This might seem to be quite a simple question at face value but when we think about it, the answer is not exactly a straightforward one. This is because we are not always aware of the real costs of performing this quite complex task in all of its steps. In addition, while direct or tangible costs are relatively easy to identify, indirect costs are less easily identifiable and some of these are often very well hidden. Let’s therefore look at what tends to fall into these three categories of costs when comparing traditional paper-based billing versus full on-line or digital billing.
Direct Costs
At face value most people would estimate that a few “direct” costs are involved in paper-based billing. These may include:
•Invoice bill/file preparation/printing
•Paper invoices/bills
•Printing (ink or cartridge replacement)
•Envelopes
•Postage/Franking
•Offering basic payment options (debit, credit, other at standard fees)
Costs will fall as bill volumes increase for most of the above but even if they do postage or franking at about £0.40 to £0.45 pence will always be the biggest fee here. And the others will typically add as much as 30 to 35 pence making for a total of £0.70 to £0.80 of direct costs. Of course, if a merchant emails invoices (with a PDF attachment), instead of physically mailing them this may fall in half perhaps.
Indirect Costs
Costs are often deemed to be “indirect” because they are either fixed and/or cannot be wholly charged to the billing costs (especially if it is only part of a person’s job). However, even proportional costs add up here. Indirect costs may include:
•Customer service manpower to handle calls/queries
•Accounting/Reconciliation manpower
•Lost invoices (and the time taken to deal with this)
•Undelivered bills (and the time taken to deal with this)
•The cost of bill storage (space rental or fixed costs)
•Bill query handling time
Once again there may be some economies of scale in the above but all of these items (except bill storage perhaps) mainly involve having staff on the payroll or at call. Even at 500 bills a month, at least quarter a person would typically be involved in issuing and reconciling invoices and another quarter in handling queries, re-issuing bills or handling “special requests” related to invoicing or payments. If the cost of this person (or two part-timers) were £12,000 a year (£8,000 plus 50% salary/overhead burden) or £6,000 each, this £1,000 a month would amount to £2 per bill.
Hidden Costs
Costs are often deemed to be “hidden” because no-one is scrutinising or controlling them (they go unmeasured or unaccounted for or are lost in general overhead or the broad costs of doing business). Hidden costs may include:
•Extra or hidden payment transaction fees (which may be fixed or higher than necessary)
•Invoice/billing run or payment processing errors
•The need for a higher than wanted or necessary float/overdraft at the bank
•Possible added customers or more business from having more payment options
•Quicker settlement/cycle time (by use of SMS or email alerts)
•Easier training of staff/opportunity to focus staff elsewhere with time saved
•Potential cash-flow acceleration
•Easier/cheaper compliance and audit work with digital billing
•Lower/No cost digital marketing opportunities
•Overall incremental "Green" benefits/credits
The benefits to an organisation of the long list above are obviously much harder to calculate but a variety of studies in recent years have suggested that these can conservatively add up to as much as 3-4% of revenues or as much as 15% of profit. If we assume our little company doing 500 bills a month has an average transaction or “ticket” value of £40, turnover per month is £20,000 or £240,000 per annum. If we assume that profit is 15% of this or £36,000, this all means that the cost per bill is somewhere between £0.90 to £1.20.
So in summary, if we add all of these costs together which have a total traditional or paper-based billing cost of £3.60 to £4 or 9.5% of the revenue collected each time (£40 average ticket value). Now that’s a quite a serious amount of money for this little company not to take pretty seriously! But what about your company?-what is 9.5% of your revenues? And when you have calculated it in cold hard cash, can you afford not to investigate the potential to save as much as half of this as recurrent savings every year by moving to digital billing?
Showing posts with label costs. Show all posts
Showing posts with label costs. Show all posts
Sunday, 25 November 2012
Thursday, 28 June 2012
Do large organizations spend an average of $25 per invoice to issue a bill and collect payment?
Almost a year ago, one of our blog articles reported that the 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) said that on average, the overall cost of sending out a bill or invoice and then collecting payment from the customer, is £17 per invoice or around $25 (based on data in Europe for the year 2010). We also pointed out that many merchants were disbelieving of this figure, suggesting that they spend nowhere near that kind of money on such a mundane and clerical activity.
