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PREFACE
To benchmark their internal utility payables cost against Cass' outsourcing fees, companies frequently ask Cass to define the functional components of processing and paying a utility invoice. To each component, a company's own productivity standards, labor rates, and allocation methodologies are assigned.
The attached report identifies these detailed invoice processing activities by the following six cost categories:
- Direct Labor Costs
- Indirect Labor Costs
- Equipment Costs
- Postage and Supplies
Costs
- Administrative and
Overhead Costs
- Other Costs
As a quick and simple benchmark, however, we refer companies to the April 1996 issue of Controller Magazine. In "Cutting the Fat from Accounts Payable", authors Tad Leahy and Ivy McLemore reort:
- "Typically, the accounts payable process represents the greatest opportunity for improvement in the accounting function ... The stakes are high: The average company processes 190,000 vendor invoices per $1 billion of revenue, pays each employee $36,705 per year in salary and benefits ..."
In this same article, Leahy and McLemore interviewed Mark Krueger, Vice President of The Hackett Group, a consulting firm in Hudson, Ohio. According to Krueger, "The average company ... processes 11,100 invoices per person per year."
The math is straightforward: $36,705/11,100 = $3.31. That is, direct labor cost alone for payables processing averages $3.31 per invoice. For Cass, direct labor represents 30% of fully allocated payables costs when indirect labor, equipment, postage, supplies, administration, overhead, and other cost components are considered. (See below.) We believe this ratio holds for other companies as well. Applying this 30% factor then to the $3.31 direct labor cost above, yields a fully allocated average payables cost of $11.03 per invoice.
- In December 1994, The Hackett Group and the American Institute of Certified Public Accountants cosponsored a benchmarking study of key corporate financial functions. Four hundred companies, including over 100 major US corporations, participated in this study.
This average invoice payables cost is closely validated by IOMA's (Institute of Management and Administration) "Managing Accounts Payable" publication. In its May 1997 Payables Benchmarking Survey, MAP notes:
- "On average, it costs an accounts payable department $16.54 to process a vendor payment ... These figures may seem a little high. However, over 7% of the companies responding reported a check-processing cost of over $50 ... When the numbers were rerun, eliminating all who had entered $50 or higher, the average dropped to $10.55 for vendor payments ..."
In summary, your cost just to pay an invoice is probably $10.50 - $11.00.
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UTILITY PAYABLES COST COMPONENTS
Direct Labor Costs
- Incoming Mail Processing
- Receive and open
envelopes
- Sort and distribute invoices
- Pre-Data Entry Processing
- Verify invoice
liability (valid billing names/locations)
- Assign general ledger
codes
- Calculate allocations
for multi GL-coded invoices
- Assign vendor codes
- Assign optional tax
and surcharge codes
- Assign optional
microfilm index numbers
- Establish invoice batch totals
- Data Entry Processing
- Key/key-verify
payables data elements
- Key extended data
elements for energy management reporting
- Edit and validate key
data elements
- Research and reconcile exceptions; adjust batch totals for:
- Edit and
validation errors
- Duplicate invoices
- Past due invoices
- Balance due invoices
Indirect Labor Costs
- Checks and Report Control Processing
- Balance daily control
reports and distribute
- Sort checks and
remittance advices
- Insert checks and
remittance advices in envelopes; apply postage
- Sort and file paid
invoices and check remittance copies
- File control reports
- Balance and
distribute other weekly and monthly payables reports
- Balance and distribute energy management reports
- Exception Item Processing
- Process and return
duplicate invoices
- Process and return
previously paid past due invoices
- Process other miscellaneous returns
- Microfilming/Imaging
- Microfilm/image and
index invoices
- Microfilm/image
issued checks and remittance advices
- Microfilm/image paid checks from bank(front and back for vendor endorsement)
- Customer Service
- Support invoice
status inquiries
- Furnish vendor proof
of payment
- Furnish invoice
microfilm/image retrieval
- Furnish check microfilm/image retrieval - issued and/or paid checks
- Other Support Processing
- Reconcile paid and
issued checks
- Maintain Vendor File
- adds, changes, and deletes
- Maintain other validation files
Equipment Costs
- Data Processing Hardware
- CPU, terminals, disk, and printers for on-line and batch payables processing
- Telecommunications -
Voice, Data, Fax
- Postage Metering
Equipment
- Microfilming/Imaging
Equipment
- Microfilm/Microfiche Readers
Postage and Supplies Costs
- Postage and Envelopes
- Checks
- Returns to vendors
- Vendor and field location correspondence
- Check and Remittance
Stock
- Microfilm Cartridges
- Miscellaneous Forms and Supplies
Administrative and Overhead Costs
- Supervisory Overhead
- all operational departments
- Systems/Programming Support
- Systems modifications
- Systems enhancements
- Systems documentation
- Software Depreciation
- Personnel Training
- Occupancy Expense
- Property
lease/depreciation
- Furniture/fixtures
- Utilities, taxes, and insurance
Other Costs
- Bank Fees - Paid
Checks
- Lock Box Fees
- Telecommunications Charges - between vendors, corporate, and field locations
Cass ... providing Utility Payables and Energy Information Solutions
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