‍Levvel Research highlights the top three concerns for AP teams in invoice processing: missed discounts (44%), late payments (39%), and duplicate payments (29%). These issues can lead to significant financial losses. For instance, small businesses have collectively faced a delayed $3 trillion cash flow due to late payments. With the U.S. hosting 30.2 million small businesses and contributing 15.2 percent to the world's GDP, the average American small business suffers approximately $15,000 in delayed payments annually.

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When an invoice arrives, the accounts payable (AP)  team reviews and reconciles it to ensure accurate and timely payment. Traditionally, invoice approval has been a manual, time-consuming process prone to delays and errors. This can hurt productivity, cash flow, and supplier relationships. Manual workflows are inefficient, expensive, and lack control and transparency. The fact is that all these points can be easily avoided if a proper invoice approval workflow is followed.

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As technology advances, automating AP workflows has become a necessity. Automation not only saves time and resources but also streamlines approvals, centralizes data, and eliminates repetitive tasks. The Business Insider report further supports this, stating that SMBs with automated invoice approvals can cut costs by 81% and boost efficiency by 73%. These benefits make a compelling case for the adoption of automation in the AP process.

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This guide will show you how to set up an automated workflow, transforming your invoice approval process into a seamless operation.

What is invoice approval workflow? 

An invoice approval workflow is a structured process that organizations use to review, authorize, and approve invoices before making payments. This workflow ensures that all invoices comply with company policies, match the received goods or services, and have the proper documentation and the correct amount, terms, and conditions. The main goal is to prevent errors and fraud and ensure that the organization only pays for legitimate and properly authorized expenses.

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Automation is not just a tool; it's a game-changer. It's bringing its dividends and encouraging growth where it has been embraced, empowering the workforce and making operations more efficient. With automation, you can take control of your tasks and be more effective in your role.

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Repetitive or automatable tasks steal over 21 days out of a year. In addition to manual efforts, 40% of productivity is lost to other tasks like meetings, checking emails, organizing, and searching for files. Automating these tasks can save you time and reduce stress, allowing you to focus on more strategic tasks.

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The following key takeaways are from the survey currently available:

• 90% of office workers believe automation helps avoid errors and make quicker decisions.
• Nearly 75% of workers said automation improved productivity, collaboration, and job satisfaction.
• 80% of employees reported that automation bolstered customer relationships and allowed them to embark on complex projects.

These findings highlight the significant impact of automation on enhancing productivity and fostering a more efficient and collaborative work environment.

Steps in the invoice approval process 

Manual processes are often paper-based, making documentation and routing for validation and approval extremely time-consuming. This can drag the process out to days or even weeks, requiring the time and availability of multiple employees. Here is a typical manual invoice approval workflow:

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Receive invoices

The process begins when the organization receives an invoice from a vendor or supplier. The AP department takes these invoices for processing and approval as part of the procure-to-pay process. There are two broad categories of invoices submitted for payment:

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PO invoices: Three-way matching is required before approval.

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Non-PO invoices: In case of Non- PO invoices it requires review and approval by an authorized approver with a two-way matching process.

Capture invoices data

The AP team manually enters the invoice data into the organization's accounting program or ERP system, documenting the receipt. The process varies depending on whether the invoice is paper, faxed, or digital. For physical invoices, steps include:

• Removing staples
• Fixing tears
• Collecting POs and Goods Received Notes (GRNs)
• Photocopying invoices and attachments
• Indexing digital images
• Sorting invoices by source or cost center
• Manually following up on missing information

Verify the invoice

After data extraction and documentation, the data must be verified. For PO invoices, verification includes:

Two-way matching: Matching the invoice to the related PO.

Three-way matching: Matching the invoice to the PO and GRN.

Four-way matching: Matching the invoice with the PO, GRN, and inspection report. 

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For non-PO invoices, the process includes two-way matching in which matching the invoice with the GRN or inspection report.

Flag and correct discrepancies

If errors are found during verification, the AP department cross-checks the information, contacts the vendor, and communicates with the procurement team for details. These issues are common in a manual approval workflow.

Approve the invoice 

Approvers review the invoice for compliance with company policies and budget allocations, verify relevant documentation, and may request additional information if needed. Once all approvals are made, invoices are prepared to be released for payment.

