Even something as mundane as the invoicing process for small and midsized businesses can be an expensive, time-consuming undertaking, and error-filled. The business process involves intensive manual data entry, revisions, approvals, and bookkeeping. CFOs should focus on improving this process not only to save costs but also because cumbersome invoicing has a direct negative impact on Accounts Receivable (AR) and Days Sales Outstanding (DSO).
Using data from a recent survey, as reported to APQC’s Customer Credit and Invoicing Open Standards Benchmarking survey, the process of invoicing a customer, for purposes of this benchmark is outlined as follows:
“The invoice process includes maintaining customer and product master files, generating customer billing data, transmitting billing data to customers, posting receivable entries, and resolving billing inquiries. Process cost includes the fully loaded cost of personnel, outsourcing, systems, and overhead, as well as other allocations to the process.”
Of the 896 organizations that participated in this survey, the best-performing organizations spent $2 or less to invoice a customer, while the bottom performing organizations spent $9 or more each time an invoice went out. At the median, are the organizations that spent just under $4 to invoice a customer.
Depending on the number of invoices an organization sends out each month, the cost to process each invoice can add up quickly. If an organization isn’t in the “top performing” $2 range, shaving even a dollar or two off of the total cost of invoice processing could produce substantial cost savings.
Invoicing isn’t just the responsibility of the accounting team. An effective operational process requires coordination between sales and accounting, so making sure that these teams’ systems talk to each other is crucial. The oversight of an experienced CFO is often needed to help streamline this process, and to ensure that all processes align with existing strategic targets.
When the sales team is using a different language or system than the billing and Accounts Receivable team, someone along the line has to translate sales orders as they come into the billing system, adding time and cost. For example, a sales order with an abbreviation or acronym that comes into the billing process might be misinterpreted, creating an inaccurate invoice and frustrated customer.
This type of inefficiency can be greatly reduced by creating a common system and data model for sales and billing that standardizes customer names, addresses, and all fields related to transactions.
Armed with standardization in place, it’s easier and more effective to invoice frequently — or even daily. Manually processing invoices in large batches requires a lot of set-up time and is labor-intensive. It’s more effective and less costly to invoice in small batches every day than to wait to do it once a week or once a month.
An organization can save even more if it sends invoices to customers electronically, through email or a customer portal, skipping the costs of paper, postage, and labor associated with snail mail. Daily billing also starts the time clock on when payments are due, reducing working capital needs.
According to the invoicing benchmarking survey, at the median, 70 percent of invoice line items are invoiced using electronic or automatic methods. An even higher 80 percent of line items invoiced are automatically entered into a general ledger. Invoices that are automatically generated based on event triggers — such as discharge from a hospital — also take labor cost out of the process. According to the APQC survey, 74 percent of invoices are automatically generated this way.
A key factor working against increased automation and system integration is custom pricing, which adds time and errors to the invoicing process.
A customer may negotiate a discount, causing a salesperson to manually override the standard price. But unless that change translates to the billing system, the invoice is still going to go out with the original price. Few things make a customer more dissatisfied than a promise broken. And, an inaccurate invoice nearly always guarantees a payment delay.
A common system shared by sales and billing can avert such mistakes and eliminate the rework, corrections, and rounds of review that are part of a manual process.
Other factors also add time, labor, and cost to the invoicing process:
Excessive levels of approvals
Client or customer purchase order requirements
Out-of-date customer master file and terms
Other missing data, such as lack of customer tax identification information
Invoice customization to accommodate customer requests
In many cases, a simple checklist can ensure that all of the necessary billing information is current and in hand before an invoice is created, reducing rework and frustration.
As for invoice customization, 47 percent of organizations offer it to all customers, while another 31 percent offer it only to key customers. To reduce manual work, the only parts of an organization’s invoices that should differ from customer to customer are the products or services being billed. One way to reduce the cost of invoice customization is to create one standard invoice template that does it all, and include a separate, blank field for any unusual notes.
Like all cost-reduction efforts, continuous process evaluation and improvement is the key. Troubleshooting invoicing processes, and looking for ways to automate and improve interdepartmental communications and efficiency, will pay off as an organization begins to accumulate dollar savings, one invoice at a time.
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