What is Invoice Processing: Definition, Helpful Tips in 2024

Whether you’re a small startup or a large corporation, effectively managing invoice processing is essential for maintaining healthy cash flow and optimizing financial processes.

But have you ever wondered about the complexities of handling just one invoice?
How many steps does it entail, and how much time does it consume? 

There are a number of things that can go wrong if invoices are not processed efficiently:

• late payments, 
• inaccurate data entry,
• missed discounts and penalties, 
• strained relationships with suppliers, 
• and even fraud, to name a few. 

Not to mention, you have to put everything in the correct format. And now you have to do it for all 50 live projects.

That’s a lot of work, and the importance of efficient invoice processing cannot be overstated. 

These questions shed light on the challenges that companies have when trying to keep track of their billing processes. 

Keep reading to discover all you need to know about managing invoices and learn some actionable tips to regain control over your invoice management process.

Let’s first understand how invoice processing works in practice.

Key Takeaways

• Invoice processing involves the handling of incoming invoices from receipt to payment
• It is crucial for maintaining accurate financial records and managing cash flow effectively
• Automating the process can significantly reduce errors and increase efficiency
• Establishing clear policies for invoice approvals helps in maintaining consistency and accountability
• Regularly reviewing and optimizing the invoice processing system can lead to cost savings and improved vendor relationships

Understanding Invoice Processing

Invoice processing steps encompass a range of essential tasks to ensure the seamless handling of invoices, from their initial receipt until the payment is recorded in the general ledger. It’s a continuous operation critical for maintaining the financial health of a business.

At its core, the objective of invoice processing is twofold:

• to ensure the accurate and efficient handling of invoices and payments, 
• all while adhering to the company’s internal protocols and regulatory compliance standards.

The bigger the company, the more complex this seemingly easy activity becomes.

Traditionally, each step of invoice processing would demand manual intervention from accounts payable (AP) team members.

Let’s dig into more details.

Quick Fact: Handling just ONE invoice can incur costs ranging from $14 to $20 for your company. Imagine if your business deals with 25,000 invoices annually, each at an average cost of $15. That totals to a staggering $375,000 spent solely on invoice processing.

Key Steps of the Invoice Processing Workflow

Processing accounts payable invoices is crucial for every business and plays a key role in keeping things running smoothly. 

By staying on top of this process, you can avoid any hiccups that may arise. Remember, timely payments help maintain strong relationships with your vendors and keep everything moving in the right direction.

Invoice processing usually involves the following steps:

1. The invoice is received

Once an invoice lands in the hands of the accounts payable department, the ball starts rolling. This formal payment request, commonly known as an invoice to pay, can arrive through various channels:

• In the traditional mail as paper documents.
• As email attachments.
• Via fax.
• Or as electronic documents received through specialized AP software.

Regardless of how they arrive, it’s crucial to have a centralized system for processing all invoices uniformly. Divergent workflows not only hamper efficiency but also increase the likelihood of human errors and confusion.

The AP team should meticulously verify and record details such as:

• The invoice date
• Contact information for both parties involved
• Descriptions of the products or services rendered
• Quantities and unit prices

Every piece of information must be carefully cross-referenced with related documents to ensure the invoice’s accuracy before advancing to the next stage. 

In case of any discrepancies, prompt communication with the vendor is vital to rectify the issue swiftly.

PRO TIP: 
Assign a unique number to each invoice. This number serves as a handy reference point for both internal organization and communication with suppliers or vendors. 
Having a distinct identifier makes it easy to locate and reference the invoice within the system whenever necessary.

2. Checked, verified, and entered into your invoice processing software

The subsequent stage in the process involves meticulously recording the invoice data and ensuring it aligns with the necessary paperwork for approval.

The specifics of how you record this data can vary based on your unique processes. However, at the very least, you should have a clear understanding of:

• The total amount owed.
• The recipient of the payment.
• Payment terms.
• Various payment components, such as the cost of goods sold, shipping fees, taxes, and any additional charges.
• A brief or detailed description of the goods or services provided.
• Any category codes – essential for your company’s financial records.

Once all details are confirmed, the invoice is then entered into the accounting system.

This phase of the process is particularly delicate, as errors here can cascade throughout the entire general ledger, causing significant disruptions.

Even a simple slip-up, like an extra zero, can have costly repercussions for a company.

