Businesses pay their dues differently than private citizens. Instead of just handing in your card or paying with cash, you will likely get an invoice from a vendor or a supplier. While spending the sum marked on this invoice is the whole point, there are other things you must do. An invoice needs to be processed and recorded in the general ledger. All of this needs to be done in a step-by-step approach.
With the help of modern technology, these invoices can be automated and streamlined. This will reduce the chance of error, improve your record-keeping, and speed up the process. For this, you have to pick the right invoice processing software. We’ll get to this, as well.
With all of this in mind and without further ado, here’s what you need to know about the basics of invoice processing.
Table of Contents
1. Steps in invoice processing
To understand how invoice processing works exactly, we need to explain the five steps that make up the process.
- Capturing invoice: This means more than just receiving it. You must put it in your general ledger and match it with supporting documents.
- Sending to authorized approvers: Perhaps you’re not in charge of the finances, or someone else needs to confirm the payment. The AP department can take care of the invoice approval process. In other words, this process can be automated.
- Submit invoices for payment: This is a purely administrative step. Namely, before you process the payment, they must be introduced to your financial system.
- Process invoices for payment: Now, you pay via any available method. It can be via wire transfer, PayPal, check, etc.
- Archiving invoices: You must archive invoices and payment information when everything is done. This is important for legal protection, as well as facilitating future payments.
Of course, this is an oversimplified version of events. For instance, approval alone would require the following:
- Validation or PO matching
- Definition of exceptions
- Route approvals
- Payment processing
As you can see, this is best left to professionals.
2. Benefits of automated invoice processing
The benefits of automated invoice processing are through the roof.
- Not only does it take you less time to verify and approve an invoice and less to pay it.
- The chance of being late with your invoice payment is also eliminated. This is important because it helps you avoid dealing with late fees. Late payments ruin your creditworthiness and may even ruin your relationship with vendors and suppliers.
- Automated invoice processing helps you take advantage of early payment discounts. Many vendors have a special discount (sometimes up to 5%) for those who pay by a certain set date. By automating your invoice processing, you can ensure that this happens more regularly.
So, to sum it up, automating your invoice processing helps you save time and money and improve your reputation (or, at least, keep it intact). Here is a free invoice generator for small business if you need.
3. Centralizing data and processes
Handling account payables (AP) is not simple; you can do a lot to improve your AP automation. Invoices sometimes need to be verified. While this can be done manually, you can also integrate your accounting system with your invoicing app so that this happens automatically. This makes for a much quicker process, and validation of your invoices is guaranteed.
The biggest problem with this is in a situation where you have different accounting systems. Then, you might have to deal with duplicate efforts and manually enter all the necessary data. With centralization, further automating processes in the simplest way possible is possible. There’s no duplication since all the information comes from the same place.
4. Invoice communications
One of the biggest concerns with invoicing is that you have all the records on demand. You need to know what you paid for, when you paid for it, and how much it costs you.
Second, some invoices are of questionable legitimacy, and being able to find them quickly can be an important matter. Sure, there are usually ways to find them, ranging from digging through your texts and messages all the way to digging through your drawer. With digital tools, you can find them in an instant.
Regardless if you have an accountant or handle your finances independently, they must access all these files. The majority of accounting platforms and payment gateways have a well-organized record. All you need to do is combine them into your accounting system to get things going.
The way you receive these invoices is also quite important. Namely, in the past, you probably received invoices in the mail, via email, fax, and electronically. Today, you may use many platforms like PayPal, Payoneer, Deel, etc. Either way, with AP automation, all of these invoices will go to the same place, and you’ll reduce the chance of missing any of them.
5. Setting payment terms in advance
Displaying consistency when it comes to your invoices is important. This is also true with account receivables, seeing how it won’t put your clients in a spot where they’re faced with expenses they don’t recognize. Using actual dates is better than vague terms like “payment due upon receipt.”
When it comes to account payables, you must ask three questions:
- Does the invoice reflect what was agreed on?
- Have the services been performed/goods delivered?
- Are the costs, calculations, and taxes correct?
You can proceed only when the answers to these three questions are a resounding yes.
While reviewing this occasionally is good, you need to track every payment as it comes in.
Wrap Up
So, to sum it up, without invoice processing, bills probably won’t get paid on time. Your reputation will suffer, you will have to pay late fees, and you can ruin your credit rating.
Automating your account payables, on the other hand, will make you more financially responsible. It will make all your payments come through promptly, and all the documentation goes in the same place. In other words, AP automation does all it can to ensure you do things by the books.
Also, regardless of how you’re handling your accounting, proper invoice processing practices make your job a lot easier.
