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Invoice Processing

What Is Invoice Processing?

Invoice processing is the system a company uses to make payments to suppliers or vendors. This system starts upon receipt of an invoice and is completed when payment is made and recorded in the company's general ledger.

What Is an Invoice?

An invoice, also known as a bill, is a request for payment. Typically, an invoice details goods or services provided to a business, states the amount due for the items listed, and indicates when the payment is due. Traditional invoices are detailed on paper, but invoices can also be transmitted electronically. Types of invoices include:

  • Pro forma invoice: This invoice is a type of estimate, indicating what will be billed once the work is done or goods delivered.
  • Interim invoice: On big jobs or high-value projects, invoices may be sent periodically to break down large bills into multiple payments over the course of the job.
  • Final invoice: This type of invoice lets the customer know that work is complete or final goods have been delivered and payment is due.
  • Past due invoice: If a final invoice isn't paid on time, a past due invoice can be sent as a reminder. This invoice may detail any late-payment fees.
  • Recurring invoice: This type of invoice is used for ongoing services, particularly when the bill is the same every billing period.

Small or midsize companies may receive invoices by hand or through the mail, and personnel in charge of bookkeeping or the company's checkbook may simply write a check and put it in the mail, depending on the company's cash flow and ability to pay.

A larger company with a structured accounting department may direct all invoices to accounts receivable. This department is responsible for invoice processing and shepherds each invoice through the company's system from receipt to payment.

How Does Invoice Processing Work?

Invoice processing is the first step in an accounts payable system. The specialists on this team receive invoices and match them to the company's purchase orders. In other words, these specialists make sure that the company is being billed for what it ordered and actually received. The team also verifies that the correct amount is being charged.

A company typically decides on a two-way or three-way invoice matching system. In a two-way system, the invoice processing clerk is responsible for matching the invoice against the original purchase order. In a three-way system, the clerk must take the additional step of verifying that the goods or services that were billed were actually received.

There is no standard invoice processing system that works for all companies. However, a typical process can look like the following:

  • Step 1. A processing clerk compares the invoice to the purchase order and the receiving documents, such as packing slips and order receipts. Any discrepancies, such as back-ordered items, are checked to make sure the situation was accounted for in the billed amount.
  • Step 2. Verified invoices are passed to an accounts payable manager for payment processing.
  • Step 3. The accounts payable manager enters the invoice into the general ledger of the company's accounting system and schedules the payment.
  • Step 4. A list of scheduled payments gets sent to the company's financial officer to approve the outflow of cash.
  • Step 5. Payments get processed and delivered. This can mean checks get cut, signed and mailed or electronic payments get processed.

Why Is Invoice Processing Important?

Invoice processing is a critical business system that helps a company manage its cash. Standardized invoice processing ensures a company pays its bills on time. Also, some suppliers and vendors offer discounts to companies that pay invoices early, so invoice processing enables a company to take advantage of these opportunities.

More importantly, invoice processing is part of a system of checks and balances that can help a company avoid invoice fraud, costly inaccuracies, and missed payment deadlines that can result in late-payment fees and interest penalties. Imagine a company with no invoice processing system: An invoice is presented to the bookkeeper who writes a check, gets the financial officer to sign it, and mails it out. The bookkeeper may recognize the vendor but have no way of verifying if services were performed to specifications or goods received as ordered. In some situations, the invoice could be fraudulent, and goods or services were never received if no one checked the invoice against an original purchase order and receiving receipt. An ad hoc invoice processing system relies on the memories and attention of individuals who may not have access to the totality of the business cycle.

What Are Some Options for Invoice Processing?

Advances in automation can make it easier to streamline invoice processing as a company scales up. A large company can handle thousands of invoices a year, requiring thousands of hours of labor to process all the paper. A company's accounts payable department can get bogged down, affecting payment processing, cash flow, and a company's credit standing.

Accounting programs and software systems that use optical character recognition to scan documents can match an initial purchase order to an invoice and receiving documents, reducing some manual labor costs in the verification process. Companies that make investments in automation can reap rewards in more than one area of business management.

More importantly, the insertion of specialized software and machine learning into the invoice processing ecosystem can improve invoice turnaround time and processing accuracy. Invoices get paid faster when some parts of the process are automated, and these types of automated systems can help avoid human errors that may cause staff to approve fraudulent, inaccurate, or duplicate invoices for payment.