Most companies know roughly how many invoices they pay each month. Very few know what each one costs them. The cost to process an invoice is that number: every minute, system and mistake it takes to get a vendor invoice from the inbox to paid, divided by the number of invoices. Once you have it, you can judge what invoice processing automation would change, in dollars.
It takes an afternoon with your AP lead and last year's records. Here is how.
The formula for the cost to process an invoice.
(staff time + systems + errors + late fees + missed early-pay discounts) ÷ invoices processed
Use one month, and use a normal one. A month with a year-end close or a system migration will skew every line.
Five steps to fill it in.
Step 1: count the invoices and time each step.
Take the number of invoices for the month. Then time each step an invoice goes through: receiving it, keying it in, matching it to the PO and the receipt, chasing the approval, resolving exceptions, paying it and filing it. Add the minutes up for one typical invoice.Step 2: load the labor cost.
Turn those minutes into dollars with the loaded cost of an hour: the salary plus benefits, payroll taxes and a share of overhead. Multiply by the minutes per invoice and by the invoices in the month.Step 3: add systems and outside costs.
Take the monthly share of what AP uses: accounting or ERP seats, AP software, scanning, payment fees, document storage, and any outsourced data entry.Step 4: price the errors.
Add the hours spent on rework, plus any money paid out wrongly and never recovered, such as duplicate payments and wrong amounts.Step 5: add late fees and missed early-payment discounts.
Total last year's penalties and interest and divide by twelve. Then add the early-pay discounts your vendors offered this month that you did not take. It is often the largest line, and the one nobody counts.
The cost per invoice worksheet.
| Line | How to calculate it | This month |
|---|---|---|
| Staff time | Minutes per invoice × invoices × loaded hourly cost ÷ 60 | $ |
| Systems | Monthly share of seats, software and outsourced entry | $ |
| Errors | Hours on exceptions × hourly cost, plus unrecovered overpayments | $ |
| Late fees | Last year's penalties and interest ÷ 12 | $ |
| Missed discounts | Early-pay discounts offered and not taken this month | $ |
| Total | The five lines added together | $ |
| Invoices processed | The count for the same month | |
| Cost per invoice | Total ÷ invoices processed | $ |
Here is the worksheet filled in for a made-up distributor, so you can see the shape of the result.
Every figure here is invented to show the method. Yours comes from your own records.
Common mistakes when counting.
- Counting only the AP clerk. Approvers, the buyers who confirm receipts and the controller who handles exceptions all spend time on invoices, and their hours cost more.
- Using salary instead of the loaded cost of an hour. Benefits, payroll taxes and overhead belong in the rate.
- Picking an unusual month. A quiet month flatters the number, and a month-end close or a system change inflates it.
- Leaving out the discounts nobody tracked. If no one records the early-pay terms your vendors offer, the missed discounts never show up anywhere, which is exactly why they need counting.
How to read published cost-per-invoice benchmarks.
Published benchmarks for the cost to process an invoice vary widely, because each survey counts different lines. Some count only staff time. Some add systems and overhead. Few count missed early-pay discounts or late fees. Before you compare your number to one you have read, check which of the five lines it includes, and compare like with like.
Your own number, built from the five lines above, is the one to make a decision on. It is also the baseline you will measure any change against.
What to do with your number.
Multiply your cost per invoice by the invoices you process in a year. That is what accounts payable costs you today, and it is the ceiling on what automating it can return. Then look at which lines move. A system that reads, matches and posts the routine invoices, with a person approving the exceptions, cuts the staff-time line, and with it much of the errors and late fees. Paying on time also puts the early-pay discounts within reach.
It also helps to split your invoices into two groups. Routine invoices have a matching PO and receipt, a known vendor and the right price, and they are where a system gives back the most time. Exceptions still need a person, and the useful question is whether they reach that person quickly, with the evidence attached.
How the capture, the matching and the approvals work in practice, with the ERP and inbox you already have, is covered in how invoice automation works. The rest of the back office, from order entry to the weekly reports, is in the guide to back-office automation. If accounts payable is one of several candidates, rank them first with the method in which process to automate first.
Where StrikeArc fits.
Two plays in the StrikeArc PowerPlays Library work on this number. StrikeArc Scout calculates your cost per invoice as part of the Intake & Diagnostic, and a person walks you through it on the readout, with the value at stake and the plays that fit.