Invoice processing could be a simple process if your purchase to pay process is set up properly. But it could be cumbersome when you have to manually process the invoices. Especially, if you don’t have a purchase order process.
If you are using a system like QuickBooks or Xero, then you might be manually creating the purchase orders and that too for not all the purchases in the company.
Without a PO, the finance team is left with a manual reconciliation process which is painful and time-consuming!
Otherwise, it could be a nightmare of never-ending phone calls and email follows up with employees to figure out where the spend belongs or who approved it
So granted you are spending a lot of time on it but what is the real cost?
Cashflow issues: You don’t know enough visibility in advance about purchases so you can’t accrue expenses. The last-minute invoices cause issues with working capital and cashflows.
No Cost control: If you have a manual process, chances are that the spend is not authorized before the invoice shows up. This could be a real problem where you have a rogue spend or in other words, unauthorized spend.
We intend to present techniques you can use to cut short the time you spend on processing invoices and reduce the total cost.
By the time you are done reading this blog post, we hope that you can start implementing one of the many tips we have mentioned here.
What is Invoice processing?
Invoice processing is defined as a process followed by the Accounts payable team to upload the invoice, match the invoice with a purchase order, or a lack thereof.
Sometimes this can also be referred to as the invoice reconciliation process.
The steps could vary based on your company process, but in general, here are the steps for invoice processing.
- Key in the invoice in the system.
- Match the invoice with the purchase order, assuming you have a purchase order process in place.
- Resolve the exceptions in the matching process.
- In case there is no purchase order, find out who ordered the product or service from the vendor.
- Then route the invoice for approval to the appropriate person.
- In case they haven’t approved in time, follow up multiple times till they approve!
Those are just basic steps and based on the complexity of your purchasing process, you might be spending a lot of time resolving invoice exceptions.
What is the cost of Invoice processing?
So what does it cost to process an invoice?
That includes the cost of technology, labor, and everything else involved in the process.
As per research by Ardent Partners, the average cost to process an invoice is $ 11.57
That includes the cost of entering the invoice, matching the invoice, getting it approved, and so on.
Let’s assume that you process 100’s of invoices a month. For a medium-sized company, it is possible to have around 6000 invoices a year (500*12)
So the invoice processing cost is staggering $69,420
That is almost the cost of a headcount.
Now imagine that with better strategies, you are able to reduce your cost by 50%, which is approx. $34,710 in annual cost savings.
The cost can be further reduced by adopting e-invoices and we will cover that in the later sections.
Does it make the process inefficient?
As per the same research, it takes an average of 8.6 days to process an invoice.
That is the time spent on indexing, waiting for approvals, etc.
That’s a huge loss in productivity. The forward-looking finance teams are using technology to reduce the time and cost of invoice processing.
Scaling your Bookkeeping system for invoice exception management
A common approach to faster invoice exception management is to scale your existing system.
If you are using a system like QuickBooks, XERO, or so on… there are two main issues with why they can’t scale to manage invoice exceptions.
a ) They are not workflow systems.
If you review the steps mentioned above, one thing is clear – the process you are following to process invoices is essentially a workflow.
In a workflow, you need to route a document from one person to another in a timely fashion to complete the activity on time. For example, x number of days to process the invoice.
Now systems like QuickBooks are great for managing books, they solve that use case very effectively.
What they don’t do well is that they don’t handle the workflow for routing the documents in case of exceptions.
Most of A/P or finance teams land up doing is that they start managing these exceptions outside of the system.
That is generally done in an email and that doesn’t scale either.
b) You have to open access to everyone to make it work.
Theoretically, you could open access to a system like QuickBooks to everyone so that everyone can enter their own documents after the approvals at the right authority levels.
But for that you have to provide access to all users who need to enter invoices, there are two main issues with this approach
1. You still need to have controls in place so that you can make sure that the data entered incorrectly and the spend was properly authorized.
2. It increases compliance risk if the system is open to other users
So probably it is safe to assume that your current accounting system might not be able to scale unless it has a workflow component in it.
And you probably won’t open it to everyone so that they can create invoices in the system.
5 effective strategies for reducing invoice processing time
With that said, now let’s look at some strategies you can use to reduce the time spend on invoice processing
1. Implementing a purchase order process
The single biggest improvement to the invoice processing time is to automate the matching process of the invoice with the purchase order.
With a purchase order, the invoices take less time to process, there are fewer exceptions and fewer approvals to resolve the exceptions.
As per the research done by Ardent partners, 60.5% of invoices are PO based or in other words, there is a PO for those invoices.
Of course, this is an average number and some companies might be doing better than this number.
