Invoice processing: steps, common problems and best practices
What is invoice processing?
Invoice processing is all of the actions that occur from the time a customer or buyer receives an invoice until they pay it and make a record of the payment.
The primary goal of invoice processing is to make sure invoices are accurately and efficiently processed and paid, while adhering to the company’s internal and regulatory compliance requirements.
What are the steps in invoice processing?
Receipt of invoices
Buying organisations can receive invoices in various formats, including paper invoices, PDF invoices and, between some trading partners, electronic data interchange (EDI) and e-invoicing.
Invoice data capture
The relevant data from the invoices, such as vendor information, invoice number, invoice data, line items, quantities, prices and totals, need to be accurately extracted and entered into the company’s financial system. This can be done manually or through automated data capture tools.
The customer reviews the invoice to make sure it’s accurate and that they aren't being over-charged or billed for goods or services that they didn’t receive. This may mean cross-checking the invoice with the purchase order and delivery documentation, or verifying it with the individual who made the purchase.
For larger companies that process a volume of invoices, there may be an invoice approval workflow in place. This may involve finance managers manually routing invoices to specific individuals for approval. Organisations that use enterprise resource planning (ERP) software can often automate this approval workflow.
Coding and account allocation
Those looking after accounts payable will allocate invoices to specific accounts or cost centres in the company’s accounting system. This step in the process ensures expenses are properly categorised for accurate financial reporting.
When invoices have been verified, approved and coded, accounts payable schedule and pay the invoice according to the business’s agreed terms with the vendor.
Document storage and archiving
Invoices and related documentation, such as purchase orders and receipts, need to be stored for record-keeping and auditing purposes. In Australia, the ATO requirement is currently 5 years. In New Zealand, the IR requirement is currently 7 years. Many organisations use electronic document management systems for easy and efficient document storage and retrieval.
Reconciliation and reporting
Invoices processing also involves reconciling payments with the corresponding invoices and generating financial reports. This helps in tracking expenses, monitoring cashflow and upholding financial accuracy.
What are some common problems with invoice processing?
If invoice processing is manual rather than automated, mistakes can happen at any touchpoint in the process. Errors inevitably mean processing delays and late payments. For example:
Data entry errors
If individuals make keystroke mistakes when entering invoices into company systems, the verification and approval workflows are likely to be held up. The invoice becomes an exception that needs to be investigated and resolved before it can be paid.
Discrepancies and exceptions
Likewise, invoices become exceptions when key details are missing or their line items don’t tally with the related purchase order. Buyers need to check what they received from the supplier to make sure they only pay what they owe.
It’s important to resolve invoice exceptions to protect against over-payment or invoice fraud. However, exceptions slow invoice processing times and add to company costs.
Many organisations don't have a centralised accounts payable process. The company may receive invoices in the post or emailed directly to specific individuals. With no visibility of incoming invoices, it’s impossible to keep track of them. As a result, invoices may quickly get lost in a person’s in-tray or inbox.
Suppliers may re-send their invoice if it hasn’t been paid and is presumed lost. Without proper controls in place, the original invoice and its replacement may both be paid, resulting in a duplicate payment being made.
If invoice processing is inefficient, it can affect cashflow management, potentially leading to cash shortages or missed investment opportunities.
Best practices for invoice processing
Ask vendors to submit invoices digitally to a centralised location, such as an accounts payable inbox or supplier portal. This will enable you to have more efficient workflows, store your documentation electronically and gain visibility of all incoming invoices.
Limit data entry
Consider using optical character recognition (OCR) technology to extract data from invoices and input it into company systems. Similarly, the customer can put the onus on the supplier to input invoice details directly into their systems, especially if both trading partners are e-invoicing.
Standardise and automate approval workflows
Develop and implement standardised approval workflows for invoices. Clearly define approval thresholds and delegations of authority so invoices are reviewed and approved in a consistent and efficient manner. With the right business management platform, you can then automate this workflow so you don’t need to manually track and route invoices for approval.
Audit your processes
Regularly review your business processes to see where you can improve them. If you spot issues like consistently late payments to a particular vendor, you can dig deeper to find out what’s causing that problem. By digitising and automating your invoice processing, you have the visibility you need to take control, become more efficient and lower your accounts payable operating costs.
Automate your invoice processing with MYOB
If you handle a heavy volume of invoices, you may benefit from invoice processing software to manage your approval workflows and give you visibility across your invoice lifecycle.
With MYOB Advanced Business — an enterprise resource planning system built for the Australian and New Zealand mid-market — you can access a full suite of accounting functions that covers invoice processing, accounts payable, cash management, comprehensive reporting and more.
And as an open platform, you can also integrate additional specialist third-party applications with MYOB Advanced Business, so you get the business management platform that’s right for you. Find out more. Contact an Enterprise solution specialist today.