Unmasking the Hidden Costs of Manual Accounts Receivables

In our last article, we outlined how inefficient AR can drain your resources. In this week's blog post, we want to go one step further and provide specific examples of how these costs can accumulate. This is particularly the case for companies with 100-300 employees (or larger), primarily B2B businesses, that don’t have proper automated processes and instead use invoicing software, online banking, and/or Excel.

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1. Labor Costs

Before diving into the cost drivers, we need to establish a foundation for our calculations. It is important to acknowledge that, regardless of the level of automation, there will always be human oversight and management involved. This means that, in addition to processing and software costs, the primary cost driver will be human time.

To calculate the impact, we have used average salaries in Europe for the following positions: 

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While some bigger companies may have dedicated collections agents, others may have more general finance and HR resources where collections are part of their daily responsibilities. We will use examples from usual setups that we are familiar with from our clients to account for these situations in our calculations.

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2. Operational Costs

The cost of human time is the most significant expense related to manual accounts receivable operations, aside from software and processing fees. This section details how these costs accumulate across various operational areas.

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Manual Data Entry

Time consumption: Manual data entry diverts valuable employee time from strategic tasks. Even with readily available software solutions, employees often spend a significant portion of their day on manual data entry and related processes like correcting invoice amounts or managing invoice files. An employee might, for instance, spend two hours, or around 20% of their time, on data input and manual processes. This would amount to about €47 per day, €940 per month, and €11,280 per year per employee based on the average European salary. 

Error Rate:  Manual processes are inherently prone to human error. Studies suggest manual data entry can lead to error rates as high as 5%. For a company processing 1,000 invoices monthly, this could result in up to 50 errors. Correcting each error can take an additional 30 minutes, costing around €11.75 per error, solely considering labor costs and excluding potential business impacts like delayed payments or strained customer relationships.

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Non-Integrated Applications

Data Export and Import: Switching between different applications to access and input data is time-consuming and error-prone. Industry experience shows that employees can spend up to 60 minutes daily on these tasks. This constant switching between systems reduces productivity and increases the risk of errors.

Data Inconsistencies: Non-integrated systems can lead to data inconsistencies, resulting in incorrect invoices, delayed payments, and customer dissatisfaction. While these inconsistencies are difficult to quantify financially, they can significantly damage a company's reputation and long-term profitability. We chose not to include these errors in our calculations because of their immeasurable amount.

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Manual Follow-Ups

Time Consumption: Chasing overdue payments requires dedicated time and effort. A collections agent might spend 30 minutes daily on follow-up calls. This time could be better utilized on more strategic activities.

Customer Dissatisfaction: Frequent follow-up calls, while necessary in a manual AR process, can strain customer relationships and negatively impact brand perception. Losing customers due to aggressive collection practices can be far more costly than automating the follow-up process.

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Supervision and Management

Manager Time: Even if the company has dedicated collections staff, managers, such as the CFO and Head of Accounting, still spend time on manual AR tasks, including reviewing problems, following up on key accounts, and analyzing cash flow, especially in the absence of centralized dashboards or task overviews. A CFO's involvement might range from 2 hours weekly for oversight to up to 5 hours weekly with direct involvement in problem-solving. Moreover, if a Head of Accounting is present, they likely dedicate a substantial portion of their time (e.g., 50%) to managing these manual processes. For these cases, automated systems can improve efficiency and free up accounting staff from tedious tasks.

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3. Adding Things Up: Calculating Potential Costs

Now that we've laid the groundwork, let's calculate the potential costs of manual AR processes for two example scenarios focusing on B2B operations.

We will analyze companies with 100–200 employees for the first example. In these companies, financial operations are typically managed by a CFO and two dedicated finance and accounting professionals. While these teams play a crucial role in maintaining financial accuracy and compliance, manual processes, inefficiencies, and error corrections can lead to significant hidden costs.

The table below outlines the estimated financial impact of these inefficiencies, highlighting areas such as manual data entry, error management, application administration, follow-ups, and CFO supervision. These costs can add up to nearly €48,000 per year, affecting the company’s overall financial efficiency and resource allocation.

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Next, we will analyze companies with  500-1000 employees for the second example. In these companies, the financial management is typically handled by a CFO, a Head of Accounting, and a team of four finance and accounting professionals. As businesses scale, the complexity of financial processes increases, leading to higher time consumption, error rates, and inefficiencies that result in significant hidden costs.

The table below highlights the estimated financial impact of these inefficiencies, including manual data entry, error corrections, system management, follow-ups, and supervisory oversight. These costs can accumulate to over €132,000 per year, affecting productivity and overall financial performance.

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The Real Cost of Manual Processes

As we've explored, manual AR processes are far from cost-free. The seemingly small increments of time spent on manual data entry, follow-ups, and navigating disparate systems accumulate significant financial burdens. For a company processing a substantial volume of invoices, the costs associated with just the labor involved in these manual tasks can be staggering, as illustrated in the calculations provided.  Beyond the quantifiable expenses, the hidden costs of manual AR can negatively affect your company's long-term success and bottom line. By automating your AR processes, you can free up valuable time for your team to focus on strategic initiatives, improve accuracy, enhance customer satisfaction, and ultimately, boost profitability. Moving beyond manual processes is not just about efficiency; it's about investing in the future growth and stability of your company.