What is invoice processing: Key invoicing steps explained

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Invoice processing is an essential piece of your accounts payable (AP) workflow, ensuring invoices are paid on time, cash flow stays healthy, and vendors remain happy. In this post, we’ll explore the key steps in the invoice processing cycle, common invoice processing challenges, and strategies for improvement.

What is invoice processing?

Invoice processing is a core AP function that covers how your business handles invoices, from initial receipt through approval and payment. The steps involved are fairly consistent from one business to the next, typically including receipt, validation, recording, approval, and payment.

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Invoice processing is a key piece of your business’s overall financial operations. An efficient invoice processing system ensures you know the status of all your outstanding invoices, reduces payment errors, and helps you maintain a healthy cash flow.

Key steps in invoice processing

The invoice processing workflow begins when you receive a vendor invoice and ends when the payment is executed. Here are the key steps involved:

1. Invoice receipt

The process starts when your accounts payable department receives an incoming invoice from a vendor or supplier, whether it’s a paper invoice via post, an email attachment, or an electronic invoice submitted through a cloud-based invoice management platform.

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At this stage, recording all the invoice details is crucial, including the invoice number, date, items or services provided, quantities, prices, payment terms and due date, and relevant taxes.

2. Validation and matching

Once you receive the invoice, you need to verify that it’s accurate. That means performing an invoice matching exercise to cross-reference the invoice details against the initial purchase order (PO), delivery receipt, and master service contract. If you spot any issues, you’d flag the invoice for further review.

3. Exception handling

Let’s say you find a discrepancy during the matching process and flag the invoice. At this point, you’ll need to route the invoice for resolution. This often involves clarifying the issue with the vendor, updating records, or seeking additional approvals before the invoice can proceed through the workflow.

4. Data capture and coding

Once the invoice is validated, you can enter it into your accounting system or invoicing solution. Modern AP automation software offers invoice capture features that can extract and code invoice data automatically, making this step much simpler and more efficient. For example, Ramp can help AP teams process 10x the invoices with the same headcount.

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Otherwise, this is a manual and often error-prone process that involves correctly coding the invoice for proper financial tracking. That means manually entering information like the invoice number, vendor name and contact information, item descriptions, quantities, amounts, and more—not to mention details like project codes, general ledger (GL) codes, or other data.

5. Invoice approval

After capturing and coding all the invoice details, it begins moving through the accounts payable approval process. Depending on the size and complexity of your company, this step could involve multiple approvals from stakeholders across departments to confirm accuracy, budget availability, and compliance with internal policies.

6. Payment processing

Finally, after completing all validations and approvals, you can schedule the invoice for payment according to the vendor’s payment terms and preferred payment method. These days, ACH transfers and other electronic payment methods tend to be among the most popular.

Some vendors that work on net 30 or net 60 payment terms might offer an early payment discount. Depending on your cash flow management strategy, you might choose to take advantage and schedule the invoice early.

How to make a journal entry for invoice processing

When your company receives an invoice, you’ll need to make a journal entry in your general ledger that shows the date, description, invoice number, and amount. Let’s cover a quick example of how to make an AP journal entry as part of your invoice processing cycle.

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Let’s say you’re a manufacturer. On October 1, you purchased $5,000 worth of screws to produce widgets. When you receive the supplier invoice, here’s how you’d record the entry:

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Your supplier works on net 60 payment terms, so you process the invoice, approve it, and schedule it for payment on November 29. Here’s how you’d complete the entry for the invoice:

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Tips to improve your invoice processing workflow

Depending on your business size, there are some clear steps you can take to improve your invoice processing:

For small businesses:

1. Use simple accounting tools: Start with user-friendly, cloud-based accounting and invoice processing software that requires minimal setup and training
2. Standardize your process: Create clear guidelines for recording invoice data, approvals, and GL coding so you can scale payment volume quickly and reliably
3. Establish vendor guidelines: Give vendors clear instructions on where and how to send invoices, as well as any format or data requirements, to reduce rework or errors

For mid-sized companies:

1. Consider automation: Basic automation systems or OCR (Optical Character Recognition) tools can reduce manual data entry and speed up approvals
2. Implement clear approval chains: Define structured approval levels and workflows so everyone knows their role, improving efficiency as you scale
3. Integrate your systems: Link your invoice processing workflow directly to your accounting or ERP system to improve visibility, reporting, and control over your financial data

For large enterprises:

1. Invest in advanced AP automation: A comprehensive AP automation platform can streamline invoice processing at scale with machine learning features and custom workflows
2. Optimize vendor management: Set up supplier portals where vendors can submit invoices directly, track payment status, and quickly resolve disputes
3. Continuous improvement and analytics: Regularly analyze accounts payable metrics like AP aging and reconciliation reports to refine your workflows and maintain efficiency at scale

Improve invoice processing with Ramp

If your business handles a high volume of transactions, automated invoice processing can drastically reduce the time you spend on invoice matching, data capture, and routing bills for approval. With Ramp’s modern finance platform, automating invoice processing is simple. 

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‍Ramp automates routine tasks like invoice coding, verification, and approval, freeing up your AP department’s time to focus on more strategic work. After implementing Ramp, the social Q&A site Quora reduced their time spent on invoice processing from 5–8 minutes per bill to just 1–2 minutes.

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“With Ramp's automation, I actually have the time to think about how to improve things, how to make things more efficient, how to make things better for employees,” said Richard Gobea, Quora’s finance manager.

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What could you do with that kind of time savings? Try Ramp’s AP automation software and find out.