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The invoicing process includes receiving a supplier invoice, authorizing it, creating a repayment date, clearing the invoice, and entering it in the general ledger. It is essential to every successful company.
Failure to pay bills on time may disrupt your flow of services, supplies, and raw materials and harm your relationships with vendors. Even if you get by with a late payment or two, your company will suffer if the problem persists. So, as a business, it is essential to have a perfect invoicing process.
More than ever, excuses like “the cheque is in the mail” won’t cut it when paying bills because of technological improvements. Your vendors probably know that you utilize an electronic system for invoice receiving, processing, and sending them on to be paid.
Regarding automating business processes in the back office with invoice processing software, accounts payable ranks first, as stated in the 2021 State of AP report. So, while discussing how businesses can improve invoicing procedures, let’s start with defining the invoicing process.
What is Invoice Processing?
The accounts Payable department handles invoice processing once the invoice is received. This is the sequence of actions taken from receiving supplier invoices until it is paid and entered into the general ledger coding.
Automating the invoicing process via automated invoice processing software is often called invoice automation. For example, with a flowchart, accounts payable may follow a systematic plan for handling bills from suppliers.
How Does Invoice Processing Work?
An invoice automation platform, also known as an AP automation solution, refers to handling invoices using specialized software. PDF files, paper invoices, emails, and other electronic formats are all used to deliver invoices to customers.
In its simplest form, invoice processing is the invoice processing steps taken to handle invoices from the time they are received until they are paid and recorded in the books. And Yes not to forget businesses are now digitizing the process with the help of invoice processing automation software.
1. Receiving a Billing
When a vendor invoice is received, the first stage in its processing may begin. Suppliers (or vendors) may send invoices to customers in various forms, from paper to electronic (PDF or electronic).
Accounts payable staff receive invoices and other payments and must scan or manually input them into an accounts payable system so that they may be recorded in the general ledger.
2. Checks for Accuracy
Once invoices are digital, they can be verified against purchase orders and delivery receipts to ensure they are valid and correct.
If there are discrepancies between the totals on the invoice and the purchase order or delivery receipt, the process will end here.
3. Invoice Approval
Once the vendor invoice has been checked for accuracy, it may be sent to the appropriate department for final approval and invoice payment in the invoicing procedure.
Companies may have somewhat different approval workflows, but in most cases, approval is now handled electronically. This reduces the possibility that an invoice may be misplaced or forgotten.
4. Making a Payment to the Supplier
After an invoice has been received, reviewed, and accepted, the next step of the approval workflow is to execute payment to the provider.
To maximize savings, the accounts payable team will handle all payments in line with the conditions agreed upon with each supplier, including early payment plans where applicable.
Why are the Invoicing Procedures so Necessary?
A corporation may reap numerous benefits by developing a systematic strategy for handling invoices and providing its workers with the necessary tools to implement that strategy. You should consider implementing automated invoice processing inside your firm for several reasons, including the following:
1. Reduced Waiting Periods for Payments
By ensuring that the invoices go through the processing structure in a more efficient and timely manner, establishing an ap invoice processing system inside your firm may make it simpler and more convenient to pay bills promptly. It can ensure invoices get paid on time.
2. Enhanced Relationships with Suppliers
Improving how your firm handles invoices may benefit how you interact with the companies providing you with goods and services. For example, maintaining deeper relationships with suppliers is made more accessible using a more efficient system. This is because the accounts payable process makes it simpler for third parties to ensure they will be paid on time.
3. Management of the Revenue Flow
Processing invoices should be considered an essential component of efficient revenue flow management and invoice processing workflow automation inside your firm.
Processing enables your organization to maintain financial discipline by adhering to the established budget and keeping tabs on any outstanding debts, allowing you to spend and invest money responsibly. It also assists you to avoid duplicate payments.
4. Fewer Hours Worked by Employees
If you want to save your workers time throughout the workday, designing a more efficient invoice process to help accounts payable function well is one way to do so. This frees up time-consuming manual data entry so that they may focus on other activities, which ultimately results in a more productive workforce. The accounts payable automation solution can also help you save time and money.
What is the Journal Entry for Invoice Processing?
Let’s pretend your firm, XYZ Company, made a credit purchase from ABC Company. In this instance, ABC Company will issue you an invoice for $1500 in merchandise bought on credit.
You will enter the amount due to the ABC firm for the products you bought on credit as an account payable when you get the invoice.