That’s why automated invoice processing, and leveraging technologies like optical character recognition (OCR) and text to speech, are gaining traction. These tools ensure accurate data capture with precision, saving time and resources in the long run.  

3. Invoice approval

Once the information is verified as accurate, the invoice is then sent for approval following the company’s established policies.

Depending on how your organization is set up, some invoices may need approval from one or more staff members or departments before they can be processed.

4. Payment

Once all the necessary approvals are obtained, the invoice is settled based on the terms agreed upon with the supplier. This could involve a wire transfer, credit card charge, or any other predetermined payment method.

In a manual process, you’d typically communicate payment details to the individual responsible for conducting the transaction. 

Depending on your company’s internal structure, this responsibility often falls on the accounts department, although in some cases, it may rest with the department that issued the purchase order.

On the other hand, automated invoice processing streamlines workflows by following predefined processes, triggering the payment once all approvals are secured. Additionally, the system sends a confirmation to the vendor to acknowledge the payment.

PRO TIP:
Late payment fees can accumulate rapidly, so be diligent in tracking and delivering payments to ensure they are made on time.

5. Record keeping

At this point, you might think everything is done, right? Wrong. Invoice processing doesn’t stop after your payment has been executed.

The invoice and its corresponding payment must be accurately recorded in the appropriate accounts within the general ledger. This involves the accounts payable team submitting journal entries, reconciling the general ledger, and ensuring each account reflects the correct amount during the monthly close.

7 Key Tips for Efficient Invoice Processing

To transform the above-discussed obstacles into opportunities, organizations are reassessing their approach to automate invoice processing. 

By using strategic insights and incorporating best practices into their operations, businesses can enhance their financial health, improve vendor relationships and find opportunities for growth. Here are some best practices that you can follow:

1# Centralize invoice receipt

Have you ever had the unsettling feeling that you have authorization for a bill previously, but you are unable to locate the proof? Or worse, you’ve come across some concerning information about an invoice’s legitimacy but can’t find the documentation to confirm it.

When your data, records, and tools are scattered across different systems, it leads to unnecessary duplication of efforts.

To streamline your processes, centralizing the receipt of invoices is key. This approach simplifies tracking and management, whether they arrive by post, email, or fax.

A centralized platform like Ahsuite for communication, collaboration, and document sharing can be the solution. It consolidates all your data into one easily searchable location, ensuring nothing gets lost or overlooked.

2# Establish clear approval hierarchies

Granting unrestricted access to your financial systems to employees increases the risk of accounts payable fraud.

Instead, it’s wise to provide employees with access levels tailored to their job requirements, limiting unnecessary privileges.

Establishing a well-defined approval process is crucial. This ensures that invoices undergo a thorough review and are approved by the appropriate individuals at the designated times.

3# Use automation tools

AP teams that fail to employ automated invoice processing tools spend 4x more time and resources compared to their counterparts who embrace automated solutions.

By leveraging online invoicing software, we’ve saved countless hours on manual tasks and significantly reduced the risk of errors. Plus, features like recurring invoices and automatic payment reminders for overdue payments, allowing us to focus on serving our clients rather than chasing payments.”

– Vineet Gupta, Agency Owner of 2xSaS

Employing invoice processing software can drastically reduce the time and effort it takes to process invoices. Automation can capture and extract data, validate and match invoices, create invoices, route invoices for approval, schedule invoices for payment and financial reporting.

4# Establish a rules-based routing workflow.

Once the document management system intelligently categorizes the incoming invoice and understands its contents and purpose. It utilizes key index data such as vendor details, purchase order information, address fields, and total amounts to determine how invoices should be handled automatically.

(An example of how an invoice approval workflow with conditional routing might look like…)

For instance, invoices from pre-approved vendors below a certain dollar threshold can be automatically approved without any manual intervention.

On the other hand, invoices from unfamiliar vendors trigger a new vendor workflow before undergoing any approvals, safeguarding against potential fraudulent activities.

5# Ensure that invoice formats are uniform

Processing your bills might be challenging and confusing if you don’t use a consistent format. Use email template creators to generate your own customized email invoice template. Make sure that you have your own format when you extract data from your suppliers, even though their invoices will have different formats.

6# Regularly evaluate audits and reviews

Review your protocols for handling invoices at regular intervals. Keep an eye out for places with frequent errors, inefficiencies, and bottlenecks.  

