Electronic invoicing (e-invoicing) is the exchange of computer-readable payables data between finance systems via a standardized data format.
It doesn't matter if the buyer and seller use different software, provided their systems can receive data in this format.
E-invoices are digital from transmission through to receipt, processing, and payment. This contrasts with invoices that are emailed as PDF attachments or other file types. Here the transmission is electronic, but the processing at the buyer’s end is usually manual; data needs to be extracted from files and uploaded to company systems before it can be processed.
What is e-invoicing?
Typically staff manually process invoices, keying in payables information into the finance system, carrying out compliance checks to validate the data, and managing invoice exceptions and approvals ahead of payment. This process is time-consuming and unreliable, with errors and subsequent delays commonplace.
Some companies address inefficiencies in accounts payable by deploying optical character recognition (OCR) software to capture and validate data from PDF or other file types, before initiating invoice processing workflows within an accounts payable automation solution or an enterprise resource planning (ERP) system.
While the OCR validates payables data and gets it into the system quicker, more accurately, and in greater volumes than an employee can, it is still not as accurate or efficient as e-invoicing. This is because every supplier’s invoice looks different, so some verification work is always required to teach the OCR how to handle the data.
In contrast, an e-invoice contains structured data using different system integrations, such as receipt capture software. This format makes it easier to automate invoice processing as the transactional information arrives complete, with the issuer only able to send an e-invoice from their software when they have filled out all mandatory fields.
This immediately improves data quality, lowers the invoice exception rate, and leads to a higher rate of straight-through processing. In addition, compliance checks are built into the e-invoicing framework, so there is not nearly the same security risk as receiving invoices via email.
Why is e-invoicing needed?
Worldwide there are many e-invoicing standards, and nations have different reasons for encouraging – or even mandating – their use. Countries in Latin America, for example, have used e-invoicing since the early 2000s to combat tax evasion, while the European standard, Peppol (Pan European Public Procurement Online), was initiated by the European Commission in 2008 to facilitate cross-border trade with public sector organisations in that market.
Arguably, in the context of the current global disruption, there is now a greater need for e-invoicing than ever before. Across the world, invoice payment times have lengthened as accounts payable staff struggle to maintain manual accounts payable processes offsite. Clearly, it’s significantly harder - and slower - to carry out all necessary compliance checks on incoming invoices from home. Therefore, the cost of processing each invoice increases as accounts payable staff need to spend more time to achieve less.
Adding to the cost of invoice processing is the fact that fake invoices and business email compromise scams have surged since the start of the pandemic. Fraudsters have capitalised on the disruption for personal gain, and medium to large-sized businesses with poor processes are easy targets.
Currently, 93% of US firms with $25 million or more in revenues are digitising their accounts payable and accounts receivable. In doing so they are tightening their payment processes while doing the right thing by employees, customers, and vendors.
The role of e-invoicing in economic recovery
E-invoicing can also play a role in economic recovery from the pandemic. Its efficiency means that payment times and costs are significantly reduced. For the seller, this means they get paid quicker. This is particularly important for small and medium-sized businesses who now more than ever may rely on timely payments to maintain solvency.
For the buyer, the time and cost that they would have spent manually processing an invoice can be re-deployed elsewhere in the organisation and used to create business value. Further, accounts payable staff can take on a more strategic role than invoice administration; their main responsibilities may become analysing company spend, advising on where savings can be made, timing payments to optimise working capital, managing supplier relationships, and other value-add work.
Digitising payment practices lifts productivity, which is important during an economic downturn when businesses often need to achieve more at lower cost. The use of automation technologies for routine tasks is an effective way of achieving this. Further, the use of e-invoicing can lift productivity across an economy because late payments create a less dynamic marketplace, putting a brake on economic growth.
Conversely, faster payments may fuel growth by ensuring more money is circulating at any one time. In addition, funds that would have been spent on processing costs can be redirected and used to help generate profits.
