Steps in the Invoice Management Process
Manually processing invoices is a burden on procurement and finance teams. According to SME Web, “82% of finance departments are overwhelmed by the high numbers of invoices they are expected to process on a daily basis and the variety of formats they’re received in.”
Invoice management is a function of the purchasing lifecycle where procurement technology can save time and lower costs. Here are some of the key steps in invoice management, as well as ways that technology can help make this process more efficient.
What is invoice management?
Invoice management is an internal process that covers all activities related to managing and processing invoices received from vendors and suppliers. The simple version of the invoice management process includes receiving an invoice from a vendor, validating it, paying the vendor, and recording the payment.
However, things are rarely that simple. SME Web’s survey found that, on average, “manual invoice processing accounts for over 30% of the AP team’s costs, and over 32% believe that these costs could be saved if invoice processing was automated.”
Despite how straightforward invoice management appears to be, there is plenty of room for error. And, it’s important to get invoice management right; otherwise, your company could be liable for delayed payments, accounting errors, and costly financial mistakes.
Why is invoice management so complicated?
Invoice management, when done manually, is slow and labor-intensive. Each invoice that arrives needs to be processed, coded, and submitted for approval before it can be entered into a company’s ERP system. This can lead to data entry errors, delays, overlooked approval requests, and loss of information throughout the transfer process. In short: there are usually multiple people involved and plenty of opportunities for error.
There are opportunities for digitization throughout the invoice management process. But first, let’s break down the steps in invoice management to see where errors occur and where procurement software can help.
Step 1: Invoice is received
First, the vendor or supplier sends an invoice to the buyer. Typically, the suppliers sends the invoice to their primary point of contact: a manager on the procurement team or product team. Notably, the recipient of the invoice is not from the finance team or accounts payable; this means that the invoice needs to be forwarded on. Immediately there’s an extra step in the procurement process where delays can occur.
When a company utilizes a sourcing platform or other software that manages the purchasing process, it can add transparency to invoice management. Invoices can automatically be routed to the right finance or AP representative, saving time and effort.
Step 2: Invoice validation
Next, the AP or finance team tries to validate that the invoice is accurate for the goods or services received. This step includes checking the document details as well as making sure the payment terms are in line with the contract agreement. The AP representative needs to interface with the supplier if there are corrections needed, as well as the product team that received the materials.
Even if the invoice is flawless — a big “if” — the AP team will need to enter the invoice details manually into a spreadsheet or invoice processing tool.
Automation, once again, can streamline this entire process. Using a centralized platform, managers can verify that the goods or services have been received on time and in the right quantity. AI can read the document and auto-fill details into the invoice processing platform. And, AP can automate the approval routing, sending alerts to team members that the invoice is ready for payment.
Step 3: Make the payment
Next, AP will get approval from the senior leaders and make a payment from the business bank account. Hopefully, the invoice has been flawless, the data entry accurate, and the approvals process speedy. If not, delayed payment could add extra fees or penalties in addition to the original amount.
There’s a hidden cost to late payments, too. If late payments happen frequently, companies risk damaging their supplier relationships — or, worse, losing those suppliers altogether. Suppliers are the backbone of your supply chain. Changing suppliers frequently dramatically increases sourcing expenses and can prevent procurement teams from building long-term value to the company.
Most finance teams are equipped with the tools to make digital payments and complete the transfer in a few days. It’s the steps leading up to the payment transfer that can cause delays — and where technology can make a difference.
Step 4: Record the transaction
The final step is to save records of the invoice, payment, and receipt for compliance purposes. Ideally, technology handles this step too. Instead of manually recording the details, finance teams should automatically export data to the company’s accounting tool or ERP.
This data can also be used to get actionable insights for future spending and procurement needs. A tool like Fairmarkit can take spend data, break it down by category, and highlight strategic versus tactical sourcing opportunities, as well as assess supplier performance.
This empowers companies to reduce tail spend, keep tabs on performance and compliance, and negotiate better contracts.
Ultimately, invoice management is a process that is perfect for digitization. Automating the steps in invoice management can help procurement and finance teams work more efficiently, with fewer errors, and make better decisions to help the business optimize spending.
To learn more about invoice management, check out our blog, The Source.