What is invoice processing?
As simple as it may sound – receive the invoice, check for correctness, pay the invoice, close the transaction – invoice processing, in most cases, is not a simple workflow.
Invoice processing is a business task carried out by the accounts payable department. It involves a series of steps to handle vendor or supplier invoices from arrival to payment, all documented in the general ledger. The traditional method involves manually entering data, creating paper invoices, matching purchase orders, and extensive filing. This process is slow and can lead to mistakes. Invoices arrive through various means like mail, fax, and email.
Any delay or disruption in processing invoices can have a negative impact on your relationships with suppliers and hinder the timely delivery of services, supplies, and materials. Nearly 1 in 5 companies lose out on favourable terms and discounted rates due to delayed vendor payments caused by ineffective invoice processing.
Let us see how invoice processing works, some of the major challenges in doing it manually, and how AP automation software like Nanonets can streamline the entire process.
What is invoice processing?
Invoice processing or bill processing is the whole gamut of operations associated with the business-end (pun unintended) of purchasing products or services from a vendor.
Invoice processing is the workflow followed by the accounts payable team from the time it receives a supplier invoice. It encompasses all the steps right from receiving a vendor’s invoice to recording the payment after appropriate checks & approvals.
In medium and large sized companies, invoice processing is part of the overall accounts payable process. Processing invoices efficiently is important not only to organize cash-flow but also for handling vendors/suppliers to ensure timely procurement.
Manual vs. Automated Invoice Processing
Manual invoicing involves the meticulous creation and manual dispatching of invoices that often relying on traditional paper-based documents. This approach demands the careful compilation of invoices using spreadsheets, encompassing customer information, product specifics, quantities, pricing details, and relevant taxes. Once assembled, the physical invoice is mailed to the customer along with supporting documentation. Thereafter, the labor-intensive task of initiating payment requires manual intervention, typically through reminders conveyed via calls or messages.
The limitations of manual invoicing are evident, including extended processing times, a heightened propensity for errors, and the looming threat of fraud and mismanagement. Notably, over 74% of organizations fell prey to payment scams in 2020, resulting in strained supplier relationships, delayed invoice processing, and an overall reduction in productivity.
Given the evident inefficiencies and vulnerabilities associated with manual invoice processing, transitioning to automation becomes a strategic imperative for ensuring accuracy, efficiency, and error-free operations.
The invoice processing workflow: How to process invoices?
An invoice can be processed for payment only once it clears all the invoice processing steps. Let's look at the invoice processing steps in detail:
- Collect and organise invoices sent in via multiple channels: email, post etc.
- Capture invoice data, assign general ledger codes and match the invoice data with supporting documents (POs or receipts) -- in case of discrepancies, the invoice is returned to the vendor.
- Send invoices to authorized AP approvers to approve or reject, based on internal spend policies.
- Set up payments via wire transfer, ACH or check for the approved invoices.
- Record the payment in your ERP or accounting software.
Challenges in processing invoices manually
Invoice processing can get pretty tedious. Here are some of the most pressing challenges AP teams or finance personnel face while handling invoice processing manually:
Missed or lost invoices
Lost or missed invoices lead to delayed payments, late payment fees, strained vendor relationships, delays in operation, and potential audit issues. This is a problem when a company deals with multiple vendors that send in multiple invoices on a monthly basis. The problem is exacerbated by the fact that invoices can be received by different personnel, in various formats, via multiple sources.
Erroneous or missing data
An invoice contains critical data such as company IDs, tax information, service/product supplied, price, delivery status etc. Since invoices come in various formats, capturing & verifying all relevant invoice data manually becomes quite error-prone. Invoice mistakes lead to both monetary and time losses.
Nearly 40% of invoices contain errors. And nearly a quarter of all invoices are flagged for exceptions that must be addressed by the accounts payable team. Errors in paper-based invoices are pretty expensive to fix – $53.50 per invoice on average!
Invoice approval routing errors
Manually routing incoming invoices to specific stakeholders for approval can get very complicated. Especially if you deal with multiple vendors and have a large organisation. Even the most efficient AP specialist can make a mistake in manually routing an invoice to the appropriate approver/stakeholder. This “high-touch” scenario is particularly stressful, especially when the AP team must close books periodically.
Unknown invoice status
Manual invoice processing keeps vendors pretty much in the dark, unless they reach out personally for updates. Here are some common questions that vendors have due to the lack of transparency: Where is my invoice? Who has approved it What more does it need? When will the payment be processed?
Flagging duplicate invoices
An average AP at a medium scale organisation clerk processes anywhere between 600-800 invoices a month. Identifying duplicate invoices or potential vendor fraud manually is close to impossible!
