In a market flocked with competitors, only a network of trusted suppliers can let you heave a sigh of relief. However, it is more complex than it seems.
Supplier or vendor relationships work through financial commitments. Suppliers sign up for further sourcing only when they receive their last payment. Exactly what an invoice processing strategy ensures.
An invoice processing strategy controls invoice workflows by expediting third-party transactions over a specific time frame. Consistent payments mean regularized supplies, which aids in sales growth.
Invoice processing is a step-by-step payment mechanism by the accounts payable department to settle unpaid dues of suppliers or vendors. Invoice processing streamlines a company's working capital by receiving supplier invoices, processing them, and paying them off to level net profit.
Ensuring seamless invoice processing is the distributed responsibility of a company's accounts payable, accounting, and financial arms. Once the invoice details are captured and verified from the supplier's end, they are routed to a particular approver internally and fed into the accounting or bookkeeping software for auto-debit transactions.
Invoice processing is also known as automated invoice processing or AP automation.
How does invoice processing work?
The flow of work for invoice processing is a bit lengthy and cumbersome and has been so for many years.
Invoice processing is mostly a manual routine for the accounts department in a company. It juggles between suppliers sending Invoices on order completion and accounts payable receiving them and sending them for further checks.
First, the details of the invoice are verified against PO or sales receipts. Then, they are logged into a cash register or financial spreadsheet. The spreadsheet is shared with the approver, who takes their own sweet time. Once the approval comes, the invoice acquiesces to the payment stage. As most of these steps run in silos, suppliers don't receive their checks on time.
The invoice process automation tool automatically extracts invoice details with OCR and triggers a custom AP automation workflow for further approval routing. Approval workflows are only triggered once the invoice gets cross-checked against the purchase order.AP automation system integrates with financial platforms via APIs to remit necessary payments. Finally, details are transferred to the GL handbook. which helps during audits.
While there is no standard accounts payable department, the following workflow is typical when they're defined:
Invoice receipt: A supplier sends an invoice either via speed-post or an email attachment. A bookkeeper needs to scan and log this invoice information in the accounting system. A copy of this invoice is also created for filing proof.
Verification: Invoice details are cross-verified with a purchase order or shipping documents that the company receives. A copy of these documents is given to the accounts payable department, accounts receivable department, and vendor.
Tip: The invoice should contain the following details after document verification:
Date of service rendered
Date of sending the invoice
Contact details of org/seller
Name and contact of buyer
Terms and conditions
A line for each product and price
Submit for approval: Verified invoices go to the authorized approver (controller or CFO) for final attestation.
Processing payment: The account information of the supplier is used to make payment transactions. The preferred modes are bank transfer, NEFT, IMPS, or wire transfer. Nowadays, payments are also done via mobile wallets or unified payment interfaces (UPI).
General Ledger coding: As a concluding step, the accounts payable manager encodes the invoice details into a general ledger system (typically an ERP) for further audit drives.
Removal from balance sheets: Once the invoice rests peacefully in GL, the credit under the "account payable" section in the balance sheet is expunged with cash.
Tip: If an invoice says "net 30 days", it means the deadline is due 30 business days from the date of the invoice. S me suppliers also offer early discounts, like "2/10 net 30" which means 2% off if you pay in 10 business days.
Why automate invoice processing?
As a company scales its operations, invoice management only worsens. Due to the volume of paperwork, more invoices overwhelm an accounts payable department. In addition, accounts payable departments are often understaffed, leading to hours of data entry.
Even when alternative solutions exist to manual invoice processing, the IT team will be reluctant to implement them, and, instead, favor legacy software and other processes. Many IT departments are backlogged with numerous tasks and don't have the time for additional projects, leaving many technical initiatives on hold.
With intelligent validation of invoice processing software, you can automatically match the details of various documents through custom logic, reducing the practice of scavenging through invoices. This AP automation only charges $2 or $3 per invoice. This way, you can pay your dues before the clock.
