What Is Invoice Processing? How to Expedite Vendor Payments

Supplier crossovers are the new business order.

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.

From capturing invoice details to verifying POs to final cash audits, accounts payable automation software can manage every cornerstone of a successful supplier relationship. Efficient usage of bandwidth saves resources, which increases economic profit.

How does invoice processing work?

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.

Steps for automated invoice processing

As discussed above, invoice processing has several steps, from when the invoice is received to the enterprise resource planning (ERP) system input until the record adds up to the general ledger.

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.

• 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.
  

Why automate invoice processing?

KPIs of invoice processing

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.

Best practices for invoice processing

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.

1. 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.
2. 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. 
3. 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. 
4. Financial expertise: The person managing payment integrations with AP automation software must be extremely well-organized and knowledgeable of various financial terms.
5. 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. It allows users to easily create and send invoices with customizable templates, automatic calculations, and payment tracking features.

Many organizations now envision artificial intelligence techniques 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.