Paperless invoice approval system for Accounts Payable

Paperless invoice management software

Bonus: Invoice process optimizer blueprint

If you are still receiving paper invoices, you are losing at least 40% productivity of the Accounts payable team.

Scanning paper invoices, storing them in shared drives, and manually entering invoices in the accounting system takes time. A manual invoice approval process leads to the AP team spending more time chasing approvers. The manual process increases your cost per invoice metric.

Paperless invoice processing and a vendor invoice approval system can help you reduce the time spent processing invoices by at least 40%.

Want to know how to streamline the accounts payable process?

Then read on.

Companies that implement a paperless invoice approval system achieve the following results in the first three months:

  90% reduction in paper invoices

With a paperless invoice approval system, you see an immediate reduction in paper invoices. Instead of receiving invoices through the mail, you can implement electronic invoicing to receive the invoices faster.

You would still have paper invoices for utilities, tax payments, etc., but you can move most vendor invoices to an electronic process.

 Reduced errors in data entry 

With a paperless invoicing process, you can eliminate the need to enter the data manually in multiple systems.

We will show you how AP automation using a supplier portal and electronic invoices can eliminate the need for data entry. It saves the accounts payable department time and reduces human error.

 Better cash flow planning

The biggest issue with cash flow planning is surprise invoices that were not authorized before purchase and not having all the invoices in one place.

With paperless invoicing, you can process invoices faster, and business owners can set up a pre-authorization process to reduce the surprise invoices. These internal controls are helpful for compliance and preventing payment fraud.

Invoices are processed faster, and that gives you the ability to avail any early payment discount and avoid any late payment penalty.

This article is divided into two sections.

First, we will talk about strategies that you can implement to reduce the number of paper invoices.

Second, we will talk about how to speed up the invoice matching and approval process after you have received the invoice.

3 ways to get rid of Paper invoices

If you are struggling with paper invoices, the first thing you need to do is to stop receiving paper invoices. I know it is obvious!

The AP team eliminates the need to scan paper invoices by moving to electronic invoices.

That should give the AP team an efficiency boost of 15-20%.

Here are three strategies you can implement today to reduce paper documents.

Invoice email to capture vendor invoices

Changing from manual invoice processing to a paperless environment needs vendor behavior change.

Vendors send you paper invoices because you never told them how to send the invoices.

Some send paper invoices because that is their process.

So let’s change that.

You will need to set up an email and inform vendors only to send invoices to that email.

This will provide you with a central place to track all the incoming invoices. Here is how to set up a paperless invoice process.

Invoice email setup 

We need a dedicated email for receiving invoices. This is important for two reasons:

  1. A dedicated email is easy to remember and easy to communicate to vendors. You can have one inbox for all invoices and one for all other communications.
  2. You need an internal email so that stakeholders can communicate with the AP team. It becomes easy to differentiate between internal and external communications.

Don’t use the current AP email. That should be limited to communication only.

Setup an email like invoices@companyname.com

Informing vendors

Once you have the email address, the next step is to inform vendors that they need to send the invoice to this email.

There are a couple of ways to do it.

You can send a broadcast to all vendors informing them about the change.

Here is a sample email:

“Dear Vendor,

We are changing our invoicing process to make it more efficient for both parties.

As of {insert date}, you would need to send the invoices to invoices@companyname.com.

Please don’t mail the paper invoices because they will not be processed.

This change will save your mailing cost, but it would also help us process invoices faster and pay you on time.

If a purchase order(PO) is issued to you, please add the PO number on the invoice document.

Thanks,

AP team”

Feel free to change it to suit your communication style.

Sending a broadcast is not enough; suppliers might forget or revert to their old processes.

That is why you need to remind them in every interaction.

There are two ways to do that:

1. You can send a reminder email after a few days and do that 2-3 times.

With the increased frequency of communication, you can get higher compliance rates.

2. The second is to print the instructions on the purchase order.

When you print the instructions on the purchase order, all supplier teams can see the invoicing instructions.

Here is an example of adding the instructions on the purchase order.

purchase_order_with_billing

Sometimes, it needs more than just informing vendors, especially when they are used to sending invoices to the stakeholders. We will discuss that next.

Internal stakeholder communication

To achieve maximum compliance, you would need to seek stakeholder support. You need to explain the need for digitized invoices and how it would help in making the accounts payable department paperless.

If the supplier sends the invoice to the stakeholder, the stakeholder might forget about it, and the vendor might be chasing the AP team for payment.

It is more difficult to track paper invoices with the increased remote work environment.

You can send a similar email to stakeholders and ask for their support.

There are two things you should mention:

First, they need to inform the vendors about the change.

