Invoice Processing:
What It Is, Steps and More

Taylor Pettis    September 22nd, 2021

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Invoice processing is a fundamental part of every growing business. When it goes off without a hitch, bills are paid on time without errors. But if your company handles invoice processing manually, you leave yourself open to human error and payment delays, which can cost your company valuable time, money, and even business relationships.

In this article, we break down invoice processing by steps and discuss the benefits of automating invoice processing within a company.

What Is Invoice Processing?

Invoice processing refers to the practice of handling an invoice through its entire lifecycle with the company that receives the invoice. It includes a series of steps, such as receiving the invoice, routing it to the appropriate parties, authorization and submission of the invoice for payment, and processing payment. The invoices should be tracked and recorded for later referencing.

What Are the Steps of Invoice Processing?

Though the management of each step may vary from company to company, invoice processing should follow at least these four basic steps:

  1. RECEIVE AND/OR CAPTURE
  2. ROUTE
  3. AUTHORIZE AND SUBMIT FOR PAYMENT
  4. PROCESS PAYMENT

In order for the flow to run smoothly, it‘s crucial that no delays, errors in data, or miscommunications occur. Unfortunately, such missteps are common without the right tools, especially in systems that still require manual invoice processing.

But to better understand how and where those missteps can arise, it’s critical to have a good understanding of the details of each step of invoice processing.

1. RECEIVE AND/OR CAPTURE

Receiving or capturing the invoice is the starting point of the entire process. The format in which each invoice arrives may vary based on your company’s preferences or the preferences of the businesses or contractors sending the invoice. Common invoice formats include paper documents, PDF, fax, email, Word, Excel, and others.

Staying on top of incoming invoices can be a struggle if you’re still handling invoice receipt manually. Someone—usually multiple people, if your company handles enough invoices—needs to manually key into the system the necessary information, from vendor ID numbers to dollar amounts tied to whatever your company is paying for. This data entry is time-consuming and error-prone. And considering how many details can be tied to each invoice, there are nearly innumerable opportunities for mistakes. 

Capture

How does automation help with receiving and capturing?
Top automation platforms take advantage of optical character recognition (OCR) technology to capture key data that appears on incoming invoices. It will then automatically port that information into your system with little to no staff intervention necessary.

Route

2. ROUTE

Next, each invoice must be routed to the necessary employees for approval. For example, an invoice from a contractor hired to handle janitorial work at a hospital may require approval from a facilities manager, while a freelance coder’s invoice may need to be routed to the company’s CTO.

If invoices are coming in regularly to various teams, juggling the routing of each one in a timely manner requires extensive employee time and attention if you’re having to handle that routing by hand.

How does automation help with routing?
Having an integrated, automated system where AP team members have easy access to invoices speeds up the entire routing process. No more delays. Instead, approvers receive invoices automatically and early, leaving plenty of time for review and approval.

3. AUTHORIZE AND SUBMIT FOR PAYMENT

Once the invoice is routed to the correct employee, that employee must then authorize it. Authorization of the invoice includes the amount billed and/or scope of the project (hours completed, etc.). If the approver notices errors or discrepancies in the invoice, they’ll need to pull in the appropriate stakeholders to reconcile those errors before proceeding to the next step. If the approver sees no errors, they then submit the invoice to the billing department for payment.

Though this step sounds relatively straightforward, there are a few potential issues that can arise during the authorization stage. First off, the approver may miss errors in billing or they might wait too long to authorize the payment, either because they have a large backlog or because they might be out of office, causing late fees. If there’s no simple way to keep tabs on an invoice’s status in each step of the process—particularly approval— payment deadlines may easily come and go.

Approve

How does automation help with the authorization process?
With an automated, integrated system, you can create AP workflows that better support invoice processing. As a result, it’s easier for designated staff to approve invoices, avoid late fees, and even earn early-payment discounts.

Pay

4. PROCESS PAYMENT

In the final step of the invoice processing cycle, your accounting department processes the payment and releases funds via your company’s preferred payment method (i.e. check, direct deposit, etc.).

Many businesses or contractors will note a payment deadline (typically 30-60 days after sending). It’s important to process the payment before that deadline passes in order to maintain positive relationships with vendors, avoid late fees, and even take advantage of potential early payment discounts.

How does automation help with payment processing?
Not only does automation better organize your payment system to avoid late fees and possibly earn discounts, but it also automates the actual electronic payment (ACH or otherwise) to vendors—all of which improves vendor relations.

