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What is invoice processing and how does it work?

What is invoice processing and how does it work?

Every business survives on cash flow—income and expenses. Tracking them is critical for any successful business. Invoices are an important part of the expense management side of a business.

Whenever a company makes a purchase, the seller will send an invoice for the amount owed on the product or service. The accountant or finance officer records that amount in the accounts payable. Then, when they pay the bill, they move that amount out of accounts payable, record it as an expense (such as utilities costs), and subtract that amount from their bank account.

That's why invoice processing is often associated with accounts payable or the AP process. All of these terms refer to the process a company goes through when it pays its bills.

Read on to learn all about invoice processing, automated invoice processing, and how you can get started with invoice processing automation.

What is invoice processing?

Invoice processing refers to the workflow in which a company handles an invoice the day it is received to the day it is paid. It is an integral part of a business’s accounting process as well as company cash flow. The essential invoice processing steps include:

  1. Invoice capture and validation
  2. Purchase order verification (if your company uses POs)
  3. Invoice approval process
  4. Invoice payment process
  5. Documentation for audits

Every company uses some form of each of these steps, even if the workflow isn’t completely formalized. The more a company grows, the more important it is for the invoice processing system to be fully defined. Using automated accounting software can help to streamline invoice processing.

Invoice processing steps explained

A business having to pay an invoice from a vendor or partner is quite a different process than how a consumer might pay a company for goods or services.

Consumers typically have to pay on the spot using cash or a credit or debit card, while a business often has to complete additional steps to ensure payments are documented and verified.

Invoice processing usually follows this order:

1. Invoice capture and validation

The first step in invoice processing is to collect all of the bills from vendors in one place for invoice capture and validation.

Collecting all of the bills and invoices can be a hard process to streamline, and getting visibility into everything that needs to be paid can be a real challenge.

To make sure all invoices are accounted for, companies may complete an invoice validation process to determine if the invoice data is accurate. Invoice validation is an important part of invoice management whereby supplier invoices are reviewed for errors prior to payment.

This includes things like:

  • Checking the invoice number to make sure the bill hasn’t already been paid
  • Checking the amount against a purchase order or contract
  • Checking the billing address to help prevent check fraud

This is just as important for electronic invoicing as it is for paper. E-invoices could involve phishing attempts, also known as business email compromise. If a red flag is discovered, your invoice processing system should lay out a set of defined steps to handle that issue.

Whether an error is innocent or not, your team also needs a way to make sure that any repeat invoices, such as a second notice for payment, will also be flagged.

What is invoice capture?

Also called invoice data capture, entering each invoice requires “capturing” that data and entering it into your accounting system, specifically under accounts payable.

For some companies, monthly invoices run into the hundreds, totaling hundreds of thousands of dollars in cash outflows. As companies grow, an entire payable departments dedicated to managing the payable process can be considered.

With more growth can mean an increased chance of human error. Even if your accounting system is a modern ERP system, manual data entry still requires a human to type in that information.

In order to help avoid instances of human error, companies often use general ledger codes.

What is coding in invoice processing?

General ledger (GL) codes are essentially account numbers, or strings of numbers and letters that are associated with individual financial entries found in the general ledger. The letters and numbers in the code should provide information about the entry for easier identification and categorization.

2. Purchase order verification

Purchase order verification is typically part of a broader procurement process that includes confirming and specifying the product or services purchased.

Not all small businesses use purchase orders, but those that do should include purchase order (PO) verification. If you don’t have POs, skip this step. 

When a business purchases a product or service from another company they will issue a purchase order to verify the details of the purchase. This can include quantity, price, delivery terms and conditions.

Before the purchase can be approved, a financial leader will have to sign off on the purchase so that the purchase order can be issued to the supplier.

Once signed, the purchase order will be sent to the supplier who will then approve the PO, prepare the goods and send back an invoice.

When the invoice has been sent back to the company purchasing the product or service, they will match the invoice with the PO and will be able to move forward with paying the supplier per the agreed terms.

As a buyer, keeping track of this documentation can help to reduce errors or mispayment.

Depending on the documents your company requires during the broader procurement process, companies use two-way or three-way invoice matching to ensure all documents match and information is correct.

3. Invoice approval process

The invoices must then be presented to those in the company who are responsible for approving or rejecting invoices. Just because a bill has been verified as accurate, that doesn’t mean it’s ready to be paid. Many invoices will still need to be approved for payment for a variety of reasons:

  • Was the product or service received to the company’s satisfaction?
  • Is the amount large enough to require executive sign-off?
  • Should you pay the bill early to benefit from vendor discounts?
  • Or do you want to hold onto that cash until the actual due date?

Approval workflows should evaluate and route each invoice to the right people according to the underlying business processes that define the approval rules.

Invoice approvals may require different approval processes depending on the amount and nature of the bill.

This is another place where manual invoice processing can become bottlenecked with inefficiencies:

  • Chasing down busy executives for physical signatures can delay payments
  • Collecting and storing a variety of email approvals and physical signatures can be a hassle
  • Finding approvals later can be a challenge, especially if key personnel leave the company
  • Ad hoc systems to handle questions or rejections are hard to manage, making it easy for issues to fall through the cracks

4. Invoice payment process

Once an invoice is approved for payment, that payment needs to be made and a record of the payment needs to be captured in the company’s accounting system.

