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The Average Cost of Processing a Purchase Order: A Detailed Analysis
A detailed analysis on the average cost of processing a purchase order and a breakdown of expenses, and strategies to minimize the cost.
In the world of business, understanding your expenditures is crucial. One of the costs that can often fly under the radar is the price of processing a purchase order (PO). While it might seem like a negligible expense, it's important to remember that small costs add up, especially when you're dealing with a high volume of orders. In this blog post, we'll break down the average cost of processing a purchase order and discuss strategies for reducing it.
The Average Cost
According to a study by the American Productivity & Quality Center (APQC), the average cost to process a single purchase order ranges from $50 to $150, with the median cost being about $100. This estimate includes activities such as requisition, approval, order placement, delivery confirmation, and invoice matching.
Several factors can influence this cost, including the size and complexity of the order, the efficiency of your purchase order system, and the skill and expertise of your procurement team.
Breaking Down the Cost
Requisition: This step involves identifying the need for a product or service and submitting a request. It includes the time spent researching suppliers and products.
Approval: The approval process can vary significantly depending on the organization's internal controls. It usually involves reviewing the requisition and approving it or sending it back for changes.
Order Placement: This includes the time and resources spent communicating with the supplier, negotiating the purchase terms, and placing the order.
Delivery Confirmation: Once the products or services have been delivered, someone needs to confirm that the order was filled correctly. This involves checking the delivered items against the purchase order and resolving any discrepancies.
Invoice Matching: After delivery, the invoice needs to be matched with the purchase order and the delivery confirmation. Any discrepancies need to be resolved before the invoice can be paid.
There are several strategies businesses can use to reduce the cost of processing purchase orders:
Automate: Automating your purchase order process can significantly reduce the time and effort required to process each order, thereby reducing costs. There are several software solutions available that can automate different parts of the process, from requisition to invoice matching.
Streamline approval processes: Overly complex approval processes can significantly increase the cost of processing a purchase order. Streamlining these processes, while still maintaining adequate internal controls, can lead to substantial cost savings.
Train your team: A well-trained procurement team can process purchase orders more quickly and accurately, reducing the cost per order.
The cost of an Invoice to Process
While the lifecycle of a purchase order costs $50-$150, a portion on the cost is also processing the invoice after the purchase has been made.
A study by the Association for Information and Image Management (AIIM) found that the average cost of processing a single invoice in the United States ranges from $10 to $20. This cost can even surge to $25 or more for companies still using traditional, manual methods. These figures include the costs associated with receipt, data entry, routing, approval, posting, and payment.
Factors Influencing the Cost
Several elements can affect the cost of processing an invoice. These include the complexity of the invoice, the efficiency of your current system, the volume of invoices your company processes, and the level of automation implemented in your invoice processing system.
Breaking Down the Cost
Receipt: This step involves receiving the invoice from the supplier, either through mail, email, or an electronic system.
Data Entry: The information from the invoice needs to be entered into your accounting system. In manual systems, this is done by hand, which can be time-consuming and error-prone.
Routing: The invoice must be sent to the appropriate person or department for approval. In many businesses, this involves physically moving paper invoices, which can be slow and inefficient.
Approval: Someone in your organization must review the invoice and approve it for payment. This step can be complicated if the invoice needs to be matched with a purchase order or if there are discrepancies that need to be resolved.
Posting and Payment: Once approved, the invoice needs to be posted to your accounting system and paid. This can involve writing and mailing checks, which can add to the cost.
Strategies to Reduce Invoice Processing Costs
Automate: Invoice automation can significantly reduce the cost per invoice by reducing the time and effort required to process each invoice. Software solutions like Ascend can allow companies to process more than 90% of their invoices without human touch.
Go Paperless: Digital invoices are easier to track, store, and retrieve than paper invoices. They can be processed faster and are less prone to errors or loss.
Simplify Approval Processes: Overly complicated approval processes can slow down invoice processing and increase costs. Streamlining these processes, while maintaining appropriate financial controls, can lead to cost savings.
Understanding the cost of processing a purchase order is crucial for any business looking to manage its expenses effectively. By investing in automation, streamlining approval processes, and training your team, you can significantly reduce these costs and boost your bottom line. Remember, every penny saved is a penny earned.