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How to identify hidden costs in Accounts Payable process

Published on 29 November 2021
Hidden Costs in Accounts Payable Process
Sumithro
Sumitro Giri
Product Marketing Manager

Sumitro Giri is a product marketing manager at Applexus. He has deep domain expertise across operations, supply-chain, manufacturing and analytics. Designing marketing strategies with a customer-centric approach, he accounts for the product marketing best practices in Applexus. He holds an MBA from Indian Institute of Management, Bangalore.

In retrospection, there are a lot of costs involved in Accounts Payable processing. Despite a few, many of them won't be visible on a standard cost estimate. According to a study by APQC, the average cost to process an invoice varies. Best performing companies spend around $4.98 to process an invoice, while median and low performing companies spend $7.75 and $12.44, respectively. However, the cost variations are directly proportional to the complexity of AP operations, volume of the invoices handled, and the efficiency of the AP team in the organization. 

A sizable portion of the expenses incurred for processing invoices is indirect and hidden. This article will explore the hidden costs in processing vendor invoices and provide insights on how to manage them.

Data Entry:

When assessing the costs of invoice data entry, organizations usually take only the direct costs involved into account. But it’s also essential to note how much time and effort the workforce spends on it for corrections, reworks, verifications and vendor communications.

Delving deeper into the process, it is visible that the total cost of data entry also includes a few costs that are often overlooked:

  • Expense for data entry staff to rework (input errors, correction and problem-solving) increases the operation cost and disrupts the workflow
  • Loss of invoice hard copies and supporting documents requires resubmission and further delay in the process
  • Process delay invokes vendor issue escalations and vendor rotation due to poor communication.

Inefficient Exception Handling:

A survey among finance and shared services professionals reported that 64% of the respondents said 31% of PO invoices are found with exceptions and resulted in delayed approval, late payment, increased operational cost and dissatisfied vendors. In addition, the survey figured that the companies required an additional 160000 man-hours to reconcile the exceptions.

Time indeed is money. Delay in managing the exceptions and validations of business rules translates into various hidden costs down the line:

  • More people required to handle exceptions and incur more operational cost
  • Delay in invoice approval and payment clearance results in missing discounts
  • Invokes heavy late fees and penalties

Approval Delay:

The actual hidden cost of invoice processing lies in the time and cost spent on getting the invoices verified and approved. A study across companies in different performance-scales revealed that, on average, high-performing companies take 3.8 days to process and invoice while moderate and low performing companies take 9.7 and 20.8 days respectively.

It is evident that the complex approval process is a key factor that drives up the cost of invoice processing. As most approval processes incorporate multi-level approvals , statistically, it  delays the process. Often, one level of approvers are business users and since approving an invoice isn’t part of their core activity, an invoice approval becomes a non-prioritized pending task for them, often subjected to multiple follow ups. Hence, the time spent at each approval level for cross-checking and validation is unaccounted for by managers in calculating the cost per invoice.

  • Approval delay translates to late payments
  • Missing early payment discounts
  • Miscommunication in the AP team when approvers are absent or on leave
  • Reduces efficiency of the AP process (Process efficiency =Value-added time/ cycle time – non-value added time increases as invoices spend more time as pending tasks  increasing the cycle time, resulting in reduced efficiency)

Complex Auditing Process:

Invoice auditing process is a complex procedure that consumes a considerable amount of time and cost for companies. The audit cycle involves reviewing purchase orders, invoices, transactional entries, and other records associated with transactions and who verified and approved payment, what was authorized, when was it paid, and how much the payment was. Even if the auditing is conducted by an independent audit firm, often AP team members are closely involved in aiding the auditing team.

Completing an audit process at a large scale seems impossible with standard procedures and incur a lot of hidden costs.

  • Disrupts normal AP operations and consumes time
  • Force AP team to stop the ongoing activities to reconcile the transactional history
  • Communication with accountable managers to tally the transactions
  • Data recollection for missing journal entries and re-calculation to tally the bills and payments
  • Error correction and re-evaluation of purchase orders and payment bills.

Moreover, a lack of overall monitoring and visibility of invoice also becomes a major impediment in seamless collaboration among the stakeholders. Vendors, purchasers or buyers, store managers & AP team members need to collaborate in order to remove bottlenecks that serve as direct or indirect sources for hidden costs.

Organizations need to adjust their invoice processing for their specific need with an objective to reduce hidden costs of accounts payable process. A single platform with flexibility to manage business rule exceptions, instantiate collaborations among stakeholders, an effective data capture mechanism to eliminate error and frauds with detailed audit log, is key to reduce hidden costs.

InSITE, a smart AI enabled invoice processing application from Applexus comes with all these key features and much more. In case, you want to re-strategize your AP process, feel free to get in touch with our experts to assess your current account payable process.

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