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 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 also). 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%!