Peppol – or Pan European Public Procurement Online – is a standards-based e-procurement framework that allows trading partners to exchange procurement documents between finance systems over the Peppol network.
Over the last decade, Peppol has become increasingly well established in Europe and elsewhere. Currently, approximately 38 countries worldwide have adopted Peppol for e-invoicing. Outside of Europe, this includes Australia, New Zealand, Singapore, and South Africa, with Peppol in development in many other countries including India, the United States, and Canada. The Peppol Authorities in each jurisdiction set localised requirements and manage its roll out in their markets.
Many countries have chosen to adopt Peppol so that their businesses can trade more easily domestically and in overseas markets that also use this standard. In 2019 Australia and New Zealand jointly adopted the Peppol e-invoicing framework to help businesses in this region connect with each other, while also helping to digitally transform these economies, lift productivity, and create new jobs.
How does Peppol work?
Peppol works on a four-corner model, as shown in this example issued by the Australian Government:
The supplier is in corner one and the buyer is in corner four; corner two is the supplier’s access point to the Peppol network, and corner three is the buyer’s access point. Both trading partners’ finance systems need to be Peppol-enabled and connected to the respective access points to be able to send or receive e-invoices.
While sellers can issue invoices through several different access points according to their business needs and software deployments, buyers can only receive e-invoices through one access point.
In simple terms, the seller’s accounting software or ERP needs to be integrated with a sender’s Peppol access point (corner two) so data can transfer from their finance system to the access point. The sender’s access point converts the data for transfer across the Peppol network and uses the buyer’s Peppol ID to look up which access point to transmit the data to. The buyer’s access point will then receive and convert the data, passing it onto the buyer’s finance system.
As a result, participants can exchange e-invoices regardless of whether they have the same or different software systems without compatibility issues. Likewise, it does not matter which access point service providers they use, provided they have the respective access point to trade with their business partner. Should a supplier send an e-invoice and the buyer not be registered on the Peppol network to receive it, then the sender’s access point will notify the supplier and often provide a back-up option of sending the invoice via email attachment.
What are the business benefits of e-invoicing?
Eliminating manual payment processes saves time and money. For the buyer, this reduces their cost of doing business. Receiving e-invoices straight to the finance system improves data quality, lowering the exception rate and facilitating further automation. Efficient accounts payable processes enable more strategic decision-making around when to make payments, such as whether it makes sense to pay straight away to enjoy early-bird payment discounts, or whether to make use of the full payment term.
For the seller, e-invoicing means they consistently get paid on time. As a result, they may be better able to manage their finances, build their cash reserves, and respond to new strategic opportunities that come their way. Further, they do not need to waste hours chasing unpaid invoices when they could put this time to better use pursuing sales opportunities or providing an enhanced customer experience.
In addition to increased efficiency, another major benefit of e-invoicing is a lower risk of fraud. To use Peppol as an example, all trading partners can only get onto the network through an access point service provider. These software companies need to meet strict cyber security protocols, registering and authenticating their clients on the network as a legitimate business before they can trade. As a result, there is significantly less chance of encountering fraud than when invoices are received over email.
Another clear benefit of Peppol is that firms can choose the access point provider or access point solution that suits their business to e-invoice. In many countries there are no cost and low-cost options available to access the network, such as web portals through which suppliers can send e-invoices.
This potentially creates new trade opportunities between companies of different sizes; previously the expense of adopting an Electronic Data Interchange (EDI) system may have prevented smaller companies from trading with larger ones.
Will I need to change my software?
In many cases, global accounting software and ERP providers update their solutions to make sure they enable compliant electronic document exchange in each of their markets. Therefore, for some users, e-invoicing functionality may be available in their solutions at no additional cost to their existing subscription.
Other providers may not offer e-invoicing on all their software solutions; they may, for example, encourage their users to upgrade to their SaaS platform to access this functionality. If businesses do not wish to upgrade their finance system, other options include engaging a Peppol access point service provider to integrate their existing software or subscribing to an application that is already enabled for Peppol e-invoicing.
