Can a Third-Party Digital Billing Company Put Big Savings on the Bottom Line?

In a recent article, we broadly confirmed that a general claim of the international billing and payment research companies was true for two companies (one small and one large) and that it is therefore likely to apply more widely. This claim is that on average every organisation spends around 5% of its revenue on issuing invoices and collecting payment for them. Now that we believe this claim to broadly accurate, in this article I want to test the claim of some third-party electronic billing and payments companies that they can make cost savings of up to 50% if their clients adopt a fully digital billing and payment service. At the full 50%, this would mean that up to 2.5% of a given company’s revenue would be saved. And as the large company in our previous article had an annual turnover of £90 million, this would amount to a whopping £2.25 million (and that’s certainly worth having as recurrent additional income).

To properly analyse this situation, we first need a few facts. In the information below therefore are some statistics about the company which we called Beta in the earlier article:

What this chart tells us immediately is that Beta spends slightly more than 5% of its revenue on issuing invoices and getting them paid, with 43% of this £4.62 million cost being on the staffing side and 57% being on the transactional cost side. So, now that we know this, where is the particular scope for savings, taking each of these two headings separately?

A) The Staff side savings potential
By moving to a fully digital billing solution, there is an expectation that many more people will be happy to both get/view their bills or invoices on line and pay them by the same means. However, this is not going to be the case for all customers and even for those who do make the transition, it takes time. For our purposes here we will therefore estimate potential take up after a three year period, at which point, 50% of Beta’s customer base is happy to view their bills online and half of these (or 25%) are happy to pay online. For simplicity we could say that this is a switch of 35% of the customer base to online billing and payment (the other 65% staying with previous practices and methods).

The implications of the above is that Beta cannot cut or redeploy its staff too aggressively, as the majority of customers still need to be serviced in the old way. However, we can nevertheless estimate that staff man-hours necessary to tackle the new workload (and therefore numbers needed) are reduced as follows:

Accounting: The 50% of customers now viewing their bills on line and the 25% paying by online means, allow much easier settlement and reconciliation, with electronic records at every step, less errors and much easier analysis of data (because the digital billing system can be used for the entire customer billing process and not just part of it). As a result, the people handling invoicing and payments could be reduced to a manager plus four accountants at Beta (a reduction in staff of 38%).

Clerical staff: Quite high numbers of clerical staff are needed at Beta to handle the 25% cheque and cash mix, general data entry (with records often being keyed two, three and even four times on occasions) banking and the chasing of invoices when overdue. Because there is also likely to be faster payment in the electronically paying customer base, this reduces the amount of time chasing late payments. In summary, data administration is simplified considerably across the whole system. As a result, the people handling invoicing and payments could be reduced to a manager plus fifteen clerks at Beta (a reduction in staff of 39%).

Call-centre staff: 50% of all Beta’s payments are taken on the phone, where service agents have to find the customer data and invoice, take the payment manually and payment data to a system of some kind. With a fully digital solution being used by 50% of the customer population, and half of these paying on line, the burden on the call-centre is reduced by 25% (as there is no need to contact the call-centre anymore for these customers). In addition, call-centre staff may be able to convert more and more customers to online payment by showing them the digital invoicing and payment system and pointing out that this is available 24/7, 365 days of the year-and not just 9am-5pm call centre hours. As a result, the people handling invoicing and payments could be reduced to a manager plus forty agents at Beta (a reduction in staff of 30%).

All of the above adds up to staff savings (even with a lower overhead recovery now of 40% as there are less offices, desks, computers etc needed) of £730,056.

B) The Transactional cost side savings potential
We have assumed no change in Beta’s business in terms of revenues and overall transactional volumes (and therefore average cost of each transaction). There are, however, two major changes that a digital system is likely to bring:
1. A change in bill presentment costs
2. A change in the mix of payment types being used

Bill presentment costs: Now that 50% of the customers are viewing their bills on line, it is reasonable to assume that they are happy to see paper “turned off”. As Beta were emailing invoices previously this was a preparation cost mainly (on the staff side) but it does allow the opportunity to send statements electronically as well as give customers copy invoices in the new digital system forever as a free service. This means that paper and envelope costs would reduce, as well as the need to store physical paper copies within the Beta organisation or externally (so costs of storage space are reduced also). Perhaps more significantly, the marketing material send in the post by Beta can now be put online for half of the customers (where it is presented without the cost of having to send it out). All up, savings in all of these presentment areas for Beta are estimated to be £481,035 per annum.

