Poking an angry bear and expecting to get honey from it, doesn’t usually work out too well. The same thing can be said for your business suppliers. If they’ve sent your business invoices for goods and services, and you don’t process them quickly and accurately, they won’t be very happy either!
Making sure that your company’s invoices are processed correctly and paid on time is essential for any business. As a business owner, this helps you keep a healthy relationship with your vendors, and avoid potential disruptions in your supply chain.
We’ll go over the general aspects of invoice processing, the risks behind poor planning, and the steps your business can take to learn how to process invoices like a pro. Along the way, you’ll even learn how automation can make the whole process that much easier.
How does invoice processing work?
If you manage a business, you know that purchasing goods and services from vendors and suppliers is often a key part of running a business successfully.
Simply put, invoice processing is the entire series of phases and steps that must be completed to verify, validate, pay, and record invoices.
As the payment process isn’t always as simple as putting in your credit card information, there are generally whole teams that will handle this process from start to finish.
In larger companies, a dedicated accounting department often manages invoice processing. Smaller businesses don’t always have the means to pay for an entire team, so, accounting managers, office leads, or occasionally even the business owner will deal with invoices themselves.
No matter the size of your organization, invoice processing must be done at some point or another. But, what are the main aspects that you’ll need to follow before really jumping into the specific steps?
📥 Receiving the invoice
This is essential to the entire process. You’ll first need to obtain your supplier’s invoice and ensure that you’ve actually received the goods or services requested.
If there are any potential issues at this stage, it’s a good idea to contact your supplier early in the process, to ensure that you receive the expected products/services as soon as possible.
✅ Business approval
Approval by your accounting team, or whoever handles the invoices, is a time-consuming but necessary part of invoice payment. Before invoices can continue to be processed, they should be validated by at least one or two dedicated individuals.
💸 Invoice Payment
Usually, payment is the easiest part of the process. Of course, your business must follow the previous payment terms that were negotiated with the vendor. Make sure that your company is capable of paying in the allotted time.
By following a pre-determined processing workflow, such as the one you’ll see below, you’ll speed up invoice payment and ensure that your business has what it needs and that your supplier stays happy.
The risks of a poorly planned invoice processing
We’ve already mentioned it before, but there are clear risks that come from an improperly established invoice processing workflow.
First and foremost, there is the risk of not receiving your goods or services due to unpaid or late payments. This could have a major effect on the amount of cash flow and business operations that your company can accomplish while you wait for invoices to be paid and items or services to be received.
In the same vein, your business risks harming the relationship with your suppliers, while also harming your company’s reputation.
Businesses can be lucky sometimes, and one or two late payments may go over without a problem, but missed invoices or multiple late payments are a bad sign. Additionally, it could also incur extra fees.
Businesses can consider visualizing how long it takes them to pay invoices or bills to vendors by calculating financial ratios like DPO (Days Payable Outstanding).
🚩 If your company has a high DPO, it can show that you can’t or won’t pay invoices on time, which is a red flag for other suppliers!
Not only does poor invoice processing affect the present, but also the future of your business.
If the workflow process is unorganized, businesses will struggle to get an overview of their financial forecasts. When there is no clear vision of your overall debts and payments, this makes it more difficult to plan future purchases, inventory, and business operations as a whole.
Last but not least, this can cause problems in the case of a business audit. Seeing as there would be a lack of accurate and timely financial statements or payment records, this would once again harm the reputation of your business or cause future legal issues.
Okay, we get it, there are plenty of risks associated with improper invoice processing, so how do we do it correctly? Don’t worry, we’re about to jump right into the essential steps to process your unpaid invoices!
How to process invoices: 5 steps to success
1. Receive the invoice and ensure proper documentation
The first step requires the invoice that your supplier should have already sent you. Your invoice might arrive by a variety of methods such as fax, snail mail, email attachments, or directly sent to you electronically through an online portal or invoicing system.
💡 Most businesses have entered the digital age and will prefer sending invoices electronically to save time and reduce errors
Once you’ve located the invoice, make sure that all the necessary documentation is there. Generally, the invoice itself is the essential document, but you may also need to locate purchase or work orders to verify that you are indeed paying the correct invoice.
2. Verify and record the invoice information
For accounts payable departments, this step takes the most amount of time and is also the most cumbersome.
With the relevant documentation in hand, the employees in charge of verifying payments should go over the essential information on the invoice. The checklist is as follows:
- Verify the total cost owed to the vendor,
- Ensure that the invoice is from the correct supplier,
- Double-check the expected goods or services,
- Verify any additional fees or costs,
- Go over the payment terms for the transaction
- Identify that any General Ledger codes are accurate
After going over the general invoice information, it can be pertinent to make sure that you got what you paid for. Go over the itemized list that should be included in the invoice, did you get X, Y, and Z products? Were services A and B fully completed?