Early payments also result in early discounts. The waived-off amount accrues to your bottom line every time you pay. Apart from these, you get end-to-end visibility into your AP workflows, by managing and authenticating user permissions.
Did you know? Focused research and data predict that the market will cross $24.7 billion, at a CAGR of 20%.
When looking for areas of improvement for invoice processing, it's important to benchmark key performance metrics that other companies follow for streamlining their invoice workflows.
Not sure where to start? Here are a few (key performance indicators) KPIs to help you understand the way companies should analyze invoice processing:
Invoice turnaround: An average-sized company, which receives over 3000-5000 invoices, roughly takes 25 days to manually process a single invoice. With AP automation, this has been reduced considerably.
Cost per invoice: When considering what to pay your AP executive to process a single invoice, be sure to include staffing and storage costs. Metrics like late fees and invoice discrepancies can add up to this amount.
Early payment discount: An early payment discount is a favorable metric offered to companies in exchange for a reasonable payment. For example, many suppliers will offer a 1% to 2% discount per month if payments are made sooner.
Late fee: Generally, the typical late fee levied for late clearance is around 1.5% of the total invoice amount.
Duplicate payments: Sometimes, invoices have a discrepancy of charging for one service or good twice. When not detected, it can lead to double payments or spending leakage.
An accounts payable automation software works in accordance with this flowchart. It processes large volumes of invoice data and financial transactions between companies and external suppliers.
While switching from a manual system to a digitized system, a few best practices need to be kept in mind. Small maneuvers in your software can help you streamline bigger challenges.
ERP integration: ERP systems can store all the accounts payable documents, such as open PO files, shipping documents, invoices, and receiving reports. The best invoice processing solutions can be integrated with your ERP stack to improve your business workflows.
Cash flow management: Quick invoice processing can manage your operating cash flow and even cut down on explicit expenses. Choosing the best controlling mechanism for your invoice data throughout the process can optimize cash equivalents.
Prevention of frauds: Accounts payable professionals need to be responsible for preventing invoice fraud, inaccuracies, or missed deadlines. Notifying responsible members in real-time throughout the processing lifecycle is crucial.
Financial expertise: The person managing payment integrations with AP automation software must be extremely well-organized and knowledgeable of various financial terms.
2-way and 3-way matching: Before details are entered into the invoice management software, account payable staff can perform 2-way matching or 3-way matching using "stare and compare" to verify invoices.
2-way matching vs. 3-way matching
Two-way and three-way invoice matching is a multi-step invoice verification process that helps in the following aspects. Both of these techniques are used to affirm whether the invoice generated by the supplier is genuine or not.
Two-way matching is when an accounts payable specialist verifies that the goods and services ordered through a purchase order are reflected in the invoice. Some companies take this process a step further by performing three-way matching.
Three-way matching includes verifying the purchase order and invoice with the receiving documents. These documents are typically either packing slips, sales receipts, shipment documents, or order receipts.
Even if 2- or 3-way matching is performed hundreds of times, executives miss important dates, values, or formulas that ultimately cost a fortune.
The future of invoice processing
Invoice processing has progressed dramatically over the last few years through AP automation solutions. Companies have been able to reduce manual labor costs, accelerate invoice turnaround, and improve opportunity costs.
Automated solutions help log invoice entries in the general ledger and streamline month-over-month audits much faster, to cut back on human errors. Managing finances smartly always attract future investments and venture capitalists.
Many organizations now envision artificial intelligencetechniques like computer vision to detect invoice categories and sort them for supplier or vendor details. Over the next couple of years, this would come to fruition.
Bolster the ties and the supplies.
The more punctual you are with payments, the better your stance would be in the vendor market. One bad word-of-mouth can potentially derogate your standing for years, and depreciate your in-service assets. So, it's better to clear your dues on time and establish a good reputation.
Optimize your expense management operations at every stage of the procure-to-pay vendor cycle with accounting software.
Don't wait, just automate
Manage everything about your current account payables and co-ordinate with vendors with AP automation software