Invoice processing explained: Key steps and benefits
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Among the many things your accounts payable handles, invoice processing is probably the most important one. Invoice processing ensures that you pay your vendors on time. This is vital for fostering partnerships with suppliers and driving the growth of your business. It also plays a crucial role in financial record-keeping by helping you track your expenses.
This article will explain the key steps involved in invoice processing and highlight the advantages of establishing an efficient invoice processing system.
What is invoice processing?
Invoice processing refers to the steps your accounts payable (AP) department follows in managing invoices from the moment it receives them to when it finally pays them. These steps include verifying invoice details for accuracy, approving them for payment, and documenting transactions.
The importance of invoice processing
An efficient accounts payable invoice process is essential for maintaining your business’s financial health. A well-managed invoice process can help ensure that you pay your vendors on time and avoid late fees and penalties. On the other hand, a poorly managed invoice process can result in lost or delayed payments, inaccurate financial records, and strained vendor relationships.
Other than improving your business’s financial health, efficient invoice processing is also important for the following reasons:
- Improved Vendor Relations: When you pay your vendors and suppliers on time, you nurture trust and goodwill, which creates the potential for discounts or other preferential treatment in the future.
- Time savings: Invoice processing minimizes the need for data entry, approval routing, and reconciliation. This allows your finance team to dedicate their attention and time to other responsibilities.
- Enhance cash flow: Streamlining invoice processing ensures that vendors receive payments and your organization maintains a positive cash flow. This helps minimize unnecessary expenses (late fees and penalties) while maximizing revenue.
- Improve cost efficiency: Your businesses can lower costs by reducing tasks and minimizing errors associated with invoice processing.
- Better Decision-Making: Access to real-time data on outstanding invoices and payables can help you make better financial decisions. For instance, having insights into pending payments allows for better resource allocation, budget adjustments and taking advantage of investment opportunities without neglecting obligations.
- Enhancing Internal Controls: A well-structured accounts payable invoice process ensures transparency and traceability. This not only strengthens internal controls but also ensures compliance with industry regulations and government mandates.
- Facilitating Audits: An organized and transparent invoice process simplifies audits by providing a clear trail of financial transactions. Whether it's internal audits or regulatory inspections, having readily accessible and accurate invoice records can make the auditing process smoother and less stressful.
Understanding the Invoice Processing Workflow
The invoice process workflow goes through several steps, starting from receiving an invoice and ending with its payment. The specific stages can differ from one business to the other, but generally, a proper invoicing procedure should include the following:
- Invoice receipt
- Invoice verification
- Data entry and integration
- Exception handling
- Invoice payment
Key Steps to Efficient Invoice Payment Processing
Having an invoice processing workflow is one thing—having one process that works is another. So what’s the difference? It all comes down to the steps to invoice processing. Let’s break down the steps outlined in the previous section and how your business can leverage them for invoicing and payment processing.
Handling invoices begins when you receive them from suppliers and vendors electronically or in paper form. In this step it is crucial to record all the details from the invoices. This includes capturing the invoice number, date, items or services provided, quantities, prices, payment terms and any relevant taxes that may apply.
Verification and matching
Once you receive invoices it is important to verify their accuracy and authenticity. This is referred to as income verification or matching. After capturing all the necessary invoice information, you must cross-reference the details with purchase orders, delivery receipts, and contracts to ensure that everything aligns with agreed-upon terms regarding billed items and costs.
There are several types of matching you can use, including:
- Two-way: This involves comparing the invoice with the corresponding purchase order (PO). The goal is to ensure that the items, quantities, and prices on the invoice match those specified in the PO.
- Three-way: This matching type involves comparing the invoice with the purchase order and the receiving report or delivery receipt. This method ensures that your business has received the goods before approving the payment.
- Four-way: Sometimes, you may need to extend matching to include the vendor's packing slip or supplier's invoice acknowledgment. This additional step of validation is important in ensuring that every part of the transaction starting from placing the order to delivering and invoicing is well coordinated and aligned.
Entering and integrating data
Once approved, the invoices must be entered into the accounting or invoice processing system.
After verifying that all the invoice details are correct, your AP department will send the invoices to the appropriate individuals within the organization for review and approval.
Occasionally, there may be discrepancies or problems that arise during the matching process. In such cases, you must deal with these exceptions by either resolving the discrepancies or obtaining approvals before the invoice can move forward.
Processing invoice payments
After completing all validations and approvals, the approved invoices are scheduled for payment.
Common invoice processing challenges to avoid
Managing and processing invoices can be quite challenging and consume a lot of time. As such, you should anticipate and expect several challenges. These challenges include:
- Delays: Invoices can get lost in transit, buried in emails, or stuck in approval queues. This can result in delayed payments, which could strain relationships with suppliers and impact your business’s cash flow.
- Data entry errors: Manually entering invoice data can lead to errors, such as mistyped numbers or incorrect amounts. These can affect how accurate the payments you make to your vendors are and your company’s financial records.
- Disputes: Differences between invoices and purchase orders or delivery receipts can lead to disputes and payment delays.
- Bureaucracy: Relying on manual approval workflows can slow down the process, especially for invoices requiring multiple levels of approval.
- Lack of communication: Inadequate communication between departments can lead to misunderstandings and delays in invoice approvals.
If you don’t deal with these challenges, you risk exposing your business to several problems. For instance, if you pay invoices too early or late your business may end up having less available cash-on-hand and strained relationships with your suppliers.
This directly affects your business’s bottom line because strained supplier relationships means that your business might face disruptions in the supply chain, delayed deliveries, and even potential shortages of essential materials or products. These disruptions could lead to production delays, increased costs, and lower customer satisfaction due to unmet demands. Ultimately, this can negatively impact your business's reputation and market standing.
That’s why you must approach them strategically. For instance, you can implement a centralized digital platform that automates invoice submission and approval. This can inadvertently tackle delays caused by misplaced documents and bureaucratic processes. An automated invoice process can also solve breakdowns in communication between departments involved in the process.
Automate invoice processing for improved efficiency
Automating invoice processing involves using software to streamline the process of receiving, managing and paying vendor bills. This can include tasks such as:
- Matching purchase orders to invoices
- Capturing data from AP-related documents
- Routing invoices to individuals involved in invoice processing
- Flagging duplicates
- Automatically releasing funds to suppliers once the invoices are approved.
By automating invoice processing you can significantly enhance the efficiency of your accounts department. This automation saves time and money by reducing errors associated with handling invoices. This ensures that your business consistently maintains high data integrity. It can also lead to other savings, such as the late fees incurred when a payment misses its due date. Automation also keeps vendors and employees happy, while allowing your AP team to focus on higher-value projects.
Ramp’s accounting automation software reduces manual work and decreases the risk of errors involved with manual data entry. Here’s how it works:
- Backed by AI software, Ramp streamlines your accounting process with integrations such as NetSuite, QuickBooks, Amazon Business, and Outlook.
- Ramp’s platform not only automates receipt collection, but also provides a default coding capability that enhances coding and categorization of expenses.
- Ramp's automation handles multiple transactions, pinpointing errors and flagging issues which reduces the need to dissect every line item.
- As your business grows, Ramp grows with you. Our software reliably syncs your data in real-time with a single click, facilitated by accounting software integrations and our API.
Click here to get started with Ramp today.