What is Invoice Processing? Meaning, Methods, Steps and Workflow

What is Invoice Processing?

Invoice processing is the comprehensive management of incoming invoices from vendors or suppliers, from their initial receipt to final payment.

The process involves verifying invoice accuracy, matching them to purchase orders, approving payments, and recording transactions in the general ledger. This process is essential for maintaining accurate financial records and ensuring timely payments to suppliers.

Read More About: What is an Invoice? Purpose, Types, Elements and Format

Examples of Invoice Processing

When a company makes a purchase, the vendor issues an invoice for the amount owed. The finance team then records this in accounts payable and pays the vendor. This process, from receipt to payment, is termed invoice processing.

Processing invoices on time is a critical factor in maintaining a smooth flow of raw materials and services for your business operations.

Types of Invoice Processing Methods

Here’s the two types of invoice processing methods:

1. Automated Invoice Processing

Automated invoice processing streamlines the entire workflow through the use of advanced technologies:

STEP 1: Receiving the invoice

Receiving invoices from vendors or suppliers through various channels like Physical mail, Email, Electronic data interchange (EDI) and Portal or online platform.

STEP 2: Data extraction

Using Intelligent OCR and machine learning, the software captures data from both paper-based invoices and electronic invoices (e-invoice).

STEP 3: Automatic data entry

The extracted invoice data is automatically entered into the invoice management system or software.

STEP 4: Validation

The invoice software checks the data against predefined rules and flags any discrepancies for manual review.

STEP 5: Automated approval workflow

Integrated with ERP systems, the invoice software automates approval notifications and task assignments.

STEP 6: Payment processing

Once the invoice is approved for payment processing, the invoice software automatically processes the payments to vendors.

This structured, step-by-step approach highlights the efficiency gains of automation over manual methods.

2. Manual Invoice Processing

The traditional method of invoice handling involves several manual steps:

STEP 1: Receiving the invoice

Invoices are received, often in paper form or via email.

STEP 2: Manual data entry

Information is manually entered into the accounting system.

STEP 3: Verification

Invoices are checked against purchase orders and receipts for accuracy.

STEP 4: Record-keeping

A copy of the invoice is filed for future reference.

STEP 5: Approval process

Invoices must be routed for approval before payment is initiated.

This manual process is prone to errors such as data entry mistakes, missed approvals, and delays. Handling a large volume of invoices requires significant time and attention, which can lead to delayed payments and inefficiencies.

The Invoice Processing Workflow: A Step-by-Step Guide

STEP 1: Invoice Receipt

Vendors send invoices through various channels such as email, physical mail, fax, or accounts payable software.

These invoices include details like

• Due date
• Total amount
• Product codes
• Quantities
• Contact information for both parties.

2. Data Entry

• Once the invoice is received, its details are entered into the accounting system either manually or automatically using OCR (Optical Character Recognition) technology, which digitizes paper invoices.
• Ensuring accurate data entry is critical for the rest of the process.

3. Verification and Approval

• Invoices are verified by cross-referencing them with documents such as purchase orders and delivery receipts (a process known as 3-way matching).
• After verification, key stakeholders review the invoice and supporting documents for approval before payment is processed.

4. Coding and Classification

• Each invoice is assigned a General Ledger (G/L) code based on the type of expense it represents.
• These codes ensure proper classification in the accounting system, making financial tracking and reporting more efficient.

5. Invoice Payment Processing

• Once approved, the invoice is processed for payment.
• Invoice payment methods include wire transfers, ACH (Automated Clearing House) payments, or via electronic payment system, depending on company policies and the terms agreed upon with the vendor.

6. Record Keeping

• After the payment is completed, the transaction is recorded in the general ledger.
• This step is crucial for tracking expenditures, maintaining financial transparency, and ensuring compliance with regulatory requirements.

Related Read: How to Send an Invoice? A Step-by-Step Guide

The Benefits of Automated Invoice Processing

1. Increased Efficiency

• By eliminating manual data entry, invoicing software reduces processing time from days to hours, allowing the system to handle large volumes of invoices simultaneously.
• This leads to time savings and boosts the company’s bottom line.

2. Improved Accuracy

• OCR technology extracts data with precision, while built-in validation rules catch discrepancies.
• This reduces invoice processing errors, minimizing disputes and invoice reconciliation issues.

3. Faster Payments

• Integrated payment platforms speed up payment cycles, resulting in quicker payments to vendors and improved cash flow.
• Automation also boosts employee productivity by reducing manual tasks.

4. Better Data Management

• Automated systems centralize data storage and offer real-time visibility into invoice status.
• This provides businesses with valuable insights into spending patterns and vendor performance.