Automated invoice processing
Manual invoice processing is a pain. Close to 60% of AP personnel reportedly find invoice processing the most detested part of their job. Automating many of the repetitive tasks of the process can conserve time, save money, preserve employee morale, and maintain good vendor relationships.
Automated invoice processing is the process of seamlessly extracting data from invoices entering your system and pushing it into your ERP so that processing a payment can be done in just a few clicks. AP automation software help automate many of the manual steps involved in invoice processing.
Accounts payable teams use AP automation or automated invoice processing software to automate:
- invoice capture and coding
- verification and matching of invoice data against POs and receipts
- approval routing or auto-assigning approvers
- and integrating or reconciling invoice data into accounting or ERP software
The automation of invoice processing offers a clear solution to most, if not all the problems associated with this manual process. Surveys conducted among personnel involved in AP processes shows an overwhelming support for automating a majority of the manual tasks.
Invoice processing steps that are a good fit for automation
Invoice automation is clearly a better option than manual invoice processing. It's faster, more accurate and cost effective in the long run. Here's a more detailed look at the specific invoice processing steps that could easily be automated:
- Invoice receipt: Given that various formats of invoices are received from different vendors, automatic detection of the various relevant fields in the invoice would help in digitization of the invoice and better management of data. OCR tools come in handy here.
- Invoice validation: It is easy to set up rules to check for data integrity and completeness in invoices. Populating the various data fields in the invoice database can help in detecting incomplete or missing information.
- Three-way matching: Invoices are often raised in response to a PO and are often associated with a receipt. Automated matching of invoices, POs and receipts will hasten the validation process and move the invoice to the next level without delays.
- Exception handling: Exceptions and edge cases are not uncommon in invoice processing. Edge cases may arise due to time zone changes, multiple recurring charges, retrospective price adjustments, and currencies. Some AP automation software, like Nanonets, can handle these edge cases, while others might require differing levels of human intervention.
- The approval process: Digital invoices can be moved along the management hierarchy automatically for approvals based on preset business rules. Or AI-based AP automation tools can auto-assign approvers as well.The setting up of reminders can also help in hastening the process.
- Payment: Digital payments (wire-transfer etc.) can be built into the software to enable automatic payment to the vendor once all approvals have been received.
- Analytics: Automation can enable assessment and analyses of spend patterns and vendor relationships, which could help in course corrections and productive business decisions. AI-based systems would allow better analytics with more training with invoices.
Components of Automated Invoice Processing
An efficient automated invoice processing system is made of several key functionalities and tools that work together seamlessly to optimize the entire process. These components play a pivotal role in simplifying tasks, enhancing accuracy, and facilitating the seamless flow of invoices through the system.
1. Invoice Capture: Accurate acquisition of Data
Invoices arrive in diverse formats –as email attachments or scanned physical copies – the automation system steps in to extract the essential data from these sources. This data is then converted into a standardized format, ready for processing. By automating this step, the system not only reduces manual data entry but also ensures consistency in formatting.
2. Data Validation: Checking for accuracy
Data validation examines the accuracy of the captured information. The system scans for errors, duplicates, or inconsistencies. In cases where discrepancies are identified, the invoice flagged and is stopped from progressing within the processing workflow until these issues are rectified. Such validation guarantees that the data is reliable and errors are nipped in the bud.
3. Approval Workflow: Seamless flow through the approval heirarchy
Automation further orchestrates the routing of invoices for approval through predefined rules. This step is instrumental in expediting the approval process while maintaining accuracy. The involvement of multiple stakeholders is managed by the system. Decision-makers can access the complete context of the invoice process, aiding their choices to approve, seek clarification, or disapprove and halt the workflow altogether.
4. Integration with Key Systems: Continuous operation
A good automated invoice management system seamlessly connects with existing accounting software, database, and communication systems like email and chat. This integration ensures that data flows effortlessly between various components, enabling real-time updates and accurate information exchange.
5. Reporting and Analytics: Decision-making assistance
A robust reporting module furnishes insights into the performance of the invoice processing system. By analyzing the data, bottlenecks and areas for improvement are pinpointed. This intelligence empowers businesses to optimize their processes, identify patterns, and enhance overall efficiency.
Automated invoice processing solutions, such as Nanonets, exemplify these key components in action. Through intuitive interfaces and seamless interactions, they redefine the way invoices are managed. By embracing the potential of automation, businesses can not only streamline their operations but also unlock new levels of accuracy, productivity, and strategic decision-making.
Implementing Automated Invoice Processing
Autoated Invoice Processing is not just a technological upgrade; it's a strategic move toward operational excellence. Each stage - assessment, planning, solution selection, data preparation, testing, and training - plays a crucial role in determining the success of the implementation. The implementation of automation in the AP process involves several stages that pave the way for a successful transition.