You can forward them the email template so that they can forward it to the vendor contact.

If your contract template has a section for invoicing, you want to include these instructions on the template too.

Second, They should forward all vendor invoices to invoices@companyname.com.

Some vendors might continue to send paper invoices to the stakeholders.

Or they might be emailing the invoices directly to them.

Your goal should be to centralize the invoice capture process. So ask the stakeholders always to forward the invoices to the new email address.

Supplier portal

What if you don’t have to worry about receiving the invoice from the supplier?

That is possible through supplier self-service.

Suppliers can submit the invoices against a specific purchase order or without a purchase order through supplier self-service.

Here is how a supplier portal can help simplify the process for you.

You need a supplier contact email that can submit the invoices against the purchase order.

When you approve a purchase order, the system automatically sends a request to the supplier with instructions on how to submit the invoice through the supplier portal.

The supplier clicks on the magic link to submit the invoice. There is no need for registration and managing a username and password.

The supplier then selects the purchase order and clicks on “Create Invoice.”

Supplier_invoice_portal

The system then converts the purchase order into an invoice. The supplier contact can adjust the pricing or quantity and attach the actual invoice document.

Once they click on the submit, the system sends the invoice matching and stakeholder approval.

Here is how simple it is:

Supplier_Invoice

 

We expect that 40-50% of your supplier base would easily adopt this approach.

Some of the larger companies might have stringent processes. So your mileage would vary based on your leverage with your vendors.

Electronic invoice

The third option to achieve paperless invoicing is to implement electronic invoices.

An electronic invoice is sent from a vendor Accounts receivable system to the buyer AP system without manual intervention.

It leverages industry standards like cXML or EDI integration to implement a system-to-system communication between a buyer and a supplier.

The biggest advantage is that there is no need for anyone to upload the invoice into the system.

The invoice is submitted and then matched with the purchase order and receipt.

Here is an example of an electronic invoice submitted automatically by the vendor.

approved supplier invoice

 

We recommend this approval for high-volume vendors like Amazon.com or Staples.

It provides the best return for high-volume vendors.

The best approach is to sort your vendors by annual invoice count and then contact the top 10 vendors to check if they support electronic invoices.

 

How to set up a paperless accounts payable software

In the above section, we talked about the AP automation process and capturing the invoice from the vendor.

In this section, we will talk about how to automate the process of approvals after the invoice is received.

Automating the  3-way matching process

Once the invoice is received, you need controls to ensure that an invoice is approved for payment.

If there is an issue, you need to hold the invoice for further invoicing unless that issue gets resolved.

Most AP teams rely on manual AP processes for matching the invoice with the purchase order and receipts. That process is called the 3-way matching process.

Since the manual 3-way matching process takes a lot of time, the first step is to automate the 3-way matching process.

A tool like ProcureDesk can help you with automating the 3-way matching process.

Here is how to automate the 3-way matching 

Once the invoice is submitted, the system automatically matches the invoice with the purchase order and receipt.

The system automatically raises an exception if a receipt is missing or the quantity and price don’t match between all three documents.

There are generally three types of exceptions in a 3-way matching process.

  1. Missing receipt: the product is not received or received but a receipt is not created in the purchasing system.
  2. Unit price: The unit price on the invoice is more than what is on the purchase order.
  3. Quantity: The quantity on the invoice is more than what is ordered and received.

Here is an example of a missing receipt exception:

 

The invoice is received, but there is no receipt in the system.

Here is an example of a pricing mismatch exception:

In this case, the vendor has invoiced more than what is on the purchase order.

The next step is to figure out what should happen if there is an exception. That is the topic of the next section.

Invoice approval software

Once the system identifies an exception in the 3-way matching process, we need to automate the entire invoice approval process so that the exceptions can get routed to the appropriate person.

With a manual approach, you would send emails to different stakeholders or walk to someone’s desk. AP clerk might send the review email to the wrong person. This causes avoidable approval delays.

That approach is not scalable in this remote work environment.

Here is how to invoice approval software automates the invoice approval workflow.

Configuration of workflow

A paperless invoice approval system should be able to route the invoice for review and approval automatically. In most cases, you can reconfigure the current workflow in the tool.

You don’t want the AP team to figure out who needs to approve a particular invoice or review an exception.

We recommend that you define the workflow upfront and let the system route the request for approval. It will drastically reduce the invoice approval time.

Here are a couple of scenarios that you need to configure for invoice review:

Missing receipts

As we mentioned before, if a receipt is missing – the system can’t proceed with a 3-way match process.

There are two ways to resolve this issue.

  1. Send the request to order contact to create the receipt
  2. Send to a group/person that is responsible for receiving.