Although this may be done by your accounts payable department it adds a lot of time to the process and could be potentially completed by the team that handles inventory, or product management, depending on the layout of your company.
This verification and self-audit step is also key because it allows business departments to make sure that all the totals are accurately calculated. Totals, taxes, and extra fees should all reflect the amount that your business is expected to pay for the transaction based on the goods and services you received.
💡 Watch out for duplicate invoices or errors in the documents to save you a headache down the line
3. Get approval from the relevant employee(s)
While every company is different and organizes its approval processes in different ways, there will generally be one or two employees to approve invoices for payment.
This will generally be the head of your accounting department, or maybe even the owner of smaller businesses. In some cases, it may be the same person that verified the invoice in the first place, in which case, you can skip to Step 4.
If not, you’ll have to send the invoice for approval by email, by taking it over to their desk, or whatever other method your office uses. If you’re doing this the traditional way, make sure that the invoices are received, and not lost along the way.
💡 By using automated invoicing software, it's much easier to centralize information and speed up the entire invoicing process. We’ll go over this more in detail in the next section.
4. Pay your invoices correctly and on time
You’ve made it to the easy portion of the process. You’ve received approval to pay for the invoice, now what?
Just like for approval, there is often a dedicated employee in the accounts payable department that handles payments, and if you’re reading this, it might just be you. Either way, the person in charge of payments needs specific invoice information to continue to the next step:
- Total costs to pay: this should include taxes, discounts, late fees, etc.
- Vendor payment information: ensure you have the correct supplier and how to reach them such as an address to send payments, account numbers for a direct deposit, etc.)
- Accepted payment terms and methods: make sure that you’re aware of the prior payment terms that were set such as Net 7, Net 30, EOM or End of Month, etc. Also, ensure that using the previously agreed upon payment method, this could range from a check or credit card to online payments through gateways such as PayPal, Authorize.net, etc.
5. Input and archive the invoice payment in your general ledger
You’ve done it, the payment was sent out and your business and the suppliers are happy!
The last step is to make sure you record the final invoice and transaction information in a central area or ledger. This could be in a physical filing system or an online invoice processing management tool.
By recording and archiving this information accurately, businesses will have a history of their invoice payments as well as records for any future audits.
When inputting this data into a general ledger, it is key to have some sort of system to organize your invoices. Businesses generally use GL Codes (General ledger codes), which are a string of numbers that easily identify a transaction.
These GL codes might identify an invoice as being a debit or credit, which vendor the invoice was for, which products or projects the invoice was a part of, etc. Code categories and information all depend on the needs of your company and how the accounts are organized.
The advantages and disadvantages of invoice processing software
Although we’ve established the essential steps of invoice processing, it’s still somewhat complex, and very time-consuming with a higher margin for error than we’d like.
With the digital wonders of today, it’s no surprise that many companies have moved away from manually processing piles of paper invoices. With invoice processing systems for invoice management and automation, various benefits come from digitalizing your workflows.
Going digital speeds up the process, making it more likely that you’ll make payments early and receive potential discounts. You’ll also spend less money on labor due to a more efficient invoicing workflow. Don’t forget the money saved on printing and storing paper invoices!
✅ Employees focus on more important tasks
Employees no longer have to spend hours working on verifying invoices and processing information, leaving them room to work on higher priority business missions.
✅ Increased efficiency
By automating and digitalizing the invoice process, the time spent working on approving, inputting, and recording invoice payments is greatly reduced.
✅ Reduced errors
Using electronic software also helps to minimize the errors that come from human input, whether it be from illegible handwriting, misplaced documents, or poorly calculated numbers.
❌ Data security
Inputting data into an online tool always has a certain level of risk. Despite this, the risk of potential security breaches on important data is mitigated by the other benefits.
❌ Suppliers that don’t accept digital processing
You might come across an old-school supplier that only accepts paper invoice documents, which means your well-planned software tool won’t be of much help. Most companies these days accept electronic invoices, the traditional companies that accept only paper invoices are few and far between.
❌ Potential Fees
Depending on the software you use, you may incur certain fees, such as the price of the software of course, but also potential fees for sending invoice payments.
If you’re unsure about which solution to choose, check out our directory of accounts payable software to get started!
There are many risks when not processing invoices correctly such as fees, poor supplier relationships, inaccurate bookkeeping, and more.
But, the 5-step process is easy to remember:
- Receive the invoice
- Verify the correct information
- Get approval for payment
- Pay the invoice
- Archive the transaction
Manual invoice payments can also be a burden, and many software options improve how your business manages invoice processing. With the essential steps and resources at your disposal to improve your process, your business is ready for anything!