Home
  /  
Learning Center
  /  
What is invoice approval?

What is invoice approval?

Josh Krissansen

According to data published on Forbes.com, mid-sized companies lose an average of $280,000 every year to invoice fraud.

That means that every month, as your accounts payable team processes invoices from suppliers, ~$23,000 could go out the door due to fraudulent invoices.

These invoices might be from real vendors but with exaggerated or incorrect pricing. Or the could be entirely fake, with nothing at all to do with your daily business.

In any case, it's a problem that needs solving.

A solid invoice approval process is one protocol you can use to bolster your AP policy and help protect your organization against such risk.

In this article, we’re going to help you create one.

We’ll start by explaining what an invoice approval process actually is and why it's valuable before diving into a five-step process for signing off on invoices and approving payment.

Key takeaways

A good invoice approval process can prevent paying for fake or incorrect invoices

The invoice approval process involves verifying invoices against company guidelines, resolving any discrepancies, routing them for approval, and approving them for payment

Implementing invoice approval increases visibility over spending and adherence to purchasing guidelines

What is invoice approval?

Invoice approval is the process of reviewing invoices that your accounts payable team receives and approving them for payment.

This process involves:

At smaller companies, invoice approval is generally handled by the finance person or even a member of the admin team.

Larger companies will use their accounts payable team for this, and some may even have dedicated AP personnel whose principal job is to match and approve invoices received.

Why do you need an invoice approval process? 

Any new process that puts a barrier in the way of business efficiency needs to be justified.

The invoice approval process is the perfect example of this. 

It's in your best interests to pay your suppliers promptly, not only to reduce your outstanding accounts payable, but to maintain solid relationships with vendors and potentially even access early payment discounts.

But having to match an invoice and even route it to an approving authority runs contrary to this—it slows down the process.

So, why bother with invoice approval?

Reduce invoice fraud

Invoice fraud is the biggest concern. 

Without an invoice approval process in place, any person or organization can send your company an invoice that looks legitimate and extract cash from your business.

Sounds extreme, but even behemoths like Google and Facebook have fallen prey to such attacks (to the tune of $100M).

A robust approval process helps confirm that you’re paying an actual vendor from whom you’ve received actual goods or services.

Improve vendor relationships

Speaking of vendors, a good invoice approval process can actually help improve vendor relationships by reducing the number of incorrect payments and providing an opportunity to hold suppliers accountable for inaccurate invoices.

Increase spend visibility

Invoice approval has a hand to play in improving spend management and visibility. 

When internal stakeholders know that invoices must be signed off by an approving party before being paid, they’re incentivized to follow purchasing guidelines and avoid shadow spending. 

They know that any deviance from established policies will be caught and brought up with them.

Installing best practices early

Small business owners and leaders often look for ways to side-step what appear to be bureaucratic processes, like invoice approval, in favor of efficiency and agility.

While that’s a reasonable business decision—and, in the end, yours to make—even if all of the above benefits don’t sway you, it's worth bearing in mind future growth plans.

As a growing organization with a relatively small AP department, now is the best time to put best practices such as invoice approval in place so you can iron out any processing issues and set yourself up with a good foundation upon which to scale.

The invoice approval process in 5 steps 

Before we dive into our five-step invoice approval process, a quick note:

Not every company’s approval workflow will be the same.

The below is not the be-all and end-all of approval processes. You might choose to add or remove checks and stages depending on your business needs.

However, it's a great starting point and includes the best practices that real AP departments use to approve invoices for payment.

invoice approval process
Five-step invoice approval process

1. Confirm that the invoice hasn’t been paid already 

The first step is super simple:

Check that the invoice in question hasn’t already been paid.

This will help prevent duplicate payments (which means you either lose that money if it doesn’t get reported or will have to request a refund to be processed).

2. Follow the matching process laid out in your AP policy 

The steps you follow at this stage depend entirely on the matching process your AP team follows.

If you use 2-way matching, you will only match the invoice against a purchase order number in your PO system.

If you use 3-way matching, you’ll also need to match the invoice against a goods receipt bill, confirming not only that the goods have been ordered but that they have also been sent and received correctly.

A final option, 4-way matching, also requires that you match the invoice against a quality inspection report.

Most organizations will use either 2-way or 3-way matching, as they are more commonly able to be automated with AP software.

For example, BILL has automated 2-way and 3-way matching, a helpful feature for speeding up the invoice approval process.

3. Resolve any issues 

In a healthy, functioning organization, most of the above will simply be confirmations.

You’ll be able to match invoices against purchase order numbers in your AP system, confirm that amounts are correct, and process payment.

Occasionally, however, there will be issues that need to be resolved.

An invoice might come through without a matching purchase order number, for example. 

In this case, you’ll need to chase that up with the procurement team, find the PO number, and ask the supplier to review the invoice to include it (if that’s a policy of yours).

Or, the amount charged by the vendor might not match up against your purchase order. 

If you’ve established that they’ve billed you incorrectly, then you’ll need to follow up with their accounts receivable team to rectify the problem and resend the invoice.

4. Route the invoice for approval 

Next, you’ll route the invoice to the appropriate authorizing authority.

This is one of those stages that not all organizations will follow. In smaller companies, for example, the finance person running the invoice approval process likely has the authority to give the final sign-off.

In businesses that do require that specific people approve invoices, most will have some form of policy that describes when additional approval is required and by whom.

For example, your company might decide that any invoice above $10,000 (or any other amount you choose) is signed off by both the AP Head and the Procurement Head, while invoices below this threshold can be approved by any AP team member.

Or, you might set certain routing rules based on vendors. For example, recurring and pre-vetted vendors may not require special approval, while first-time or one-off suppliers do.

5. Process the payment 

Having performed all of the above checks, you can say with great certainty that the invoice is legit and relates to services or goods that someone in your organization has at least ordered, if not received.

All that’s left to do now is to process the payment.

The role of AP automation in invoice approval 

We mentioned earlier that there is often a tension between security-focused processes like invoice approval and the desire to maintain efficient and agile business operations.

Accounts payable automation offers a solution to this problem.

With the help of AP automation software like BILL, you can design an invoice approval workflow that is almost entirely automated.

The invoice is automatically received and imported into your AP software, matched based on your internal invoice matching policy, and routed to the appropriate approval authority based on the routing rules you set up.

In some cases, invoices can even be approved automatically, should your policy allow approval based on accurate matching alone.

Learn more about how BILL’s streamlined accounts payable software helps over 2,000 businesses spend 50% less time on AP processes.

Josh Krissansen

Josh Krissansen is a freelance writer, who writes content for BILL. He is a small business owner with a background in sales and marketing roles. With over 5 years of writing experience, Josh brings clarity and insight to complex financial and business matters.

BILL and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. BILL assumes no responsibility for any inaccuracies or inconsistencies in the content. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, BILL is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event shall BILL, its affiliates or parent company, or the directors, officers, agents or employees thereof, be liable to you or anyone else for any decision made or action taken in reliance on the information in this site or for any consequential, special or similar damages, even if advised of the possibility of such damages. Certain links in this site connect to other websites maintained by third parties over whom BILL has no control. BILL makes no representations as to the accuracy or any other aspect of information contained in other websites.