and seminars to large companies and financial associations. Email Tom Nichols