You can route the request to the warehouse clerk if you have a central warehouse. Otherwise, the request can go to the person who created the purchase order.

Price mismatch 

In case of a pricing mismatch, you want to route the request to a person who can resolve the pricing exception.

If you have a purchasing team or an assigned buyer, we recommend sending the invoice to them.

If you don’t have a purchasing team, you want to send the request back to the order contact.

Here is how to create a workflow for resolving price mismatch issue:

Approval workflow setup

After the matching issues get resolved, the system sends the invoice for payment.

Quantity mismatch

If the quantity invoiced is more than what was received, you need someone to confirm if they received the additional items.

It is also possible that the supplier made a mistake while submitting the invoice.

Ideally, you should route such requests to the purchasing team so that they can work with the vendor.

If you don’t have a purchasing team, the request goes to the order contact for invoice verification.

In some companies, we see the AP team directly working with suppliers to resolve such issues.

Here is how to create a workflow for resolving quantity mismatch issues.

Approval_workflow_receipts

Tolerance matching 

When implementing a 3-way matching process, the biggest issue is a pricing mismatch between the invoice and the purchase order.

By implementing a tolerance process, you can allow the system to auto-approve the exceptions if the excess amount is within the limit of the tolerance level.

There are three cases where the invoice amount is greater than the purchase order amount.

Shipping and taxes

If the vendor charges for shipping, those charges get added to the invoice.

If you don’t add taxes to the purchase order, the vendor will add the taxes to the invoice document.

When the vendor adds the taxes and shipping to the invoice, the invoice amount is more than the purchase order amount. An electronic invoice approval system can automatically resolve these exceptions.

Pricing changes

Price changes are often the cause for the invoice amount to go over the purchase order amount.

For example, You ordered a product at a $10 unit price, but the vendor charged you $10.10.

You can avoid these price changes if you have a negotiated contract with the vendor and your pricing remains fixed for a certain amount of time.

Quantity changes

Quantity change is another reason for the invoice amount to be higher than the purchase order amount.

Quantity change is caused by the difference in how you order and how the vendor sells the product.

For example, you ordered a product in each, and the vendor only sells in dozens. So even though you ordered one unit, you will receive a dozen units.

No matter the reason for the amount mismatch, it becomes a nuisance if you always have to approve the invoicing mismatch issues.

You can let the system do it for you by automating the tolerance process.

Here is an example of total amount tolerance:

Tolerance_matching

In this example, we instruct the system to automatically accept the invoice if the invoice amount is greater than the purchase order amount by up to 10% or $100 – whichever is less.

You select the amount and % because it allows you to set up an upper threshold.

A 10% of $100 order is $10 while a 10% of $100,000 order is $10,000.

A $10 deviation might be ok in the above case, but a $10,000 deviation should trigger an additional review.

By adding an amount, you are setting up an amount threshold.

Invoice approval process

So far, we have talked about a 3-way matching process.

But what if you are purchasing a service and there is no receipt.

It could be the case of an invoice that doesn’t have a purchase order number associated with it?

That is where you need to set up an additional invoice approval process so that the system knows how you route these exceptions.

Non PO invoices

For non-PO invoices, we recommend that the invoice follow an approval process similar to the purchase order approval process.

The reason for that is an invoice without a purchase order means that the Spend is not authorized, so it needs to be authorized by the appropriate stakeholder.

Here is an example of how to set up a workflow for non PO invoices

Approval_workflow_Non_PO Invoice

In this example, the invoice is first routed to an employee and then the employee’s manager.

You can then track pending approvals through a centralized dashboard

Service invoices

When you are not receiving a tangible product, the AP team still needs confirmation that the service is delivered.

You can achieve this by sending the invoice for review before marking it approved for payment.

The idea here is to have a sign-off for the invoice.

If the invoice amount is greater than the purchase order amount, you might need to send this for additional approval based on your approval hierarchy.

Here is an example of a workflow for service invoice:

Approval_workflow_Service_Invoice

In the screenshot above, the system sends the invoice to the order contact for review.

Once the invoice is approved,  the system automatically sends the invoice to the accounting software.

Now your turn!

If you want to implement a paperless invoice approval system, here are the two things you would need:

  1. A process to electronically capture the invoices so that the AP team doesn’t have to key in every invoice.
  2. A matching and workflow engine to match the invoices with the purchase order that automatically routes invoices for review and approval.

So how to get started?

Here is the approach that our clients follow.

  1. Take an inventory of invoices and identify the top vendors that you could move to electronic invoices.
  2. Document your purchasing policy and the approval matrix.
  3. Implement an invoice approval system that automates the invoice capture, matching, and approval of invoices.
  4. Reduce the time spent on processing invoices by 40%.

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