How Do You Calculate Cost Per Invoice?

Understanding Cost Per Invoice

The cost per invoice represents the total expense a business incurs to process a single invoice, from its initial receipt to the final payment. This metric encompasses all activities involved in the accounts payable workflow, providing a comprehensive view of the financial outlay for managing vendor obligations. This cost helps businesses achieve greater financial clarity regarding operational expenditures and offers insight into process efficiency.

Understanding this figure allows businesses to identify areas within their payment processing system that might be consuming excessive resources.

Components of Invoice Processing Cost

Calculating the cost per invoice requires a detailed accounting of various expenditures that contribute to the overall processing expense. These costs are categorized to provide a comprehensive view of the resources consumed.

Labor Costs

Labor costs typically represent the most significant portion of invoice processing expenses. This includes salaries, benefits, and associated overhead for employees involved in tasks such as data entry, invoice matching, obtaining approvals, handling vendor queries, and reconciling accounts. The time spent by accounts payable staff on these manual activities directly impacts the total cost.

Technology Costs

Technology costs encompass the expenses related to software and IT infrastructure utilized in the accounts payable process. This includes subscriptions or licenses for accounts payable automation software, enterprise resource planning (ERP) systems, and document management solutions. These costs can range from a few thousand dollars to over $50,000 annually, or be based on a per-user or per-invoice pricing model.

Payment Processing Fees

Payment processing fees are another component, covering charges levied by banks or payment service providers. These fees can include transaction fees for electronic payments like Automated Clearing House (ACH) transfers or credit card processing. Credit card transaction fees typically range from 1.5% to 3.5% of the transaction amount, often with an additional fixed fee per transaction. ACH payments generally incur lower fees, sometimes being free or costing a small fixed amount, such as $0.15 to $0.25 per transaction.

Overhead Allocation

Overhead allocation accounts for a portion of general administrative expenses that can be reasonably attributed to the invoice processing function. This may include costs for office space, utilities, and general office supplies.

Error Correction Costs

Error correction costs arise from time and resources dedicated to resolving discrepancies, correcting inaccurate entries, or managing disputes related to invoices. Manual invoice processing is prone to errors, with rates typically ranging from 1% to 3% of all invoices processed. These errors can lead to additional work, such as investigating mismatched data, correcting duplicate payments, or addressing late payment penalties, which consume valuable staff time.

Training Costs

Training costs involve the expenses associated with educating accounts payable staff on processing procedures, new software, and compliance requirements. This can include fees for specialized courses, workshops, or internal training materials.

Step-by-Step Calculation

Calculating the cost per invoice involves a clear, sequential process to aggregate expenses and divide by the volume of invoices handled. The first step is to establish a consistent time frame for the measurement, such as a month, quarter, or year. All costs and invoice counts must correspond to this defined period to ensure accuracy.

Next, sum all the identified invoice processing costs for the chosen period. This total includes all categories of expenses incurred, such as labor, technology, payment processing fees, allocated overhead, error correction, and training. For example, if a business’s monthly accounts payable expenses are $4,000 for labor, $500 for software, $100 for payment fees, $200 for overhead, $150 for error correction, and $50 for training, the total processing cost for that month would be $5,000.

After totaling the costs, determine the exact number of invoices processed within that same period. This count should include every invoice that passed through the accounts payable workflow. For instance, if the business processed 500 invoices in the month corresponding to the $5,000 total cost, this figure represents the volume.

Finally, perform the calculation using a straightforward formula: divide the total invoice processing costs by the total number of invoices processed. Using the example figures, the calculation would be $5,000 (Total Invoice Processing Costs) divided by 500 (Total Number of Invoices Processed). This yields a cost per invoice of $10.00.

Interpreting Your Cost Per Invoice

Once the cost per invoice is calculated, the resulting figure offers valuable insights into the efficiency of an organization’s accounts payable operations. This number directly reflects how resource-intensive the current invoice processing workflow is. A higher cost per invoice suggests that the existing processes may involve significant manual effort, multiple touchpoints, or other inefficiencies that consume more resources.

The calculated cost per invoice allows a business to understand the financial implications of its present operational state. For instance, an average cost of $15.97 per invoice for low-volume organizations processing manually indicates a substantial expenditure. Conversely, a lower cost per invoice can signify streamlined processes and effective resource utilization within the accounts payable department.

Tracking this metric over time provides a clear indication of trends in operational efficiency. Observing changes in the cost per invoice from one period to the next helps identify whether process improvements or new technologies are having a positive financial impact.