Invoice processing, also referred to as invoice automation or automated invoice processing, is the process of managing incoming invoices from suppliers or service providers.
Paying supplier invoices on time is crucial to your business operations. If you miss your deadlines, it won’t only disrupt your incoming stream of supplies, services and raw materials – it can also damage your supplier relationships.
Automated invoice processing is here to ensure that incoming invoices are recorded, approved and paid accurately and in a timely manner, saving time and resources for your business and helping you maintain good relationships with your suppliers.
In this article, we’ll cover what invoice processing is, how it works and the benefits your business stands to gain from automated invoice processing.
Invoice processing is the tracking and payment of supplier invoices. Specifically, the term refers to the steps that take place from the time a supplier invoice is received until it’s paid, recorded and archived.
Whether the invoice is received physically via fax or post, as a PDF attachment or as an e-invoice, the data contained in the invoice must be entered into your accounting system.
Once a manual process, invoices are now typically processed through the use of invoicing software that automates repetitive and error-prone steps in the process. For that reason, invoice processing is often referred to as automated invoice processing or, simply, invoice automation.
Step by step: How invoice processing works
There are five primary steps to invoice processing:
- Receipt of invoice
- Recording and matching
- Approval of invoice
- Payment and processing
- Recording and archival
Let’s take a closer look at each step.
1. Receipt of invoice
Invoice processing starts with accounts payable (AP) receiving an invoice. Invoices can be received in a variety of formats, including faxed documents, paper documents via post, e-mails with attachments and electronic documents received through e-invoicing software.
Regardless of how the invoice is received, all invoices should be processed in a centralised system.
To avoid delays and errors, your process should also quickly and accurately capture the data from all incoming invoices.
These data include:
- Date of the invoice
- Contact details of supplier and buyer
- Description of the product/service
- Amount of product/service
- Pricing and total amount owed
Before the invoice moves on to the next step in the processing workflow, it’s important to cross-reference these data with other documents to verify the accuracy of the information.
2. Recording and matching
Once the invoice data is captured and cross-referenced, the next step is to match it with the right paperwork for approval. This includes:
- Assigning the invoice a general ledger code
- Linking the invoice with the corresponding delivery receipt and/or inspection report
- Matching the amount billed with the amount on the original purchase order
During this step, the invoice is also formally verified to avoid duplicate payments or fraud. This includes verifying fees, totals and taxes, verifying the order and examining the invoice for fraud.
3. Approval of invoice
When the information has been verified, it’s time for the invoice to be approved. At this step, the invoice is routed to the right internal employees.
Approval used to be done manually – a sluggish process that often resulted in penalties and late payments. Now, however, invoice approval can be automated, saving AP valuable time and resources.
Automated invoice processing keeps approval workflows in the invoicing system. It creates a transparent, conclusive timeline for every action that needs to be taken during the approval process.
With this transparency, the AP department is always up to date on the status of the invoice, allowing them to keep track of:
- How long an invoice has been in process
- If someone has been sitting on the invoice
- What actions to take to get the invoice paid
Want to learn more about invoice automation software? Check out our article: ‘6 top invoice management software solutions in 2024’
4. Payment and processing
Next, it’s time to pay the supplier. For the AP department to process the payment, they need the following information:
- The total owed
- Supplier details
- Payment identifiers – e.g. account or invoice number
- Types of payment accepted
Invoices are typically paid through ACH or wire transfers – especially if the company conducts business internationally.
5. Recording and archival
Finally, all that’s left to do is to capture and archive the final data. This step includes making general ledger entries for the payment debits, as well as any other relevant accounting entries.
This is also the time to save invoice images and supporting documents in a secure and searchable document repository. That way, they’re easy to access for future reference.
The benefits of invoice processing
Automated invoice processing saves you a lot of trouble in a variety of ways. Let’s take a look at some of the benefits your business stands to gain from invoice automation:
- Efficiency: Invoice automation allows you to process invoices much faster than manual methods. Within just a few minutes, you can capture, interpret and route invoices for approval, saving valuable time.
- Cost savings: By reducing the need for manual data entry and paper handling, you can save on labour costs and materials. Invoice automation also minimises errors, reducing the resources you spend on costly corrections and delays.
- Accuracy and error reduction: With optical character recognition (OCR) and artificial intelligence (AI), automated invoice processing systems accurately capture data from invoices. This reduces the likelihood of human errors.
- Better supplier relationships: Automated invoice processing helps ensure timely and accurate payments. This allows your business to improve and maintain your relationships with suppliers, which can lead to benefits such as discounts or more favourable payment terms.
- Improved cash flow management: By ensuring timely payment of invoices, invoice automation allows your business to better manage your cash flow. This also helps you take advantage of early payment discounts offered by suppliers.
- Compliance: With automated invoicing, your invoices are stored and organised digitally. This makes it easier to comply with regulatory requirements.