Business payment processes can take many different forms, from corporate cards to physical paper checks to wire transfers and more.

The more these payments are made on an ad hoc basis, the more opportunity there is for errors to creep in, like a mistaken amount or an incorrect account number.

A single extra zero can cost a company dearly.

If one person is signing checks and someone else is keeping the books, that communication can break down, leaving the accounting department unsure whether payment went out.

Documentation helps companies to avoid making duplicate payments.

5. Documentation for audits

Paid invoices and approvals need to be documented in the company’s general ledger for record-keeping purposes. These documents can later be used in case of an audit as well as for internal financial reports done by the company.

From using AI to capture invoice data through storing records in the cloud, automation software gives today’s agile, distributed finance teams the scalable systems they need to support business growth.

Ad hoc filing systems, whether paper or electronic, also run the risk of being all but impossible to navigate if the person who created the system leaves the company.

Businesses should establish a standardized back-office system that is easy to use and maintain.

How long does it take to process an invoice?

If you are using manual processes, invoice payments may take as long as 3–4 weeks, while automation can reduce this time to only a few days. A single accountant can usually process up to 40 invoices a day.

Scaling your invoice management workflow

As companies move into periods of growth, back-office workflows have to adapt and scale too. Otherwise, that growth can outpace the ability of the AP department to keep up.

CFOs need more visibility into cash flow, a growing demand for financing often requires better transparency, and the finance team needs to move away from time-consuming, manual processes so they can play a more strategic role.

To accomplish all these goals and more, many growing companies turn to automation for scalable back-office systems.

What is automated invoice processing?

Automated invoice processing simplifies the mechanics of pulling data from invoices, storing it, and making sure the invoice gets paid. This can be done with accounting software that automates the entire process to help ensure everything is done consistently.

What is an automated invoice processing system?

An automated invoice processing system is a function that can be performed through accounting software. This software allows you to use the program for data entry so that you may track the status and details of your invoices.

Manually tracking your AP process can not only create internal efficiencies within your organization, but make room for error as the accounting process, specifically with AP, can be sensitive to mistakes.

An automated invoice processing system can move an invoice or other accounting documents (such as purchase orders or receipts) through a workflow much faster than you would manually.

How invoice processing automation works

Automated invoice processing removes a tremendous amount of the manual effort that can bog down traditional invoice management systems.

1. Automating invoice capture and invoice matching

Automated invoice processing software starts by centralizing invoice collection and minimizing the need for manual data entry.

A centralized inbox provides a dedicated email where vendors can send invoices—at an address that isn’t tied to any specific employee. Paper invoices can easily be added by snapping a photo on your phone.

No matter how an invoice arrives, it gets put into the same system so it follows the same invoice processing workflow.

From the inbox, optical character recognition (OCR) reads each invoice and enters the data, checking it for things like duplicate invoice numbers. The accounting team can simply review the data instead of having to type it in, noting any flags that were raised by the system.

Invoice processing solutions can also sync with your accounting software or ERP so the information flows seamlessly into your accounts payable, with no need for duplicate data entry down the line.

2. Automating approvals

Next, invoice processing automation makes sure each invoice is routed to the right people for approval, and paperless approvals are collected digitally.

If an approver has questions, that communication is all part of the same automation system. Because communication chains are stored with the invoice record, accounting teams don’t have to hunt through emails or filing cabinets to figure out the current status of any invoice they want to look up.

Rejections can also be captured and handled through a standardized AP process, and of course the AP automation solution prevents those rejected invoices from being paid.

3. Automating payments

Once a bill is approved for payment, AP automation includes several options for invoice payment, all flowing from the same convenient system.

For example, you might want to pay by card, ACH, wire transfer, or even check.

For vendors that insist on traditional paper checks, an AP automation solution can print and mail those checks for you from a clearing account. This masks your own banking information and also tends to make your monthly close much quicker and easier.

4. Automating data capture and storage

Every touchpoint with an invoice is captured and stored automatically in a time-stamped audit trail. From communications to approvals to payment, it’s all right there with the invoice itself.

Invoices are stored digitally in the cloud, and even vendor records like contracts can be added to the AP automation system, making it easy to access them whenever and wherever you need to.

What are the benefits of automated invoice processing?

By automating your invoice process, you may not only free up your employees' time, but your time as well. This may lead to overall better productivity as well as more time to spend on more revenue-driving tasks.

Using an automated invoice process also can centralize all your accounting information so it’s not only easy to pull if your business is being audited, but you can pull analytics on your accounting processes to find out where you can improve.

Automated invoice processing can also help you better manage your invoices by reducing human error that could negatively impact your financial statements.

How to build an automated invoice processing workflow

Manually processing your invoices can be both cumbersome but convoluted as well. It can be easy to make errors like paying a bill twice or writing down an incorrect amount in your ledger.

Automated invoice processing can help make accounting a much more streamlined experience.

Find out how BILL can help you reduce manual invoice processing and start implementing accounts payable invoice processing best practices.

BILL offers flexible approval policies that give you more control over the process. You can set up policies that require approvers for any bill or vendor credit, based on the dollar amount. You can also require a minimum number of approvers, specific approvers, or both.

Find out how our invoice processing automation can make a difference in your organization today.

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