5. Reduced Costs

• Automation cuts labor costs, minimizes paper handling expenses, and eliminates late payment fees.
• It also allows businesses to handle more invoices without hiring additional staff.

6. Enhanced Auditability

A complete digital trail of invoice activities improves compliance and simplifies audits, offering greater control and transparency.

Common Challenges in Invoice Processing

1. Manual Data Entry Errors

• In manual invoice processing, errors in amounts, payment schedules, and supplier details are common.
• These mistakes cause delays and cash flow issues. Automated invoice processing systems enhance accuracy by capturing data correctly.

2. Duplicate Invoices and Double Payments

• Paper-based invoice processing can lead to duplicate invoices and double payments due to supplier errors or fraud.
• Automated invoice processing tools help detect and prevent these issues by maintaining accurate payment records.

3. Fraud Risks

• Invoice processing faces significant fraud risks, such as forged or manipulated invoices.
• AI-driven automated invoice processing systems identify and prevent fraudulent activities, securing financial transactions.

4. Invoice Approval Delays

• Delays in invoice processing approvals disrupt cash flow and strain supplier relationships.
• Automating the approval process accelerates invoice processing, improving efficiency and timely payments.

5. Paper-Based Processes and Slow Processing

• Manual invoice processing with paper invoices is slow and prone to loss or damage.
• Switching to digital invoice processing speeds up the workflow and reduces handling costs.

6. Matching Errors

• Invoice processing can be hindered by errors when manually matching invoices with purchase orders and delivery receipts.
• Automated invoice processing systems ensure accurate 3-way matching, reducing errors and speeding up processing.

7. Invoice Management Challenges

• Managing numerous invoices manually in invoice processing can lead to missed payments and damaged vendor relationships.
• Automation improves invoice processing by enhancing tracking and reducing the risk of missed payments.

8. Integration Issues

• Poor integration in invoice processing with accounting systems can cause data inconsistencies and reporting problems.
• Integrated invoice processing systems enhance data flow and operational efficiency.

9. Data Security Concerns

• Manual invoice processing increases the risk of unauthorized access to sensitive information.
• Automated invoice processing solutions use encryption and access controls to protect data effectively.

How to Improve Invoice Processing Efficiency?

1. Standardisation

Use a scannable invoice template to standardize your invoice format, including your company’s logo, client details, and a unique invoice number. This reduces manual errors, speeds up processing, and ensures consistency across all invoices.

2. Automation

Automating invoice processing can reduce costs by up to 85% and minimize errors. Implement software that integrates with your accounting system to automate:

• Invoice creation
• Data entry
• Payment tracking
• Financial reporting

3. Workflow Optimisation

Organize and prioritize invoices to manage payment deadlines effectively and avoid late payments. Define clear roles and responsibilities to prevent delays and use automation to optimize workflows, increasing efficiency and reducing human error.

4. Employee Training

Regularly train employees on:

• Following standardized invoice formats for consistency.
• Adhering to payment terms for accurate processing.
• Keeping up with updates or changes in the invoicing process.
• Proper training helps prevent data entry mistakes and ensures effective use of automation tools.

5. Regular Reviews

Regularly assess key performance indicators (KPIs) like processing times and error rates. Collect feedback from team members and clients to evaluate the effectiveness of your invoice processing system and identify areas for improvement.

6. Technology Integration

Integrate your invoicing system with ERP, accounting, CRM, and payment gateway systems to streamline workflows. Use Business Intelligence (BI) tools for enhanced data analysis, which provides insights into spending patterns and vendor performance.

Frequently Asked Questions

1. What is the invoice process cycle?

The invoice process cycle is also known as the invoice-to-pay. Below is a step-by-step overview of the cycle:

• Invoice Receipt: The accounts payable team receives the supplier’s invoice.
• Invoice Entry: The invoice is then entered into an accounting system.
• Billing Code Assignment: A billing code is assigned to the invoice for proper categorisation.
• Internal Approval: The invoice is sent for approval.
• Payment Scheduling: Once approved, payment is executed according to the invoice due date.

2. How to learn invoice processing?

• Understand key terms such as accounts payable, purchase orders, and payment terms.
• Familiarise yourself with different types of invoices such as standard invoice, proforma invoice, and recurring invoice.
• Research relevant tax laws and accounting standards.
• Learn accounting software, such as SAP.
• Engage in practical training through formal courses to enhance your skills.

3. What is invoice processing in SAP?

The SAP Invoice Management application automates accounts payable processes. It helps streamline invoices, order confirmations, and delivery notes.

4. What is AP invoice processing?

AP invoice processing involves managing and paying invoices in the accounts payable department. This includes verifying invoice accuracy, approving payments, and ensuring timely financial obligations. The term invoice processing refers to the complete workflow of handling invoices, involving multiple departments and various invoice types across an organization.