Invoice routing – a simplistic perspective
Invoice routing, more commonly called invoice processing, is the movement of an invoice through various steps from the time it is received from the vendor until it is paid and recorded as paid, through many stages of approvals. A simple invoice routing process involves receiving an invoice from the vendor, validating its legitimacy, paying the supplier, and updating the payment status in the company’s records.
In this article, we shall learn all about invoice routing, and how automation can help in this critical task of any business.
Table of Contents
- Invoice routing – a simplistic perspective
- Manual invoice routing – the reality
- Specific problems of manual invoice routing
- Automated invoice routing
- Choosing an automation tool for invoice routing
- Nanonets for intelligent invoice routing
Invoice routing is part of the Accounts Payable process and involves handling of suppliers and vendors, ensuring products/services required by the business are procured in a timely fashion and paying the bills for these purchases. At a basic level, invoice routing involves the following steps:
- Receipt of invoice: The accounts payable team will verify the need for the product or service ordered and match it to the purchase order. The amount billed is also matched to the amount on the original purchase order (PO). Discrepancies, if any, are resolved.
- Approval of the invoice: Once the invoice is deemed correct, it is routed for various levels of approval as required by the company policy.
- Payment of the invoice: After all levels of approval, the invoice is paid in accordance with the terms that were negotiated with the vendor. Early bird discounts, etc. are considered when the invoice is paid.
- Closing the route: Once the payment has been made that particular invoice route is closed and the transaction is recorded as complete.
Manual invoice routing – the reality
While the above four-step process looks fairly straightforward, in practice, it is not as simple as that, especially as the business scales up operations.
As a company grows, multiple participants are involved in the invoice routing flow. Many variables become involved, which in turn leads to time delays and costly errors. In the very first step, the participant of the invoice route who receives the invoice from the vendor may be neither the person who requires the goods/services nor the one responsible for paying the vendor. Thus, the invoice must be passed up and down the invoice route for checks and approvals. This is a cumbersome process, more so if there are errors in the invoice that need to be tracked and corrected.
There may also be many vendors who issue many invoices on a daily basis. In manual invoice routing, the AP team sorts each invoice into the routing queue. Even the most efficient AP specialist can make a mistake in routing an invoice. When an invoice is wrongly routed, it must go through unnecessary checks before being rerouted. This “high-touch” scenario is time-consuming and can be stressful, especially when the AP team must close books periodically. Thus, although the accounts payable team is designed to improve the sourcing and procurement process, in reality, they could spend an inordinate amount of time chasing invoices through the complex approval route and fixing errors that occur in the chain.
Nanonets AI-OCR based Invoice Routing supports invoice parsing & invoice automation in over 60 languages. Build your own model or request a demo today!
Specific problems of manual invoice routing
A survey conducted by Sapio Research and Wax digital found that manual invoice routing overwhelms 82% of finance departments because of the large volumes of invoices to be processed on a daily basis and the variety of formats they’re received in. The sheer quantum of work leads to data entry errors, misplaced, or overlooked invoices and delays in approval. Manual invoice routing has also been reported to contribute to over 30% of the AP team’s costs. Manual invoice routing has the following specific problems:
- Stifles productivity: The time taken to route invoices is taken from the time that could be spent on tasks that contribute to enterprise value. This stifles the productivity of the department and all concerned parties.
- The mundanity of chores: The Sapio survey reports that 60% of AP personnel find invoice routing the most hated aspect of their job and 70% find it tedious – such dissatisfaction leads to loss of productivity. A CIO report states that the productivity and satisfaction of employees is related to the time spent on interesting and rewarding aspects of their jobs, and this reduces employee turnover and enhances employee retention.
- Errors: Manual invoice routing, as mentioned earlier, can lead to errors, even among the most efficient of personnel because of reasons like exhaustion, carelessness, ignorance or apathy. Even apparently simple tasks of the invoice routing process can be error-prone; it is said that a human being is likely to make 10 errors in every 100 steps when performing redundant work. The errors can also be caused at the source itself; for example, supplier invoices with incorrect data such as wrong PO number, different amounts charged etc., which require diligent and time-consuming checks when done manually. According to Ardent Partners, nearly a quarter of all invoices are flagged for the exception that requires AP personnel to act on
- Payment delays: Bottlenecks at any point along the invoice route could lead to delays in payments, which may be costly to the company. In the US, $3 trillion was reportedly tied up with late payments among small businesses in 2019, which led to hiring pauses, inventory purchase limits and a reduction in employee hours to make ends meet. Delays can also snowball into late receipts of ordered items, poor credit rating, poor relationships with vendors and fees/fines.
- Invoice fraud: Manual invoice routing could make the system vulnerable to third-party fraud, labor mischarging, duplicate payments due to delays, etc. A watertight approval process is required to prevent fraud. This is especially true during crisis times. For example, the Covid-19 pandemic reportedly increased the incidence of invoice fraud in 2020. Invoice frauds may manifest as abnormal invoice volume, unaccountability of goods versus invoice, discrepancies between PO and invoice, and dubious employee behaviour. These cannot be manually detected, especially when the business volume is high.
Automated invoice routing
With the business world becoming increasingly data-driven, there is now a general trend in the use of automation for various business operations. Invoice routing/approval management is no exception and various levels of automation are being employed throughout the AP activity repertoire, along the entire invoice routing process. Touchless invoice routing – the processing of the invoice automatically from receipt to closure, without manual intervention – is still rare, and today only 30.4% of all invoices are routed entirely touchless.
