Efficient invoice processing is an integral aspect of any organization’s financial operations.
To maintain strong vendor relationships and ensure the smooth functioning of business, finance teams must diligently manage the accurate and timely processing of invoices for payment.
This comprehensive guide will outline the essential steps that finance teams should follow when undertaking the invoice processing procedure.
Additionally, this article will discuss the advantages of automated invoice processing to save costs, eliminate errors, and enhance efficiency in your accounts payable processes.
What Is Invoice Processing in Accounts Payable?
The invoice processing procedure is the handling, verification, and payment of vendor invoices for goods or services rendered to a company.
It is the responsibility of the finance team to process invoices for payment within the specified terms and ensure that accurate amounts are paid to vendors.
A streamlined invoice processing system is crucial for maintaining a stable cash flow, avoiding penalties for late payments, and taking advantage of early payment discounts when available.
The Steps for Invoice Processing
Here’s the vendor invoice processing checklist:
1. Receive the Invoice from the Vendor
The first step in invoice processing is receiving the invoice from the vendor. Invoices can be received by the procurement department physically via mail, fax, or electronically through email. It is essential to have a centralized location or system for collecting all incoming invoices to ensure none are missed or misplaced.
2. Three-Way Match
Once the invoice is received, the finance team should verify it by conducting a three-way match. This process involves comparing the invoice with the purchase order (PO) and the goods received note (GRN) or services receipt.
The purpose of this step is to ensure that the invoiced items, quantities, and prices match those in the PO and the GRN. Any discrepancies must be investigated and resolved before proceeding with payment.
3. Approve the Vendor Invoice
Following the successful three-way match, the invoice must be approved by the appropriate personnel in the organization. Depending on the company’s internal controls, this may require approval from one or more individuals, such as a department head, a procurement officer, or a finance manager.
4. Proceed to Payment
To follow the invoice processing procedure, the finance team must first approve the invoice before proceeding with payment.
Payment system methods for processing invoices for payment may include:
It is essential for the finance team to adhere to the agreed-upon payment terms with the vendor to avoid late payment fees and maintain positive business relationships.
5. Record the Payment in the General Ledger
The final step in the invoice processing procedure is recording the payment in the company’s general ledger. This step ensures that financial records are up-to-date and accurately reflect the organization’s financial transactions.
Recording payments also helps with accurate financial reporting and ensures compliance with tax and regulatory requirements.
Why Should You Automate Invoice Processing?
Automating invoice processing can provide several benefits for businesses, including the following:
By automating invoice processing, companies can reduce or eliminate the use of paper invoices, contributing to a more environmentally friendly workplace and reducing physical storage requirements.
Automation reduces the risk of human error in data entry with OCR (Optical Character Recognition), ensuring that the correct amounts are paid to vendors, and reducing the likelihood of overpayments or duplicate payments.
According to the Association for Intelligent Information Management (AIIM), companies that automate invoice processing see a 50% reduction in time spent on invoice processing tasks. This improvement in productivity allows finance teams to focus on more value-added activities.
Automation can save companies up to 80% on invoice processing costs, according to the Institute of Finance and Management (IOFM). These operational expense savings come from reduced labor costs, lower error rates, and improved cash flow management.
Automated systems enable organizations to centralize their invoice processing, ensuring greater control over the entire process and reducing the likelihood of missed or misplaced invoices.
More Accurate Audit
Automation provides better visibility into the organization’s financial transactions and creates a clear audit trail. This accuracy simplifies the audit process and ensures compliance with regulatory requirements.
Invoice processing is an essential function for finance teams in any organization. By following a structured approach that includes receiving the invoice, conducting a three-way match, approving the invoice, processing the payment, and recording the transaction in the general ledger, businesses can ensure accurate and timely payments to vendors.
Furthermore, automating invoice processing offers numerous benefits, such as going paperless, eliminating errors, improving productivity, saving costs, centralizing processes, and providing a more accurate audit trail.
By implementing an automated invoice processing system, organizations can streamline their financial operations, enhance vendor relationships, and focus on more strategic financial activities.