How To Calculate the Cost of Processing an Invoice
It may sound complex, but it’s actually easy to calculate just how much you’re spending on processing invoices manually. This can be done by calculating all of the costs incurred to process the invoice and divide that by the number of invoices you process.
These costs include a variety of expenses that include payroll expenses, software subscription costs, per-transaction fees, and physical goods used in the AP process such as paper checks, postage, and envelopes.
Let’s take a look at the areas you should include when calculating your invoice processing costs.
Labor Costs
Labor costs are the largest expense incurred when processing AP manually and should include your purchasing clerk and purchasing manager, your accounting clerk, and your accounting manager.
To calculate labor costs correctly, take their hourly rate and multiply it by the number of hours spent performing AP-related tasks like locating and adding vendors, entering and approving invoices, entering information into your software, and paying bills, whether by ACH or by check.
If paying by check, you’ll also need to account for the time spent placing checks in envelopes and adding postage, or taking them to the post office.
Position |
Hourly Salary |
Hours Spent on AP Monthly |
Total Cost |
# of Invoices per Month |
Total Processing Cost per Invoice |
Purchasing Clerk |
$20 |
40 |
$800 |
140 |
5.71 |
Purchasing Manager |
$30 |
15 |
$450 |
140 |
3.21 |
AP Clerk |
$20 |
100 |
$2,000 |
140 |
14.29 |
Accounting Manager |
$40 |
30 |
$1,200 |
140 |
8.58 |
Total |
|
185 |
$4,450 |
|
31.79 |
This means that total labor costs for processing AP for the month are $4,450.
For a fuller picture of the labor costs you should also consider the time spent approving invoices by other members of staff. This can quickly add up if senior members of staff are involved and all relevant data is not easy to find.
Infrastructure Costs
Any software application you’re using to process purchase orders and invoices and pay bills should be included in your invoice cost calculation.
For example, if you pay $100 a month for a subscription to accounting software and $15 a month for antivirus software, you will need to include both costs in your calculation.
For this example, total software costs for the month are $115. You can make the calculation more accurate by determining what percentage of the tool the AP department is financially responsible for.
Payment Costs
Whether you process payments electronically or write a check, there’s a cost attached. Paper checks cost money, as well as postage and envelopes. But even if you process all payments electronically, you’ll still have payment fees.
Using the scenario above, let’s say that 115 of the invoices processed monthly are paid by check, while the rest are paid by ACH. Checks are $0.02 each, envelopes are $0.06 each, and postage is $.55. ACH transaction fees are $0.35 each. Let’s calculate the totals below.
Item |
Per-unit Cost |
Number of Invoices |
Total Cost |
Paper checks |
$0.02 |
115 |
$2.30 |
Envelopes |
$0.06 |
115 |
$6.90 |
Stamps |
$0.55 |
115 |
$63.25 |
ACH transactions |
$0.35 |
25 |
$8.75 |
Totals |
|
140 |
$81.20 |
To get your per invoice total, you would add your total labor costs, software costs, and payment costs together and multiply by the number of invoices processed to get your total per-invoice cost.
($4.450 labor costs + $115 infrastructure costs + $81.20 payment costs) / 140 = $33.19 per invoice cost. And as your invoice volume increases, so do your costs.
Keep in mind that the regular cost of doing business such as rent, utilities, paper, pens, computers, etc., and other hidden costs are not included in this calculation.
When you add in additional costs such as maintaining storage space, that $25 invoice you paid last week may end up costing you upwards of $50 just to process.
And when you factor in the cost of replacing a lost check and errors that need to be corrected, you’ll be adding even more to the per invoice total.
If you are processing invoices manually you are also likely seeing late payment fees and lost discounts impacting your bottom line.