An accounts payable automation solution may offer an integrated buyer’s Peppol access point, allowing it to receive and process e-invoices before passing the data to the finance system for posting to the general ledger and payment.
The advantage of integrating a Peppol-ready application is that the software adds value beyond connecting the business to the network; in addition to receiving and processing e-invoices, an accounts payable automation solution will also automate the data capture, processing, exception management, and approvals of invoices that suppliers continue to send via email.
Challenges with e-invoicing
While the benefits of e-invoicing are compelling, its success relies on widespread adoption across an economy. If a firm’s trading partners are not e-invoicing, then that company will have to continue to receive invoices via email. Without an accounts payable automation solution in place, inefficient manual processes may continue even as more business partners start e-invoicing. This limits the transformative potential of e-invoicing both for individual businesses and in terms of a broader stimulus to a national economy.
As a result, many countries have grappled with whether to mandate e-invoicing. Some nations, such as Norway, France and Greece have mandated e-invoicing for business-to-government transactions. While others such as Brazil, India, and Italy have imposed an e-invoicing mandate on all transactions.
The issue with this approach is that for many businesses, transitioning to e-invoicing will involve a cost that they may not want to bear, despite a positive return over time. For example, if they process a low volume of invoices or don’t use business software, they may see it as an unnecessary regulatory cost.
Certainly, the cost of e-invoicing could vary significantly from one business to another, with free and low-cost options on the market for some sellers but significant integration services potentially required by other larger businesses.
Further, there may be expenses incurred in the time and resources a business needs to spend gathering their business requirements, deciding what they need to do to start e-invoicing, optimizing their accounts payable processes, implementing a new software solution, managing change, and training staff.
For some companies, starting to e-invoice will be a more complex and time-consuming undertaking than for others. However, the efficiency gains and ongoing savings from digitising and automating payment processes could mean a return on investment is realised extremely quickly.
E-invoicing is the exchange of structured, computer-readable data from one finance system to another via a standardised data format and network. E-invoicing facilitates automated processing and modernises payment processes. Currently, human intervention is usually required to process invoices received by email attachment because these files contain unstructured data, making automation more challenging.
The case for e-invoicing is extremely strong - particularly for buying organisations that receive a volume of invoices. Often these entities manually process invoices, with staff entering invoice information into the finance systems to initiate approval workflows. Data entry is time-consuming and error prone, which may result in the supplier being paid late. This can have a negative knock-on effect on the vendor’s business and on their supply chain.
In contrast, digitising payments enables better financial management for both trading partners, giving them the means to do more; in turn, this boosts the broader economy. Adopting a global standard such as Peppol facilitates new trade opportunities in overseas markets and domestically - its open network means it does not matter which finance system a business partner uses, as long as they have the appropriate Peppol connection in place.
Rolling out a national e-invoicing program is not without its challenges though. While e-invoicing is designed to save companies money over time, many businesses may encounter an initial outlay. Some companies may face integration costs connecting their software to the network, others may need to upgrade their system or subscribe to new Peppol-enabled software to complement their current system.
For many companies, time and resources will need to be invested in working out business requirements, re-designing existing processes, deciding on how to implement e-invoicing in their environment, managing change, deploying new software, and training staff.
Certainly though, with the technology well established and e-invoicing gathering momentum globally, e-invoicing will play a role in digitising economies worldwide. Further, over time more and more standards-based procurement documents are likely to be exchanged between systems. The issue for many companies may be managing this period of transition from one way of operating to another – particularly as buyers and sellers become ready to e-invoice at different times.
For many buying organisations, a Peppol-enabled accounts payable automation solution may allow firms to digitally transform their payment practices and gradually phase out the use of OCR technology when it is no longer required to extract data from invoices that suppliers have emailed through.