Managing Cash Flow

204 Analyzing Non-Value-Added Functions
Labor hour cost: $16 per hour
Activity Cost Element Time Cost
1. Receive PO from Purchasing
and file in open PO file Labor 2 min. $0.50
2. Receive “receiving report”
from receiving, pull open
PO from file and compare
hold in open receipts file Labor 4 min. 1.00
3. Receive invoice from vendor
and match to open receipts
or pull open po and compare
and hold as open invoice Labor 6 min. 1.60
4. Invoice/receiving errors Labor — —
5. Computer data entry Labor 3 min 0.80
6. Computer check prep checks Labor,
computer 2 min. 0.50
7. Mail checks Labor, envel.,
postage 2 min. 0.50
8. File paid payable Labor 2 min 0.50
9. Meetings, phone, fax Labor, phone 4 min 1.00
Total cost $6.40 _______ Number of payments processed per year: 26,000
Cost of processing annual payments: 26,000 $6.40 = $166,400
(actual costs = $164,400)
Exhibit 6.8
Accounts Payable Activities and Costs
Although the activities and costs shown in Exhibits 6.8 and 6.9 are rough
estimates of the processing of accounts payable and accounts receivable, they
represent the expenditure of resources allocated to these two activities.
Theoretically, it could be assumed that each vendor payment or customer bill that
could be eliminated from processing would result in a $6.40 or a $9.00 savings to
the company.
In reality it does not work that way. A significant number of vendor payments
or customer bills must be eliminated to provide a noticeable reduction in
work effort resulting in substantial cost savings. However, the costs of processing
a vendor payment and the cost of processing a customer bill can be used in the
company’s internal cost system in convincing management that its costs are too
high. These figures can also be used to calculate cost savings and increases in positive
cash flow.