What is invoice processing?

Invoice processing is a business function that involves managing incoming invoices from initial receipt through to payment. It’s carried out by the accounts payable department and is a critical component of the procure-to-pay process as the final step of any procurement activity.

The invoice processing cycle is made up of several composite steps, which together make up an established workflow. This can be represented in a flowchart which includes steps for receiving an invoice, logging and approving it, and paying the supplier. Traditionally, each of these steps would be carried out manually by a member of the accounts payable team, but accounts payable automation software is increasingly being used to lighten the manual load and create efficiencies in invoice processing.

Optimizing your invoice processing procedure can not only bring about internal benefits, it also helps to ensure the supply chain as a whole remains healthy. Timely and efficient invoice processing means that suppliers are paid on time, which means that they then have sufficient cashflow to pay their suppliers on time, and so on. An automated solution can help to bring this about, while also reducing the chance of errors and enabling better control of working capital.

Invoice processing workflow

Receiving an invoice

The first step in invoice processing starts immediately after receiving an invoice. Invoices are sent from suppliers (or vendors) to buyers in a wide range of formats, from paper invoices to PDFs. When they are received by the accounts payable department, they must be standardized by being scanned or manually entered into an accounts payable system and recorded in the general ledger.

Accuracy checks

Once they’ve been digitized, invoices can be checked against existing purchase orders and delivery receipts to ensure they’re legitimate and accurate. If there are discrepancies between the amounts shown on the purchase order or delivery receipt and the invoice itself, the process stops here until the issue has been resolved with the supplier.

Invoice approval

Provided the invoice details are correct, it can then be sent on to an authorized individual who will be able to formally approve it for payment. The details of the approval process vary between companies, but approval is now generally carried out digitally rather than manually. This minimizes the chances of an invoice being forgotten about or lost.

Paying the supplier

Finally, with the invoice logged and approved, the process can move on to the final stage – processing the appropriate payment to the supplier. The AP department will process each payment in accordance with the payment terms agreed with the supplier in question, sometimes making use of early payment programs to take advantage of available discounts.

Automating invoice processing

Invoice processing can be extremely time and resource intensive when carried out at scale – for organizations that receive hundreds of invoices a month, for instance. In traditional accounts payable departments, a significant amount of time is spent on manual entry of invoice data into a central accounting system, the chance for human error resulting in mistakes is generally high, and paper invoices can easily be misfiled or even completely forgotten.

Solving these issues and bringing about efficiencies and greater accuracy in the accounts payable department is the primary objective of invoice automation software. These are some of the potential benefits of accounts payable automation:

• Time saving – Reducing the amount of manual input required from the accounts payable team to be able to properly process incoming invoices means there’s more time for them to spend on other activities, like building strong relationships with suppliers and working on further improving AP efficiency.
• Cost saving – Studies show that it costs up to $11.57 to process a single invoice, on average. Streamlining the process and reducing manual requirements can reduce this cost, generating savings in the AP department. AP automation can also generate savings in the form of making it easier to spot opportunities to access early payment discounts and reducing the chance of invoices going missing, therefore avoiding late payment fees.
• Reduced errors – The accuracy with which invoice processing is carried out is massively important. Errors caused by manual input can include overpayments and duplicate payments, both of which are harmful to the bottom line. Automating invoice processing can significantly minimize the chance of these errors occurring.
• Fraud protection – Payments fraud is a constant risk with traditional methods of invoice processing, but automated invoice processing removes a lot of the danger. Access to certain abilities, like approving invoices or making payments, can be limited to just the right people through access controls, meaning fraud is significantly more complex to perform.
• Easier auditing – Finally, automating the invoice processing cycle means that there’s a secure, backed-up trail of all AP activities that can be relied on for future audits and process reviews. Documents, invoices, receipts, and messages that are involved with the same transaction can generally be linked together, creating an easily trackable audit trail to follow.

While automation in the invoice processing workflow isn’t yet ubiquitous, adoption is increasing over time. It’s likely that, at some point in the future, invoice processing will be automated by default, freeing AP departments everywhere from laborious manual processes and giving them the chance to add value in new and exciting ways.