Benefits of Automating Invoice Processing

Though these steps are relatively straightforward, as we mentioned, trying to handle them manually and without the right tools can quickly lead to errors and many hours wasted. As with most any business process, automation is a boon to streamlining the steps involved in invoice processing. Not only can automation help your business go paperless, it helps eliminate data entry errors, expedite approval routing, perform easy three-way matching, and save time and money. Let’s dive into those benefits in more detail below:

   GOING PAPERLESS

Going paperless and utilizing digital invoices benefits businesses in numerous ways. Eliminating the paper trail means all invoices are received in a digital format, which improves efficiency and organization and helps ensure your team can find the invoices they need when they need them. Indeed, in a recent Nintex survey of 1,000 respondents, 49 percent said they struggled to find documents necessary to do their jobs.

And by embracing automation, which necessitates digital formats, you can steer your organization towards paperless operations.

   ELIMINATING DATA ENTRY ERRORS

Data entry errors are common when automation isn’t implemented during invoice processing. One misplaced decimal point or incorrect number, and your business could very well pay an invoice out incorrectly.

In fact, researchers have documented that people’s error rates range between one and four percent for spreadsheet data entry. Those percentages sound small, , but just a single decimal point out of place can wreak havoc. Even minor mistakes can compound into large sums lost or wasted. For example, AT&T’s cumulative invoicing errors led the company to spend years unknowingly overpaying vendors and likely lost the business millions of dollars.

To avoid these sorts of errors that inevitably happen in a manual process, robust invoice automation software uses optical character recognition (OCR) to translate the characters in image files into readable text. So, faxed or scanned documents—like all of the invoices your company processes—no longer require manual data entry.

   AUTOMATED, EFFICIENT APPROVAL ROUTING

Routing invoices through the many stakeholders needed for invoice approval without automation creates many opportunities for miscommunication and delays. In fact, according to one 2015 survey, 75 percent of all cross-functional teams are dysfunctional and struggle with staying on the same page on things like hitting scheduled deadlines and keeping to a planned budget.

Top invoice processing automation solutions can help ease dysfunction by letting users set up custom approval routes and establish back-up approvers that can handle invoices if primary approvers are out of the office. These functions help teams prevent bottlenecks and delays, which means invoices get approved and paid on time.

   EASY THREE-WAY MATCHING

Another advantage borne out of automated invoice processes is three-way matching. Three-way matching reduces the risk of data errors in invoice processing by comparing the purchase order, invoice, and vendor receipt to make sure all information and data matches.

While this step is important, it’s also very time consuming if it’s not automated. In fact, a 2019 report published by the Institute of Finance and Management (IOFM) 2019 claims that accounts payable departments that integrated automation into their workflows processed about twice as many invoices per full-time employee than businesses with less automation.

The right invoice automation software will make all of the necessary documents easily available so that you can quickly conduct three-way matching when necessary.

   SAVING TIME

On average, it takes anywhere from 24 to 72 hours to process an invoice without automation. In some organizations, it’s not unheard of for invoice processing to take upwards of 12 days.

Automation not only completes many of the formerly manual tasks within invoice processing, but it makes referencing and tracking the process faster as well. Plus, automation helps create more efficient workflows for the tasks that support invoice processing. Together, these benefits help save a significant amount of time. In fact, according to a 2019 report, organizations that reported using automation in their AP departments were able to process about twice as many invoices per full-time employee than departments that didn’t leverage automation.

   SAVING MONEY

All unnecessary manual processes within a company waste employee time, which, in turn, wastes company money. Time lost on everything from manual data entry and delayed approvals to tedious three-way matching means money wasted, as well. Whether that’s in the form of lost productivity or due to late payments and their associated fees.

An automated platform can lead to financial savings not just by helping you avoid late fees, but also by helping you make your payments early enough to possibly earn discounts from vendors.

What’s Next?
Find the Right Invoice Automation Solution

Invoice processing is an essential part of every business. However, when performed manually, it’s time consuming, prone to error and unnecessarily expensive. Automating your business’s invoice processing system eliminates errors, cuts down on time spent on tedious tasks, makes approval routing more efficient, and saves you money. All in all, invoice processing is key to building more efficient accounts payable workflows. But to build the right automated invoices processing workflows, you need the right software.

MHC offers solutions like MHC BDA to help streamline all of the processes under your accounts payable umbrella. BDA automatically captures and processes all invoice data, makes tracking invoices easy, and integrates seamlessly with your business’s existing ERP. Learn more about how MHC can help you streamline your invoice processing today.

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