Additionally, carry out routine audits to ensure that your company complies with both external and internal regulations.

7# Educate your employees

Ensure that all employees, regardless of experience level, have received sufficient training and are conversant with the policies and processes of the company before beginning the invoicing process. 

Offer periodic refresher courses as necessary to keep everyone up to speed.

Challenges of Invoice Processing

Traditional invoice processing can be tedious and error-prone due to manual data entry and handling of documents. Some challenges associated with traditional methods include:

• Data entry errors: Manually inputting invoice data into accounting software can lead to typos or mistakes, which can result in incorrect payments or vendor disputes.
• Approval and payment delays: Conventional processing methods often take longer than necessary to approve and pay invoices, causing delays in the accounts payable process and potentially straining vendor relationships. On average, it takes about 25 days to process a single invoice manually.
• Lack of visibility: Tracking invoice statuses and identifying responsible parties for approval is challenging, especially with a high volume of invoices.
• Compliance issues: It can be a real pain to comply with financial reporting requirements if you’re using old-school methods. Sometimes, invoices and supporting documents go missing or get misfiled, which can make things even more complicated.
• Inefficiency: Manual invoice processing is labor-intensive and slow, particularly when dealing with large volumes of invoices.
• Limited scalability: Scaling traditional methods to accommodate increased invoice volumes requires hiring and training additional staff, posing challenges for expanding businesses.
• Fraud detection difficulties: Manual review processes make it harder to detect fraudulent invoices. As they can be disguised among legitimate ones and may go unnoticed within a large volume of invoices.
  

The Benefits of Automated Invoice Processing

Handling invoices manually not only takes up valuable time but also leaves room for errors. Surprisingly, studies reveal that half of all companies have yet to embrace automation for their invoicing needs. 

The costs associated with manual invoice processing are steep, averaging around $12.90 per invoice. In stark contrast, automated invoice processing slashes this expense dramatically to a mere $2.07.

Invoice processing automation relies on specialized software to streamline various stages of the invoicing cycle, including data capture and approval. This automation can be overseen by human users or handled entirely by AI systems.  

Investing in automated invoice processing offers several advantages, such as: 

• Speed and Efficiency: Automated workflows streamline invoice processing by directing them through appropriate steps for payment. This ensures that unnecessary approvals don’t delay minor expense invoices, like $40 for office supplies. However, larger invoices, such as a $4,000 invoice for new equipment, undergo critical review when needed.
• Enhanced Organization: Minimizes the risk of losing invoices, eliminating the need to scramble or request copies from vendors.
• Avoid Late Fees: By ensuring timely payments, you can steer clear of the late fees vendors may impose.
• Seize Early Payment Discounts: Take advantage of discounts offered by vendors for prompt bill payments, typically within 10-15 days of receipt.
• Error Ridden Data Entry: Eliminate the need for manual data re-entry across multiple systems, saving time, manpower, and effort.
• Foster Supplier Relationships: In a world where competitors are just a click away, maintaining positive connections with vendors through timely and precise payment of invoices can be advantageous for negotiations and teamwork.

Focus on Core Projects: With repetitive data-entry tasks automated, accounting teams can devote more attention to critical projects vital for the business’ success.

If you’re curious about how the prorated billing process functions and how it can benefit your business, be sure to check out our detailed article.

Conclusion

Dealing with invoices can be quite a headache, as they tend to be one of the trickiest documents in an accounting department. Here’s why:

• They’re easy to misplace.
• It’s common to forget about them amidst the daily hustle.
• Tracking them down can be a real challenge.
• Plus, they’re prone to errors, adding to the frustration.

Multiply that by the invoices coming from hundreds or thousands of vendors, and it’s easy to see why this is a big challenge. As the volume of invoices increases, so do the manual touchpoints, resulting in a massive loss of time and resources.

By automating invoice creation, storage, and integration into your workflow, you can significantly reduce these risks. 

As businesses strive for a future centered around automation and operational excellence, it’s crucial to rethink invoice-processing strategies and adopt best practices. This allows AP teams to take a more “hands-off” approach, freeing them to focus on more growth-oriented tasks.

Remember, the invoice is often your last direct communication with your client. Thus, you need to make sure it’s not the last one. Use the right invoicing tools and make smooth billing part of your business culture.