Payment process

After approval, the invoice moves to the payment processing phase. Based on the company's payment terms and procedures, payment may be made via check issuance, electronic funds transfer, or other methods.

Payment reconciliation

After making a payment, the finance or AP team reconciles it with the corresponding invoice. This step verifies that the correct amount was paid, ensuring accurate financial records. Payment reconciliation is a crucial step in the AP process as it helps to identify any discrepancies or errors in the payment process. With Ramp, we can automate reconciliation and save time. 

Archiving and record-keeping

The approved invoice and related documentation are archived for record-keeping and auditing purposes. This practice maintains a transparent and traceable history of financial transactions.

It's important to note that the specific steps may vary based on a company's size and internal policies. Some companies have more complex approval workflows, while others may have more streamlined processes.

Critical components of an automated invoice approval process in AP

An electronic approval process uses dedicated software to streamline invoice approvals through the following steps:

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Invoice capture and data extraction: Technologies like optical character recognition (OCR) and intelligent data extraction algorithms digitize paper invoices, accurately capturing relevant information and integrating it into the automated workflow.

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Workflow automation tools: These tools manage the approval process, defining steps and conditions for routing invoices through various approval levels. Stakeholders can systematically and traceably review and authorize invoices.

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Integration with accounting systems: Integrating automated invoice approval workflows with accounting systems ensures that approved invoices seamlessly update financial records in real time, enhancing the accuracy and reliability of financial reporting.

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Before setting up automated approval workflows, let's examine the manual approval process's major drawbacks and how automation addresses them.

Challenges in manual invoice approval

Costs and errors

A survey targeting finance managers found that manual invoice processing accounts for over 30% of an AP team's costs. This includes expenses for physical processing (checks, postage, stamps), storage, and labor. Delays can increase costs by 5-10 times for companies paying executives hourly. Additionally, late payment penalties due to slow manual approvals further inflate expenses.

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Manual process: A manual invoice approval process is not only time-consuming but also costly. High invoice processing costs are a significant challenge for AP teams. Estimates suggest that processing an invoice manually can cost between $15 and $40 and take anywhere from 10 to 45 days.

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There are several hidden costs associated with manual or paper-based approval processes, including:

• Time spent on inspecting invoices.
• Identifying and correcting data entry errors or duplicate payments
• Archiving and storing physical invoices

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You are calculating lost discounts or penalties incurred due to late payments or errors. Performing invoicing tasks instead of their primary functions, such as chasing after missing information.

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Invoice Processing Costs= Labor Costs + Infrastructure Costs + Physical Goods Costs + Transaction Fee

Cost Per Invoice= Total Expenses in AP (Invoice Processing Costs)/ Number of Invoices

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With automation: Manual activities lead to costly errors that could have been avoided with an automated procure-to-pay solution. Such a solution streamlines and accurately gathers information, significantly reducing the time and cost involved in the invoice approval process. High-performance AP departments are estimated to save their companies as much as $7 per invoice. 

Approval speed and efficiency

Manual process: It typically takes small and medium-sized companies around 25 days to manually process an invoice. This includes numerous emails, follow-ups, and resolving disputes with stakeholders. More than slow approvals can result in missed discounts, strained vendor relationships, and penalties.

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With automation: Automation software reduces the approval time from 25 days to just 5. The software can also automate 3-way matching, enhancing both accuracy and speed.

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Accuracy and reducing errors

Manual process: According to a 2021 survey, 27.5% of companies need help with inaccuracies in manual data entry, leading to tax and accounting errors.

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Automated process: Using technologies like Optical Character Recognition (OCR), the software can automatically extract data and match it against purchase orders, receipts, and tolerance levels. If discrepancies are found, the invoice is flagged for review, ensuring that only accurate invoices are approved.

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Centralized invoice receipt

Manual process: Without a centralized and standardized receipt system, lost or missing invoices can become costly. Complex invoices are AP's biggest enemy. AP teams often spend hours navigating email threads, tools, and systems to locate these invoices.

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With automation: A centralized invoice approval workflow streamlines the process, reducing manual errors and duplicate payments. It offers real-time tracking for timely payments, improves supplier relationships, and captures discounts. Enhanced compliance, audibility, and visibility ensure better financial control and efficiency.