The more PO’s, the lesser the time it requires to process invoices.
So if this is that straight forward, why are companies not doing that already?
Here are the common reasons
- The company doesn’t have a purchase order system. Even if they have a system like QuickBooks, the adoption rates are low.
The common problem is that systems like QuickBooks are great for accountants and senior management but you can’t open the access of these systems to all users.
- Even if there is a purchase order system, you might have a lower adoption rate. A common root cause is a lack of Purchasing policy. Since there is no guiding purchasing policy, employees don’t know when to create a purchase order and when not to create one.
- Another common issue is that a company might have a purchasing policy but the process is laborious that nobody wants to do it. For example, create the purchase from a word template, save to PDF, then email for approval. Even if you somehow make this process work, you still have a compliance issue because you don’t know if approvals are always coming from the right person.
So with all these challenges, how you go about implementing a purchase order process?
Here are some recommendations
a ) Implement a purchasing process that is simple to use. You can read more about how to simplify your purchasing process.
b) Automate the purchasing process with the help of a simple intuitive purchase order management tool.
c) Implement vendor catalogs to automate the PO creation process. The purchase order creation process should be no different from purchasing on Amazon.com
d) Implement a purchasing policy which provides simple guidelines to your employees on how to purchase product and services.
e) Use Blanket purchase orders for recurring service purchases. With the help of Blanket orders, the users can get the approvals one time and the vendor can keep on submitting the invoices against it, till the time the amount on the purchase order is fully consumed.
Your goal should be to have at least 80-90% of product purchases through a PO process and 40-50% of service purchases through a PO process.
The rest can be managed through an exception review process, where a non PO invoice can be routed for further approvals.
2. Work with your Vendors to enable PO based Invoicing
Implementing a purchase order process is useless if the vendors are not submitting invoices against those purchase orders.
If the purchase order number is missing on the invoice, there is no way for the Accounts payable team or an automated system to know whether it has been pre-authorized or not.
Here are a couple of things you can do to ensure the success of the PO based invoicing process.
a) Communicate the plan to your vendors.
If you are changing your existing purchasing process to a Purchase order based process, then you need to communicate the process change to your vendors.
It could be a simple email which states that you are implementing a purchase order based purchasing process and going forward they should put the purchase order number on the invoices.
For large to medium-sized companies, this should not be a problem because they have sales order management systems that capture this information at the time of entering the customer order and then automatically transfer that to a customer invoice.
For small vendors, this could be an issue because they don’t have sophisticated systems to capture the information about customer orders.
A best practice around vendor communication is to roll out the PO process based on the frequency of the purchase.
For example, if you have a vendor that gets 10 orders from you in a month vs a supplier who only gets one PO from you in a year.
Then it makes sense to first focus on the high volume supplier so that you can get the best benefit from the invoice automation.
You should think about splitting the communication to your vendors in two stages
As we mentioned earlier, to get the maximum bang for the buck, you should look at focusing on vendors with high purchase volume.
So the first stage of the communication is to group vendors by the number of invoices and then focus on high volume vendors.
To get started, create a simple pager explaining the change and what you expect from the suppliers. Then follow that up with a FAQ document.
For vendors with low volume or for the new vendors, you should have the same one-pager.
The only difference is that you are not proactively reaching out to these vendors. You only reach out when they need to submit an invoice.
Let’s say Acme Inc. submits an invoice for the yearly maintenance. You could set up an auto-responder on your AP mailbox, letting Acme Inc know that they need to enter a PO on the invoice otherwise the invoice would not be accepted.
They can then reach out to the respective stakeholders, get the purchase order number and then submit the invoice,
b) Implement a No PO No Pay policy
Even with your best efforts, the adoption rate of the purchase orders could be lower than desired. There could be various reasons for it.
Your stakeholders might think that it is just easier for them to call the vendor instead of issuing a purchase order. The vendor then just submits the invoice, as they used to do.
It is also possible that there is an issue with vendor internal communication and they didn’t communicate to the billing team on what needs to be done.
Whatever the case might be, you need to be prepared to work with non-compliant vendors and ensure that there is a deterrence for them.
One such deterrent is a No PO, No Pay policy.
As the name suggests, the enforcement of this policy means that if the vendor fails to submit an invoice with a purchase order number, then the company is not obligated to pay.
There are some legal challenges around not obligated to pay. However having a no PO, no pay policy would certainly ensure that your suppliers start putting the PO numbers going forward.
Make sure you are communicating this policy often.
There are a couple of ways to communicate this out to your vendors
- This could be part of your vendor onboarding documents. As a new vendor is on-boarded, they are made aware that you have a no PO, No Pay policy.