Percentage of automation adoption along various points of the invoice route. Image reproduced without modification from Ardent Partner’s 2021 report on accounts payable metrics.
Choosing an automation tool for invoice routing
A recent survey showed that there were more than 3000 invoice routing applications in the world as early as 2008. The choice of the invoice routing/management tool for a company depends on the needs of the company, its needs vis-à-vis scale and such other factors.
A good automation tool for invoice routing must have the following features:
- A unified platform: A single dashboard that can provide all the steps of the invoice routing flow with access to all participants of the process. An intelligent invoice routing must handle, via the unified platform various aspects of the invoice workflow including:
- Data digitization: The capture of relevant data from invoices that are usually sent in variable formats is essential in any invoice routing process. Since each invoice holds key data that are used in accounting resource planning, and decision-making within the business, accuracy in data extraction is essential.
- Validation: Three-way matching between the invoice, PO and receipt is required before an invoice is paid. Automated three-way validation must be able to compare and match records and make decisions such as passing the transaction, flagging errors, or raising exceptions.
- Automated exception handling: The flagging of errors and exceptions would result in the rerouting of the invoice to the appropriate personnel to fix the error. The software to be used in invoice routing must be capable of rerouting the invoice as required without time delay.
- Invoice approval routing: In the absence of an exception, or after an exception has been resolved, the software must automatically route the invoice through the approval protocol as dictated by the company’s policies. The incorporation of digital signatures and approvals in digital form enables touchless invoice routing.
- Process payment: The payment is the final step in the invoice routing process, and a good automation tool will be able to either automatically pay the vendor or use some form of human intervention to pay the vendor.
- Customization: The invoice routing protocol would necessarily differ between companies depending on the style and nature of the operation and the type of vendors that the company uses. A good automation platform must be customizable, in that the business must be able to create custom invoice routing workflows that suit its modus operandi. This would enable better compliance with company policies and rules. The tool must also allow for corporate branding, custom logs and tests and optional extras as may be required by the business.
- Handling of edge cases: Edge cases are uncommon occurrences that must be handled by the software. An intelligent invoice routing portal must feature adaptive recurring billing to consider these edge cases that may arise due to time zone changes, multiple recurring charges, retrospective price adjustments, and variable month lengths to ensure error-free automation.
- Vendor relationship management: A good invoice routing software must provide clear visibility on the relationship between the business and the vendor. All stakeholders in the business, as well as vendors, if such is the policy of the company must be able to have at least view access to the invoice route and updates. Option for electronic invoicing can also be built into the software to ease the invoice raising process for the vendor. Its best if the system can also provide easy management of transactions through credit cards, ACH payments, EFT, and PayPal and other electronic payment procedures.
- Analytics: Invoice routing automation must also allow assessment and analysis of the spend patterns, buying patterns and vendor relationships in real-time in order to enable productive business decisions. AI-based systems would allow better analytics on training with more invoices.
- Pricing and Affordability: The cost of the system, setup fees, hidden charges and Data storage: Depending on the needs of the business, an automation tool must allow storage of data in local systems, centralized servers or the cloud. This would again depend on the geographic spread of stakeholders that need access to the data and security requirements of the organization.
- Integrations: An invoice routing software will most likely not be a standalone tool in the functioning of an organization. The business may use other software such as ERPs (e.g. SAP, Oracle), accounting software (e.g. Quickbooks, Xero) and CRM (e.g. Salesforce) in the processing of invoices and payments. The tool must be able to integrate with these tools, or in extreme cases, perform all the functions of the existing tools in order to completely replace them.
- Ease of use: Even for advanced automated invoice routing systems, a certain amount of human intervention is required during setup and implementation. The skill level of the employees using the software will decide how user-friendly the front end of the software should be, and the level of tech support that will be required of the developer. The need for training and tech-support must also be addressed before choosing the right tool for the purpose.
Nanonets AI-OCR based Invoice Routing supports invoice capture & invoice automation in over 60 languages. Build your own model or request a demo today!
Nanonets for intelligent invoice routing
Nanonets is an AI-based tool that can ease the invoice routing process in your business. Its OCR engine can capture invoice data from a variety of file types and is equipped to handle both structured and unstructured invoices. The AI engine of Nanonets allows training of the model with real invoices, without the need for coding and has built-in state-of-art algorithms and a strong infrastructure for invoice routing through various approval steps. The Nanonets invoice routing tool also supports integrations with other systems such as the Mysql database, QuickBooks, or Salesforce and is platform agnostic. It is accurate and scalable, saves time and money for your AP department and supercharges your invoice approval process thereby strengthening vendor relationships.
Automation of the invoice routing flow can help businesses manage their operations better and grow. Greater transparency of the invoice route, reduced costs, improved employee productivity, and customer satisfaction are some of the beneficial outcomes that would make such tools useful to companies that look to increase their bottom line. The automation of the invoice flow can hasten the process, eliminate errors, and ensure consistency of operations, and thereby lead to improved overall efficiency and profitability of the business. Invoice flow automation is a synergistic tool that would allow human employees to concentrate on less mundane, higher-value activities such as planning and strategizing that contribute to the success of the business.
Update: Added additional info based on queries from readers