Although individual merchant data is often difficult to come by, a private study of the billing and collections practices of three very different organizations was made available recently and the data sheds some light on the real costs that are experienced. These three relatively large organizations were an electricity utility, a city/council organization and a regional telecommunications enterprise. All of these are US based and currently bill their customers with a physical bill in the mail. All three offered payment via their web site but take-up is less than 5% of the combined customer base (a total of 540,000 customers across all the organizations that are billed each month).
What did the study show?
These organizations classified their costs of issuing bills and collecting payment into “direct” and “indirect”. Direct costs included:
• Invoice bill/file preparation time
• Bill printing
• Envelopes
• Postage/Franking
• Payment type fees (fees on credit/debit cards etc)
• Bank fees
The estimated average direct cost for these companies was $6.50 per bill
Indirect costs included:
• Customer service manpower to handle calls/queries or take phone payments
• Accounting/Reconciliation time
• Lost invoices (and the time taken to deal with this)
• Undelivered bills (and the time taken to deal with this)
• The cost of bill storage (space rental or fixed costs)
• Bill query handling time
• Additional or extra payment transaction fees that were unexpected
• Invoice/billing run or payment processing errors
• The need for a higher than wanted or necessary financing to cover outstanding receivables
• Slower than expected bill settlements
• Extra costs associated with compliance/regulatory issues
Of the above, the first two items (call-centre and account reconciliation costs) accounted for about 80% of the indirect costs, which on average were stated to be $18.00 per customer invoice.
So in summary, these three companies suggested that their real costs were a total of $24.50 per bill, based on real internal data from the year 2011. At least for these large merchants therefore, the Billentis estimate looks to be pretty accurate and it is even more reason for merchants of all types and sizes to look very carefully at finding ways to reduce these costs. One immediate solution, of course, is to adopt online digital billing and payment practices by partnering with a third-party bill presentment and payment portal such as PaySwyft (where these costs can be cut in half very quickly).
Although individual merchant data is often difficult to come by, a private study of the billing and collections practices of three very different organizations was made available recently and the data sheds some light on the real costs that are experienced. These three relatively large organizations were an electricity utility, a city/council organization and a regional telecommunications enterprise. All of these are US based and currently bill their customers with a physical bill in the mail. All three offered payment via their web site but take-up is less than 5% of the combined customer base (a total of 540,000 customers across all the organizations that are billed each month).
What did the study show?
These organizations classified their costs of issuing bills and collecting payment into “direct” and “indirect”. Direct costs included:
• Invoice bill/file preparation time
• Bill printing
• Envelopes
• Postage/Franking
• Payment type fees (fees on credit/debit cards etc)
• Bank fees
The estimated average direct cost for these companies was $6.50 per bill
Indirect costs included:
• Customer service manpower to handle calls/queries or take phone payments
• Accounting/Reconciliation time
• Lost invoices (and the time taken to deal with this)
• Undelivered bills (and the time taken to deal with this)
• The cost of bill storage (space rental or fixed costs)
• Bill query handling time
• Additional or extra payment transaction fees that were unexpected
• Invoice/billing run or payment processing errors
• The need for a higher than wanted or necessary financing to cover outstanding receivables
• Slower than expected bill settlements
• Extra costs associated with compliance/regulatory issues
Of the above, the first two items (call-centre and account reconciliation costs) accounted for about 80% of the indirect costs, which on average were stated to be $18.00 per customer invoice.
So in summary, these three companies suggested that their real costs were a total of $24.50 per bill, based on real internal data from the year 2011. At least for these large merchants therefore, the Billentis estimate looks to be pretty accurate and it is even more reason for merchants of all types and sizes to look very carefully at finding ways to reduce these costs. One immediate solution, of course, is to adopt online digital billing and payment practices by partnering with a third-party bill presentment and payment portal such as PaySwyft (where these costs can be cut in half very quickly).
Wednesday, 19 October 2011
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:
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:
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:
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