- You could communicate this monthly to non-compliant vendors.
Depending upon the size of your organization, you might have internal resistance from stakeholders, so be sure to talk to them before rolling out a policy change.
c) Have an onboarding process for new vendors
To ensure that the vendors are following your Corporate Spend policy, there should be an on-boarding process.
What should be covered in the onboarding document?
- The basic process around purchase orders and invoices.
- Items that should be covered in the invoice, for example – purchase order number, line item details, and other relevant details.
- If you are tax-exempt, then that should be mentioned in the onboarding document so that vendors don’t charge you tax.
The document doesn’t need to be lengthy, keep it relevant to what you need them to focus on. The goal here is to provide the vendors with enough details so that they bill you accurately.
In terms of rolling out the process document, there are two approaches
The A/P team can work with the vendors or sending them an on-boarding package.
If you have a procurement department, then you can work with them to ensure that these items are included in the bid process or in your standard PO guidelines.
3. Invoice exception review process
Once you have the PO process in place, you should be able to match the invoices with the purchase orders and resolve any issues in case the items on the invoice doesn’t match the data on the purchase order.
As per the research done by Ardent partners, 23.2% of invoices on an average are struck in the exception review process.
An exception could be because of any of the following options
- The unit price on the invoice does not match what is on the purchase order.
- The quantity on the invoice does not match what is on the purchase order.
- The invoice doesn’t have a purchase order and it needs to be approved before it can be paid.
Whatever the reason for the exception, when there is an exception, the Accounts payable team needs to spend time on resolving those exceptions and that takes time.
No wonder, the cost of processing an invoice is as high as $11.57/ invoice.
There are multiple ways to reduce the root cause of invoice matching issues. We will cover that more in the electronic invoicing section. But for now, let’s look at some ways you can reduce the time spent by your time on resolving invoice exceptions.
Identify common problems
The first obvious step is to identify the root cause for invoice exceptions.
To get to the root cause, you need to start documenting the exception log for 15-20 days to get an accurate picture.
You can choose to categorize the exceptions into different buckets, for example – Non PO exception or Unit price exception.
Hopefully, after 2 weeks you would start seeing a pattern. Generally, the Pareto principle should apply – that means 80% (or close to it) exceptions are caused by 20% of the suppliers or types of exception.
Document the exceptions and resolutions
So let’s assume you are noticing that x% of your problems are that invoices have the wrong purchase order numbers.
Then the resolution could be to work with the vendor and internal stakeholders to ensure that the purchase orders issued to the supplier a correct.
A very common problem is that vendors keep on using old purchase order numbers. The problem occurs because the vendors don’t have a sophisticated sales order system and they might be entering the order manually in the system.
At the end of this exercise, you should have a document that you can hand over to your finance team as a guide to resolving the exceptions faster.
4. Setup tolerance for automated reconciliation
Another way to reduce the time spent on invoice matching is to automate the invoice matching process and then set up a tolerance to automatically accept exceptions.
Let’s first address the automated matching/reconciliation of invoices
If you have a manual process for entering invoices in your accounting system, for example, QuickBooks, then you still need to enter the Bill against a PO, match, and identify open issues.
With the help of an invoicing system, you can automate the process of capturing the invoices as well as matching those invoices with the purchase order. The process can be further streamlined with the help of electronic invoicing – also called e-invoicing. We will cover more of that in the next section.
Once the automated invoice matching is set, you should set up automated tolerance matching.
Let’s explain with the help of an example.
Let’s say your purchase order was for $100 and the shipping was not included in the purchase order.
The vendor ships the product and adds the shipping on the invoice. Let’s assume $20.
So when you match the invoice to the PO, the invoice is over the PO amount by $20 (Invoice total of $120).
If you go with a standard matching rule, the exception needs to be resolved by someone in your team. The time wasted on resolving this exception can be saved by setting up a tolerance. We are assuming that you are using an invoicing system.
In the above case, you can set the tolerance for shipping, so that the system can automatically accept the shipping charges without raising an exception in the process.
You could set up a tolerance based on the absolute amount or a % of the invoice amount based on the exceptions across the board.
The above is just an example of how an automated matching process based on tolerance can help with reducing time and hence the cost of invoice matching.
You can set up automated matching for other common exceptions like unit price differences or total units delivered etc.
There are certain vendors who might ship the products in a different UOM (Unit of measure) then what you ordered. So the system can help you capture those exceptions and automatically approve invoices based on the rules set up by your team.
Take an inventory of all the exceptions you are facing, review for exceptions which you would approve anyway, and have them automatically accepted as part of automated invoice reconciliation.
