Invoice Management: The Types + How to Master It

If you run a business or work in finance and accounts, you understand how important invoice management is. Handling many invoices can be complicated, time-consuming, and prone to mistakes, which can lead to late payments and harm your business’s reputation.

A report by Ardent Partners shows that 42% of accounts payable professionals see the high cost of processing invoices as a significant issue.

Invoice management plays a crucial role in the smooth functioning of businesses across various industries. Efficient invoice management ensures timely payments, accurate record-keeping, and effective financial control.

In this article, we will explore what invoice management is, why it is important, the biggest challenges associated with it, the process of invoice management, and the different types of systems to manage invoices – manual and automated.

We will also discuss the pros and cons of each approach to help you determine which one is better suited for your business.

What is Invoice Management?

Invoice management is an essential business function that supports the procurement process. The goal is to manage supplier invoices to ensure timely payments and verify the legitimacy of invoices.

The steps in invoice management are:

1. Receiving the invoice
2. Reviewing the details
3. Validating the invoice information
4. Approving the payment
5. Recording invoices and transactions in a database

In other words, invoice management is the process of handling invoices, from their creation and submission to the final payment and archiving. It involves activities such as verifying invoice accuracy, matching invoices with purchase orders or contracts, obtaining approvals, resolving discrepancies, and making payments. Effective invoice management ensures that businesses have a clear overview of their financial obligations and can maintain strong relationships with their suppliers.

Why is Invoice Management Important?

Invoice management is vital for several reasons. Firstly, it helps businesses maintain accurate financial records, which are essential for tax compliance, financial reporting, and auditing purposes.

Properly managed invoices also enable businesses to track their cash flow, monitor operating expenses, and make informed decisions about budgeting control and resource allocation.

Additionally, efficient invoice management enhances relationships with suppliers. Timely payments and clear communication regarding invoice status foster goodwill and trust, leading to more favorable payment terms and conditions for future transactions.

On the other hand, poor invoice management can strain supplier relationships, potentially resulting in delayed deliveries or even discontinued services.

The Biggest Invoice Management Challenges

Despite its significance, invoice management can pose several challenges for businesses:

1. Manual Processing: Handling invoices manually is time-consuming and prone to errors, leading to delays and inefficiencies. It requires significant human effort, often resulting in late payments, late fees, and strained relationships with suppliers.
2. Complex Invoice Data: Invoices often contain large amounts of information, such as line items, tax details, shipping costs, and discounts. Manually extracting and validating this data can be cumbersome and error-prone, leading to inaccurate financial records and delayed payments.
3. High Processing Costs: The cost of processing each invoice can be substantial, especially when relying on outdated systems and processes.
4. Invoice Matching Issues: Matching invoices with purchase orders and receipts can be challenging and often results in discrepancies that need resolution.
5. Approval Bottlenecks: In larger organizations, invoices may need to go through multiple layers of approval, causing delays and confusion. Coordinating the approval process manually can lead to bottlenecks and inefficiencies.
6. Compliance Issues: Keeping up with regulatory requirements and ensuring compliance in invoice processing can be difficult.
7. Lack of Visibility: Limited visibility into the invoice processing workflow can make it hard to track the status of invoices and identify bottlenecks.

What is the Process of Managing Invoices?

To address these challenges, businesses can adopt different approaches to invoice management: manual and automated. Let’s explore both methods in detail.

Manual Process

In manual invoice management, the entire process is handled manually, involving physical paperwork, manual data entry, and manual routing for approvals. This traditional approach is still prevalent in many organizations, especially smaller ones with fewer invoices to manage.

Manual invoice management requires businesses to receive paper invoices physically or via email. The invoices are then manually reviewed for accuracy and matched with relevant purchase orders or contracts.

The data from the invoices are entered into the accounting system manually, and approvals are obtained through manual routing or physical signatures. Finally, payments are made manually through checks or bank transfers.

Automated Process

Automated invoice management, on the other hand, leverages technology and software to streamline the entire process. With automation, businesses can eliminate manual data entry, reduce errors, enhance efficiency, and gain real-time visibility into their invoice workflows.

In an automated system, invoices are received electronically through email or electronic data interchange (EDI). Optical character recognition (OCR) technology is used to extract data from invoices accurately and automatically.

The data is then validated and matched with purchase orders or contracts using automated workflows. Automated approval workflows can be configured based on your organization’s approval matrixes. This will ensure that invoices are routed to the right approvers based on predefined rules and hierarchy, accelerating approval processes.

Once approved, the system generates electronic payments or initiates the necessary steps for payment processing.

Manual vs Automated Invoice Management: Which One Is Better?

The choice between manual and automated invoice management depends on various factors, including the size of the business, the volume of invoices, and the available resources. Let’s compare the two approaches to help you determine which one is better suited for your business.