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Audit trail and compliance

Manual process: Slow approvals often lead suppliers to send numerous follow-up emails, adding to the workload. Employees must track multiple invoice statuses simultaneously, increasing the risk of errors and fraud.

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Automated process: Automation allows real-time tracking of invoices in various categories, such as approval in process, approved but not paid, and sent for review. Invoices can also be sorted by due date, status, supplier name, location, budget, etc.

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Invoice approval best practices

Best practices should always commence with an AP automation solution. While it is feasible to enhance manual processes, automating the procurement and AP processes with an application like Ramp eliminates manual data entry, automates time-consuming manual processes, and offers custom approval workflows.

Automate AP as much as possible 

Automation addresses many common challenges that AP teams encounter. Firstly, automated AP software minimizes the risk of manual data entry errors and misplaced documents. Standardizing document templates helps automate document matching, easing the clerical workload on your AP team.

Additionally, AP automation naturally leads to faster invoice processing and approval. You can achieve comprehensive visibility into procurement and expenses by creating a central data repository that integrates with ERP and vendor management modules.

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Setup an automated workflow for invoice approval

Follow the guidelines below to create workflows that make invoice processing more efficient for the AP team.

Central access

Ensure all stakeholders and the AP team have central access to receive invoices, avoiding follow-ups and errors like forwarding incorrect invoices.

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Supplier invoice policies: This process involves setting standardized vendor payment terms to streamline payment cycles via automated workflows Examples include:

• Email submission: Send invoices in a preset format to a specific email, e.g., [email protected] and also make sure all incoming and outgoing invoices received on designated email only.
• PO requirement: create workflows to accept only PO-numbered invoices, process non-PO invoices by creating a PO or assigning them to a stakeholder for approval, and re-route any problematic invoices for review.
• Check acceptance: Accept checks only under specific conditions.

Smooth vendor onboarding 

Accurate vendor onboarding is crucial to prevent disruptions in the AP process. Ramp's vendor management software centralizes SaaS vendor spending, offering clear visibility and preventing issues like duplicate spending. Automating the onboarding process captures bank information and tracks spending, while a streamlined AP workflow ensures efficient invoice approvals.

Implement electronic invoicing

Adopt an electronic invoicing system to generate structured, standardized invoices seamlessly integrated into your company's AP system.

Essential Elements of E-Invoices:

• Transaction Information: Detailed transaction data.
• Identification: Complete details for both buyer and seller.
• Payment Methods: Specified acceptable payment options.
• Taxes and Discounts: Detailed applicable taxes and discounts.

Implement multi-level approvals

Establish at least two levels of approval for invoices. You can categorize approvals by setting a dollar threshold, such as requiring two approvers to approve invoices over £1,000. Some systems can be configured so that an invoice proceeds to payment only after both approvers consent.

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Separate invoice and payment approvals

Ensure that the person approving the invoice differs from the one approving the payment. This structure aligns with GAAP recommendations since it avoids potential conflicts of interest between related parties, enhances security, and reduces the risk of fraudulent activities involving company funds.

Formalize approvals matrix

Develop a clear organizational structure for the approval process. This should define who the approvers are, the timeline for their approval, who the secondary approver will be if the primary approver is unavailable, exception handling times, the number of exceptions per invoice, exceptions per vendor, and three-way matching times. 

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This activity will enable the identification of gaps in workflow and enhance the efficiency of the AP process.

Integrate with accounting software

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Streamline the process by integrating with your accounting software, such as QuickBooks, Sage, SAP, NetSuite, and many more. This eliminates duplicate data entry and repetitive tasks. Once invoices are approved, they are automatically captured into the accounting system. This integration allows you to schedule multiple payments seamlessly, ensuring accurate cash flow management. This results in increased productivity, speeding up monthly closing with ease and accuracy, and excellent visibility into the process.

How Ramps help in invoice approval workflow automation

Implementing automated invoice approval workflows with Ramp is straightforward. First, map out your P2P process and create corresponding approval tasks. Ramp's software, designed with robust features, ensures payments remain effortless and productivity optimal. With Ramp, you can streamline your invoice approval, reduce errors, and enhance efficiency across your AP processes.

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Companies implementing Ramp saves an average of 5%. Enhanced compliance, audibility, and visibility ensure better financial control and efficiency. Visit how Ramp works. 

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