5. Move to Electronic invoicing / EDI/CXMl
With Electronic invoices, the invoices can be submitted by the suppliers using multiple e-invoicing channels.
Since the invoices are submitted electronically, there are fewer errors because there are no data mismatch issues.
For example, the errors around the unit price, the Unit of measure can be reduced to zero if the e-invoicing is working correctly.
E-invoicing is also very effective if you use punchout catalogs with vendors like Amazon.com and others. Since you are picking up line item data from the vendor’s site, there are minimal errors.
So definitely e-invoicing can help you reduce the errors and hence the time spent on invoice matching. But is e-invoicing widely adopted?
As per the research done by Ardent partners, on average companies are receiving 45% of electronic invoices. So it seems like there is still a long way to go for companies to enable e-invoices with their suppliers.
With proper supplier on-boarding, you can easily get your e-invoicing rate to 80% vs. the average 45%
Major roadblocks to e-invoicing are
Low level of vendor sophistication
A very common root cause of lower e-invoicing rates is that the vendors are not sophisticated and they lack the technology resources required to enable e-invoicing. For example, if most of your vendors are mom and pop shops, then, of course, it is hard for them to make technology investment required for e-invoicing.
A workaround to that is that you as a buyer sponsor the investment required for enabling the vendors.
Though you might outright reject the idea, we would recommend that you look at the volume and then decide if the returns are going to be higher than the required investments.
Old school Utilities
Some of the utility companies (Water, electricity) are pretty old school and they would only send you bills through old fashion mail.
Honestly, in most cases, there is not much you can do. In some cases, the utilities might be motivated to work with you if you do e-payments.
Some of them might be motivated to enable e-invoicing in lieu of e-payments
Lack of onboarding efforts
E-invoicing generally results in lackluster results if the vendors are not on-boarded properly.
Most of the companies follow an approach of the train once and then done.
They might conduct training for vendors at the time of the launch of the e-invoicing tool.
There are two challenges with this approach
1. If the volume of the invoices is not very high, the vendor might not submit the invoice immediately. By the time they get to submitting the invoice, they probably would have completely forgotten about the training you provided them.
2. If there is a turnover in the vendor’s Receivable department, the outgoing person might not do a proper handover.
This could result in incorrect invoices submitted or worst, the vendor start submitting the invoices the old way.
To avoid such issues, you should think about how to onboard vendors on an ongoing basis.
You could create online onboarding resources like help manuals, videos, and have them made available to all your suppliers.
Pro tip: Include the link to those resources in the email signatures of your A/P staff. This could increase the likelihood that the vendors might review the resources more often.
Lack of enforcement
When it comes to e-invoicing, vendors take the path of least resistance.
I.e. they will send invoices in formats which are easy for them and if you keep on accepting the invoices, there is no incentive for them to submit the invoices in your preferred way.
To increase the invoice first time matching rate (invoices matched automatically without any intervention) you need to enforce e-invoicing for your vendors.
What do we mean by enforcement?
Let’s say you have a vendor who is enabled to submit invoices through a supplier portal. As the vendor is submitting invoice through the supplier portal, it saves you time and money since you don’t have to key in the invoice
Let say next month, the supplier emails you the invoice instead of submitting the invoice through the supplier portal.
To enforce the right behavior, you should reject the invoice and have the vendor submit the invoice through the supplier portal.
The other thing you can do is set up automated rules that your email system automatically sends a response back letting the supplier know that the email invoices are not accepted.
Disjointed Purchasing and AP systems.
If you have a different system for purchase orders and invoices, then it makes the e-invoicing that much more difficult.
Let’s assume you have one system for creating and sending purchase orders to vendors. The A/P uses another system for receiving invoices from vendors.
So for e-invoicing to work, your PO system should be sending the PO data to the invoicing system, so that when the vendor submits the invoice, it can be submitted against the right purchase order.
And even if that is possible, it sometimes leads to incorrect information being transferred from one system to another. That leads to fo more errors.
Having a single purchase to pay system help to alleviate some of these issues and reduce the time spent on invoice matching.
Processing an invoice costs around $11.57.
Imagine if you process 100,000 invoices in a year, then you are spending $115,70,00 annually to process these invoices.
Having an inefficient invoice creation and matching process is costing you money but what else is it costing you?
If it takes more time to process the invoice, you might not be able to pay some vendors on time and incurring late fees or worst case your service is being discontinued because of the nonpayment of the vendor invoice.
And worst of all the time you would spend on firefighting as a result of this.
You can stop all that by analyzing the current process and taking steps we have recommended to reduce the time and money you spent on creating the invoices and then matching the invoices.
Let’s get started!