AP teams that leverage AP automation can process invoices faster.

An efficient AP automation process looks like this:

• All invoices come to a central inbox and the invoice capture process is streamlined.
• There is no manual data entry of invoices. Instead, OCR(Optical Character Recognition) technology takes care of data capture and creating the invoice.
• Invoices are automatically matched with purchase orders to ensure compliance.
• Invoice approvals are done on time. You are not chasing stakeholders for approvals.
• You have real-time visibility into the cash flow process, and you are availing early payment discounts.

If your finance team is dealing with a manual process that is time-consuming, then read on.

In this guide, we will walk you through a step-by-step process for accounts payable automation and how to use automated invoice processing to close books faster.

ProcureDesk is our invoice processing solution, designed to help AP teams reduce the time spent processing invoices by eliminating manual invoice processing.

What Is Invoice Processing?

Invoice processing is defined as the end-to-end process of processing a supplier invoice, which includes receiving the invoice, approving it, and paying it.

The steps could vary depending on your company’s process, but here are the steps for invoice processing in general.

1. Upload the paper invoice in the accounting system or your ERP system.
2. Match the invoice with the purchase order, assuming you have a purchase order process in place.
3. Resolve the discrepancies in the matching process.
4. In case there is no purchase order, find out who ordered the product or service from the vendor.
5. Then route the invoice for approval and track the invoice through the approval process.
6. The accounts payable department then issues the payment to the vendor.

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?

As per research by Ardent Partners, the average cost to process an invoice is $11.57

That includes the cost of your entire AP process:

• Scanning paper-based invoices.
• Entering the invoice data.
• Matching the invoice and getting it approved.
• Managing the Payment process.

Let’s assume that you process 100s 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 a 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.

5 Effective Strategies For Reducing Invoice Processing Time

We are using ProcureDesk as an example of an invoice processing system, but you can use any tool that integrates with your accounting system. ProcureDesk integrates with all major accounting packages, including QuickBooks,Xero, NetSuite, Microsoft Business Central, and Sage Intacct.

If you are using an invoice payment system like bill.com, ProcureDesk integrates with that to enable an end-to-end invoice management process.

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. Accounting systems like QuickBooks are great for accountants but lack invoice processing workflow.
• Lack of PO automation software, leading to manual data entry and human error.
• Even if there is a purchase order system, the adoption rate might be lower. This is often due to a lack of a purchasing policy.

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.

Work With Your Vendor 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

To optimize the PO-based invoice process, inform the vendors that you are changing your business process.

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.

To maximize the benefits of invoice automation, focus on high-volume invoice vendors first before moving to a one-off vendor.

Here are some best practices to ensure adoption and harmonious vendor relationships:

• Create a simple one-pager explaining the PO process and its benefits to vendors, such as avoiding late payments. Include that in your supplier onboarding package.
• Ensure that there is an ongoing communication with vendors. For low-volume vendors, set up an auto-response letting them know about the change in the payable process. Encourage them to 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 this:

• Your stakeholders might think it is easier to call the vendor instead of issuing a purchase order.
• There was a lack of vendor internal communication, and they didn’t communicate to the billing team what needed 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?

1. The basic process around purchase orders and invoices.
2. Items that should be covered in the invoice, for example – purchase order number, line item details, and other relevant details.
3. 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.

Set Up Approval Workflows To Streamline Invoice Management

Once you have the PO process in place, you should be able to match the invoices with the purchase orders and resolve any issues when 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.

To resolve these exceptions, the Accounts payable team can do the following:

• Set up an approval workflow so that exceptions are routed to appropriate stakeholders for review.
• Have a detailed audit trail to track any approvals.
• Identify common problems with invoice exceptions and which vendors are causing them.
• Work with problem vendors to reduce invoice matching issues. Moving to an electronic invoicing process is an easy way to achieve that.

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.

Set Up 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.

Move To Electronic Invoicing/EDI/CXMI

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, if the e-invoicing is working correctly, the errors around the unit price and the unit of measure can be reduced to zero.

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.

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 utility companies (Water, electricity) are pretty old-school, and they only send paper bills through old-fashioned 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 Enforcement

When it comes to e-invoicing, vendors take the path of least resistance.

They will send invoices in formats that 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.

Some tips to enforce e-invoicing:

• Reject invoices that are not submitted through the e-invoicing process.
• Proactive and repeated communication to vendors regarding e-invoicing rollout.

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 like ProcureDesk helps to alleviate some of these issues and reduces the time spent on invoice matching.

Conclusion

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 implementing an AP automation solution and significantly increase the productivity of your team.