Many companies still process incoming invoices manually. According to rough estimates, this is a proud 90% of companies. This despite the fact that even with a relatively small number of invoices, the required effort quickly becomes expensive and, with increasing volume, is seen in an ever worse light when compared to software-supported processing. Today, thanks to new technologies such as Machine Learning, we can process invoices much more efficiently and thus significantly minimize manual effort. The increased efficiency of course also results in considerable cost savings. Moreover, thanks to faster processing times, it is also easier to benefit from cash discounts on top of that. In this mini-series, we take a look at the costs of manual invoice processing and compare them with those of automated invoice extraction.
Our sample company – «Musterfirma AG»
It is not always so trivial to understand the processing costs incurred per invoice. Moreover, the reference of an average is by no means applicable to any company. The variation of the relevant parameters is too great. So keep this in mind when interpreting the figures listed and drawing conclusions.
For the cost calculations, we look at a sample company called Musterfirma AG. This is a Swiss company that is active in the logistics industry and processes 240,000 invoices per year, or around 20,000 invoices per month. Musterfirma AG receives the invoices as PDFs or scans in e-mail attachments from 1,500 different suppliers. These are on average 1.5 pages long and contain 24 fields that must be read. To make an example, one field could be the supplier and his address.
The average salary of a lead in the accounts payable department in Switzerland amounts to approximately CHF 115,000. A clerk earns about CHF 70,000 per year. These are also exactly the salaries that Musterfirma AG pays to its employees.
Note: Since these assumptions are based on a fictitious company, these values are accordingly not representative and the costs for your company may therefore differ significantly.
Costs incurred during manual data entry from invoice extraction
Before we can calculate the costs, we must first clarify which cost items actually incurred and are relevant in our context. Often certain positions are neglected and only the obvious direct costs are included. In other words, the time an employee spends on manual data entry. But this is not really correct, because other cost types are ignored, which clearly distorts the objective comparison. Concretely we differentiate here between direct, indirect and opportunity costs.
We calculate the direct costs basically on the basis of the full-time equivalents responsible for data entry and multiply these figures by the respective wage costs. In addition, all other costs directly related to the task are also included. For example, also those costs that incurred in the form of additional work when incorrectly entered data is corrected. This often includes communication with other stakeholders such as suppliers, customers, banks or other departments within the company. It is estimated that 12.5% of invoices require revision or additional effort to be taken into account.
What we also include in the direct costs here are things like the average cash discounts that are missed, fees for late payments and transaction costs for supplier rotation due to poor communication.
Indirect costs, on the other hand, include all sorts of costs that cannot be passed on directly to cost units. We also know this type of costs as overhead costs. In order to be able to carry out the transfer as consumer-oriented as possible, there are different procedures that you can use. Which one you implement should be determined depending on the context.
Since it is known that examples always make it a little easier to understand, here are some regularly encountered cost positions: Water and electricity costs, maintenance of equipment, cleaning, partly rent and the like. If materials such as lubricants and screws are used in this context, these are also to be classified as indirect costs.
Another type of cost that is worth questioning is the opportunity cost of having your employees spend valuable capacity that could be better utilized elsewhere. In other words, what is the value that could be generated if they would pursue other work.
In a next step, we will calculate the cost positions just mentioned for the Musterfirma AG and determine the average costs per invoice.
This value is important to become aware of as it indicates how much the manually applied work actually costs. But it also provides a good basis for comparison with alternatives and thus supports strategic decision-making. Which concrete costs incurred in our example of the Musterfirma AG and which ones with automated invoice extraction, you will learn in the next blog article.