Assessment and Planning: Laying the Foundation
“Give me six hours to chop down a tree and I will spend the first four sharpening the axe,” said Abraham Lincoln. Any endeavour starts with impeccable planning and preparation.
Before embarking on the automation journey, a thorough assessment of your organization's current invoice processing workflow is crucial. Identify pain points, inefficiencies, and areas susceptible to errors. This assessment forms the basis for devising a tailored automation strategy.
Planning follows the assessment. Define clear objectives and outcomes for the implementation. Establish a timeline, allocate resources, and ensure stakeholder alignment. Understand the specific needs of your organization to select an appropriate solution.
Choosing the Right Invoice Processing Solution: A Critical Decision
Selecting the right automation solution is paramount. The chosen system should align seamlessly with your organization's requirements and existing systems. Consider factors such as integration capabilities, scalability, user-friendliness, and cost-effectiveness.
Engage stakeholders from different departments to gather their input and expectations. Compare various software options, keeping in mind your specific industry needs. A comprehensive solution can significantly impact the accuracy and efficiency of your invoice processing workflow.
Data Preparation and Migration: Smooth Transition
As you transition from manual to automated processes, your data needs to migrate smoothly. This entails extracting data from existing systems, cleansing and formatting it for the new platform, and ensuring data accuracy during the migration.
Cleanse your data by removing duplicates, errors, and inconsistencies. Map the data fields from your existing processes to the new automation system. Ensure that historical data is appropriately transferred, as it can be invaluable for analysis and reporting in the future.
Testing: Ensuring Seamless Functionality
Testing is a pivotal phase to ensure that the chosen automation solution works seamlessly within your organization's ecosystem. Conduct thorough testing across different scenarios, involving various types of invoices, data formats, and potential exceptions.
Test data extraction, validation, approval workflows, and integration with existing systems. Identify and rectify any glitches or issues that arise during testing. This phase guarantees that the system performs optimally before its full implementation.
Training: Empowering Users
User training is a cornerstone of successful implementation. Even the most advanced automation solution requires proficient users to realize its full potential. Provide comprehensive training sessions for both end-users and administrators.
Train users on navigating the new system, entering data, approving invoices, and accessing reports. Empower administrators to handle system maintenance, updates, and user management. Continuous training ensures that your team fully harnesses the capabilities of the automation solution.
Benefits of automated invoice processing
Some key advantages of automated invoicing over manual process include:
Better Accuracy: Manual invoices are susceptible to errors that can lead to customer dissatisfaction. When data entry lacks verification steps, the error rate can escalate to as much as 4%. This signifies that for data inputted once, without subsequent verification, errors could occur in 400 out of every 10,000 entries. This substantial figure holds implications even for smaller datasets. On the other hand, automated invoices are consistently directed to the correct recipients and possess the ability to execute automatic tax and discount calculations.
Cost Savings: Automation inherently reduces costs by eliminating printing expenditures linked with manual processes and by minimizing labor requirements. The IOFM's 2021 report on World Class AP Performance: Efficiency Benchmarking Metrics categorized companies based on their process maturity and automation level, subsequently analyzing their average cost per invoice. Among three levels of process maturity, it was evident that organizations lacking AP automation incurred the highest cost per invoice. Specifically, companies at the lowest process maturity level bore a cost of $6.20 per invoice in the absence of automation, while those at the highest process maturity level paid $1.83 per invoice without automation.
4. Time Savings: Manual processing can extend over days or weeks, whereas automation condenses the process into nearly instantaneous results. On average, an AP clerk in the industry can manage 5 manual invoices per hour, spending around 12 minutes on each invoice. This time includes tasks like data entry, reviewing manual inputs, rectifying errors, and finalizing the invoice processing. However, with the implementation of automated invoice processing solutions, an AP clerk can handle 30 invoices per hour, reducing the time per invoice to just 2 minutes!
5. Convenience: Automated invoices cater to both businesses and customers by facilitating electronic sending and payment options, effectively eradicating the labor-intensive aspects tied to physical invoicing.
Nanonets for automated invoice processing
Nanonets is an AI-based AP automation software that can streamline invoice processing for your business and also handle spend/expense management workflows. Reduce manual accounts payable effort, save time and resources, set up controls, and gain in-depth visibility into business spends.
Depending on your invoice processing or AP automation needs Nanonets can:
- Automate AP management end-to-end - import, approve and pay invoices in the same platform - https://nanonets.com/flow/home
- Automate data capture, build workflows and streamline existing AP processes completely - https://nanonets.com/flow/ap-automation
The automation of invoice processing streamlines the purchase process, enhances transparency of the invoice route, saves time and money, increases employee productivity, and improves vendor relationships.
Invoice flow automation allows human employees to concentrate on less mundane, higher-value activities such as planning and strategizing. These finance automation workflows can, in turn, lead to improved overall efficiency and profitability of the business.