Payment costs: In the new world, a fully digital presentment and payment solution is likely to half Beta’s volume of cheques and eliminate the use of cash completely (even though the option to pay by cash may still be available to customers in some solutions –such as the one offered by PaySwyft). On line bill payment however goes up to become 15% of the total mix (with the other 10% coming from credit and debit card payments that used to go through the Beta call-centre). This adds a transactional cost of £0.50 per invoice to Beta, or £116,379 per annum, but it is more than offset by savings elsewhere. The greatest of these is in the float costs of the business. Because online payments are known to get to customers quicker and lead to faster payment, cash flow is accelerated and days outstanding are reduced (in Beta’s case from 45 days to 38 days (a drop of 22%). This contributes a total of £123,288 in annual savings to Beta. In addition, the often linked costs of having to handle bounced cheques, chasing debt and writing off unpaid invoices, diminishes considerably, adding another annual saving of £387,931.

If we add all the transactional side potential savings up, the total is £924,908

Summary
So, on the staff side we have estimated total savings of £730,056 and on the transactional cost side estimated total savings of £924,908. This makes a grand total of £1.652 million in savings per annum (recurrently) or 1.84% of revenue. Hence, the claim that a good digital billing system can save a company 50% of its costs (or in this case 2.5% of revenues) is not quite met here. However, with the potential to add more savings over future years as more and more customers switch to the new online system it would get very close to the 50% target and make the switch to digital billing still seem like a very good idea.

To make the above figures easier to see at a glance, a summary of all of the above is presented in the table below:

Sending Bills and collecting payment from customers costs every organisation 5% of Revenue on average!-can this really be correct?

According to several leading research companies who look at international billing and payment issues on an ongoing basis, (including perhaps the leader in the field of billing research -Billentis) they say, that on average, the overall cost of sending out a bill or invoice and then collecting payment from the customer, is anywhere from £4 to £17 per invoice. Unfortunately, apart from the fact that this is a pretty big range, it tends to create an unnecessary defensiveness in organisations (and often in the finance department in particular) who understandably become very keen to point out that they spend nowhere near that kind of money on such a mundane and clerical activity (although they will often fail to include many of the indirect and hidden costs of the process). Another recently published general statistic, however, could be much more useful and may make a few divisional heads and even CEO’s sit up and think about the efficiency and effectiveness of their billing and payments practices for the first time. This is the statement that on average, an organisation spends 5% of its revenue on issuing its invoices and in collecting payments from customers. In this article, we will explore this claim and see if it reflects reality for both small and large organisations. To do this we will look at the figures based on two real UK businesses.

First and foremost let’s deal with the “on average” part of the 5% of revenue claim. What is being done here is to look at many organisations of many sizes and types and simply working out the median or middle value in a range of numbers. In this case the median cost of billing and collecting payment in proportion to total revenues is 5%. Of course, this means that they are some companies that may be higher or lower than this but statistically, we can say that around two-thirds of all companies would fall into this average of 4%.

The Small Company
The first company (let’s call them Alpha) employs 26 people, has a turnover of £5 million in total revenues per annum. This is earned by selling goods and services at an average of £500 on average each time. Hence their total bills in a year are 12,000 or 1,000 per month. There are two broad cost categories that we now need to look at –staff and transaction costs.

On the staff side, Alpha have one accountant (on a salary of £45,000 per annum, three clerical admin people (at a salary of £21,000 each) and two people answering the phones (at a salary of £17,500 each). Hence, the all up payroll for this group of people is £143,000. The three clerical admin people devote all of their time to billing and payments but the accountant and customer service people devote only 50% of their time to this activity. Hence, we can say the cost of the people’s time which is devoted to billing and payments is £103,000. However, the company has staff overhead costs of 40% (cost of offices, equipment, training etc) which brings this cost up to a total of £144,200.

On the transaction cost side, 40% of the 12,000 bills are paid by cheque, 10% by BACS, 30% by phone (half by debit card and half by credit card), and 20% by cash. For cheques the bank charge fees of £1,200 (£0.25 pence times 4,800 cheques). For BACS, a charge is made of 15 pence per transaction (so £0.15*12000*0.1 or £180). For cash handling the bank charges a flat annual fee of £500 for all cash deposits of this size. For cost of transactions by phone, on the debit side the company pays £0.35 pence per transaction or £630 and on the credit side 2.5% of each transaction value (£500*0.025*1800 transactions or £22,500). Finally, we have to worry about how long it takes to get paid (and the cost of borrowing money to operate and allow for possibly late payments). Given that this small company has average invoice days outstanding of forty, they have to cover this £500 for 40 days or just under 11% of the year. As Alpha is paying interest at 5%, this means the cost to fund the necessary float is £26,027.