Journal Entry in XYZ Company Accounting Books while invoice receiving
Accounts receivable is how ABC Company shows that it expects to be paid by XYZ Company.
So, that is how a received invoice journal entry looks in the company’s books.
How to Process Invoices in Accounts Payable?
The structure and size of an organization determine how ap invoice processing works. For example, the appropriate accounts payable manager in a small business handles everything. However, several accounts payable executives in large firms will take each phase.
Before reimbursing the vendor, the AP division must establish guidelines and invoicing procedures to follow. The repetitive manual tasks and mistakes may be avoided by strictly adhering to these rules and maintaining tight control over invoicing.
The primary activities involved in an automated system are outlined below.
1. The Customer Receives the Invoice
When the vendor approves your purchase order, as a first step they’ll ship the products and a bill to your distribution center. Vendors have various options for communicating the purchase invoice, including email, regular mail, fax, and even in person.
Purchased items and services, as well as the total amount due, any taxes, applicable discounts, and shipping and payment information, are all itemized and detailed in the invoices you get. So, that invoice receiving happens in this step.
2. An Internal Team is Responsible for Handling the Purchase Invoice or Bill
The procurement invoice is then sent internally for processing. Accounts payable managers must match it to the purchase order they sent to the supplier.
3. Examine the Bill’s Specifics
The Accounts Payable (AP) manager must verify that all necessary information is included on the purchase invoice or bill. All vendor invoice details are checked thoroughly.
4. Reconcile Your Financial Records
As soon as the bill is received and validated, it must be entered into the books of account to reflect the appropriate adjustments.
5. Pay the Invoice or Make the Purchase
After a cost has been recorded, paying the corresponding purchase invoice is critical. The late payment fees may add up quickly, so it’s essential to keep track of your payments faster and deliver them on time.
The payment voucher is where you’ll provide the vendor’s bank information. Vouchers to process payments to vendors may be held for approval in certain businesses.
Why Does the Invoicing Process Require Automation?
The invoicing process may be exceedingly time and resource-demanding when done out at scale – for firms that receive hundreds of monthly invoices, for instance.
Manually entering invoice data into a central accounting system takes a lot of time in traditional accounts payable departments, there is a considerable chance that data entry mistakes will occur, and handwritten invoices may easily be misfiled or forgotten.
The primary goal of invoice processing automation software is to eliminate these problems and improve efficiency and accuracy in the accounts payable department. The key performance indicators of automating accounts payable include the following:
1. Error-free Performance
The precision with which the entire process of invoicing is carried out is tremendously crucial. Overpayments and duplicate payments are two examples of tens of thousands of human errors that may occur when data is entered by hand; both negative impact profits. Automating invoice processing may considerably lessen the probability of these mistakes happening with the creation of electronic invoices.
2. Less Money Saved
Most accounts payable clerk indicates that the average cost of processing a single invoice is $11.57. Streamlining the process and lowering manual procedures may minimize this cost, providing savings for the AP department with greater accuracy, greater transparency, and real-time visibility.
The accounts payable automation solution may also create savings by making it simpler to recognize possibilities to get early payment discounts and minimize the likelihood of approved invoices going missing, eliminating late payment costs.
3. Saves Time
Reducing the amount of error-prone human intervention necessary from the accounts payable team to process incoming invoices correctly means there’s more time for them to concentrate on other tasks, including creating good relationships with the supply chain and enhancing AP efficiency. No doubt it saves you a certain amount of time.
4. Defending Against Fraud
Payment fraud is always possible with manual invoice processing, but AI-powered invoice processing with three-way matching eliminates much of the risk as you can extract relevant data. In addition, committing fraud is far more difficult if only the proper individuals have access to the relevant resources, such as approving invoices and processing payments.
Last but not least, when you use an invoice processing automation system, you’ll have a reliable, backed-up record of all AP activities for use in audits and reviews. In addition, all related paperwork, including bills, receipts, and communications, may be linked together to provide a clear paper trail due to the automatic matching process. AP automation software makes it hard to extract data from the entire organization and helps a business function safely.
Having invoices and accounts payable processes stored digitally will significantly enhance their accessibility, organization, and analytic power. With digital transformation and every invoice archives, you may quickly take a look for any actual invoice related to any project, supplier, or category of supplies. With these best practices, you can build strong relationships with the people involved. The payment process is simplified as a result.
Reports based on this information can help you make educated business choices that will positively impact your company’s productivity and bottom line.