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Cost Per Invoice is Important, It’s Just Not the Most Important Issue When Sending Invoices

Organizations submit invoices to their customers in a variety of ways; paper invoices through the mail, email, electronically via a network or EDI, directly to a lockbox – the list goes on. While there are many factors that will influence how an organization most efficiently submits an invoice, cost per invoice is usually not one of them.

Many receivables professionals declare their organizations incur no costs when submitting invoices to customers. I know because I’ve had hundreds of conversations over the years about how organizations submit 100, 500, 1,000 or more invoices per year, yet it costs them nothing to do it? There are inherent costs to doing almost anything – especially when it comes to submitting invoices. But, cost may not be the most important factor an organization should consider when looking at doing a better job of submitting invoices.

Screen Shot 2016-06-16 at 12.45.23 PMIn our 2015 Perceptions Study, the most important issue when it comes to submitting invoices is getting paid faster (figure 9), not reducing costs. Collections seem to trump everything because cash flow is a more obvious metric that organizations measure when determining their success. Measuring the cost of an invoice can sometimes be a tedious and nebulous exercise. I’m not suggesting that understanding invoice cost is not important; I’m simply saying there are other criteria organizations should focus on first.

Speed

How quickly an invoice is created and delivered to a customer has a significant impact on how quickly a customer will pay. There are many variables that lengthen the process of submitting an invoice, such as keying in data to create the invoice, getting the invoice printed, mailing the invoice, allowing time for delivery, keying invoice data into the customer’s accounting system, approving the invoice and processing payment. If the customer is paying by check, several days must be added to the process to allow for the check to be cut and mailed. Those organizations that send their invoices via email will be able to lop off some time on the front end. What some organizations forget is the fact that an email will still require printing and manual handling on the customer side.

Organizations can remove anywhere from 4 to 7 days from this process by automating all or a portion of their invoice submissions. By leveraging invoice automation, e-Invoicing and other solutions such as EDI, an invoice can be submitted and entered into a customer’s accounting system in a day rather than 4 to 7 days.

When invoice submission speed is the focus, several days can be removed from the process and organizations can substantially reduce their DSO. This, in turn, leads to improved cash flow and working capital.

Accuracy

Making sure all relevant data on an invoice is accurate may seem like a no brainer, but organizations often submit invoices with minor inaccuracies, which lead to a pause in the process while the error is resolved. In the above table, reducing problems and exceptions was identified as the second most important issue facing organizations when they submit invoices. Working through an exception could often be akin to working through an issue with the local cable company – it may take a while.

While exception handling can be commonplace for some organizations, it’s important to remember that valuable time is ticking by and DSO is steadily increasing. It’s worth noting that a customer likely has more than a single exception to work through. If there are thousands of suppliers and hundreds of thousands of invoices are submitted each year, even a 1% error rate can mean exception handling for thousands of invoices. One supplier’s issue may have to wait in the queue while issues with other supplier are resolved first. If all invoices are submitted with 100% accuracy, chances are there will be no exceptions and no lengthening of the payment process.

Terms

Establishing attractive terms is what every organization strives to do, but some struggle in this area. There may not be much recourse if the industry standard is 2/10 net 45 but a customer pays the discount after 45 days or takes 60 days to pay the full amount. These practices can contribute to a decrease in a supplier’s expected cash flow or an increase in DSO. To address these issues, it’s a good idea to build in solutions that are beneficial from a supplier’s perspective when originally determining credit terms with a customer. Establishing an electronic method of accepting early payment through supply chain financing or a dynamic discount solution goes a long way ensuring payment is made in accordance with established terms.

Payment

After all is said and done, the invoice has been properly submitted, approved by the customer and processed for payment. A customer has several options regarding how they will pay – often determined by what a supplier organization requires during the customer onboarding phase. Accepting checks by mail is commonplace, but that will always add several days to the process. Reducing time in the payment phase can be accomplished by incorporating solutions that expedite the payment and cash application process.

Lockbox solutions have come a long way in recent years, often allowing a solution provider such as a bank to accept the check, scan the information and quickly deposit the funds into an approved account. Other solutions such as ACH can speed payment even further by allowing your customer to pay approved invoices within a day or two.

Screen Shot 2016-06-16 at 1.24.52 PMReferring again to the 2015 Perceptions Study, while 83% of respondents indicated that they currently receive paper checks from their customers and 71% indicated receiving payment via ACH (figure 11), when asked how they prefer to be paid, preference for ACH (63%) outpaced payment by check (25%) by more than 2 to 1 (figure 12).

Screen Shot 2016-06-16 at 1.25.06 PMAlthough we started out by saying that cost of an invoice is not the most important component of submitting an invoice, addressing the areas of speed, accuracy, terms and payment will ultimately make a pretty significant dent in the costs associated with invoice submission. One might even say that reduced costs are a valuable byproduct of addressing the other four areas.

Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. His resume also boasts time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.

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