There are also a few direct invoicing costs for Alpha to bear including printing invoices, paper, envelopes, stamps and even marketing material (to also design and print). This adds up to a total of £0.90 per invoice (the stamp alone being half of this). We therefore have a total annual cost of £10,800. This makes the grand total on the transactional side of things £61,837. If we total all of the above, we now have a grand total billing and collection cost of £206,037. As a % of the £5 million in revenues this is 4.12% (or what would be £17.17 per invoice).

The Large Company
The second company (lets call them Beta), employs 525 people, has a turnover of £90 million in total revenues per annum. This is earned by selling goods and services at an average of £58 each time. Hence, their total bills in a year are 1,551,725 or 129,310 per month on average. Once again, there are two broad cost categories that we now need to look at –staff and transaction costs.

On the staff side, Beta have a team of eight accountants (on an average salary of £48,000 per annum each, thirty-two clerical admin people doing bookkeeping, settlement and reconciliation (at a salary of £23,500 each) and a call-centre with sixty people answering the phones (at a salary of £18,500 each on average). Hence, the all up payroll for this group of people is £2,214,000. The Beta company does not keep detailed records but estimates that billing and collecting payments occupies about 60% of the time of this whole team. Hence, the cost of the people’s time, which is devoted to billing and payments is £1,347,600. However, the company has staff overhead costs of 45% (cost of offices, equipment, training etc) which brings this cost up to a total of £ £1,954,020.

On the transaction cost side, 20% of the 1,323,530 bills are paid by cheque, 20% by BACS, 50% by phone (half by debit card and half by credit card), 5% by cash and 5% via Beta’s Internet bank site portal. For cheques the bank charges fees of £52,941 (£0.20 pence times 264,706 cheques). For BACS, a charge is made of 12 pence per transaction (so £0.12*264,706 or £31,765). For cash handling the bank charges a flat annual fee of £15,000 for all cash deposits of this size. For cost of transactions by phone, on the debit side the company pays £0.30 pence per transaction or £99,265 and on the credit side 1.8% of each transaction value (£58*0.018*330,883). transactions or £405,000). Finally, we have to worry about how long it takes to get paid (and the cost of borrowing money to operate and allow for possibly late payments. This company has average invoice days outstanding of 45, they have to cover this £68 for each transaction for 45 days or 12.3% of the year. As the Beta company is paying interest at 5%, this means the cost to fund the necessary float is £553,500.

There are also a few direct invoicing costs for Beta to bear including sending invoices (which Beta does via email not paper unless it is requested by a customer), monthly mailed statements and accompanying marketing material (to also print and design). This is a total of £0.40 per invoice. We therefore have a total annual cost of £620,690. This makes the grand total on the transactional side of things £1,860,054.

If we total all of the above (all staff plus all transaction costs), we now have a grand total billing and collection cost of £ £3,814,074. As a % of the £90 million in revenues this is 4.24%. (or £2.46 per invoice).

Summary
Although the data from these two very different sized companies cannot in any way constitute a statistically significant result, it is nonetheless quite remarkable that both costs of invoicing and collection are so close. At 4.12% and 4.24% respectively they are also only a little less than the 5% average claim made by the research companies. In fact, it is a reasonable assumption that a few more “hidden costs” still need to be added to both sides here (which may completely close the gap). For example, the small company Alpha added no costs for the senior managers (GM and CFO) who both spend some of their time in payment matters, nor for the extra bank charges for bounced cheques, debt collection and writing off-unpaid invoices (issues also not included for Beta). And, in the large company, there were some system and invoice storage costs that were excluded. This may well have made both % numbers even closer to the 5% figure and possibly slightly higher.

In the final analysis, this is just the data from two individual companies. However, they seem to provide a useful general justification to the claim and serve as a basis for calculating the actual figures for almost any business. This may be especially useful ahead of talking with online digital bill presentment and payment companies that often claim that they can reduce these costs by up to 50%-if this is true, what a great way to lift revenues by up to 2.5%!