Invoice processing is critical for an organization’s cash flow management. Accounts payable specialists are accountable for preventing invoice fraud, inaccuracies, and late payments. When invoices are processed correctly, businesses can improve their cash flow by obtaining more favourable payment terms, more competitive pricing, or even better discounts.
Numerous suppliers even offer early payment discounts to businesses that pay their invoices before the due date. As a result, the individual responsible for invoice processing must be highly organised and knowledgeable about the various payment terms.
How is procure-to-pay implemented?
There are many steps in the accounts payable process, which is also called procure-to-pay. The first step is when the invoice is received. The invoice is then entered into the Enterprise Resource Planning system (also called an ERP system), which is where the invoice is stored.
It’s not standard for accounts payable, but this is how it usually works when it’s done:
1. A purchase order is used to communicate with a vendor what the company is ordering. A copy of the purchase order will be sent to the accounts payable department, accounts receivable department, and vendor.
2. The receiving company creates a shipping document to record the receipt of the goods.
3. Once the vendor has completed the shipping documents and purchase order, the vendor sends an invoice to the company that received the goods. A vendor may put different information on an invoice. Invoice to payment (AR & AP) must have the following:
- The vendor’s and the purchasing company’s contact information
- Prices and other terms for the goods purchased have been agreed upon.
- The method of payment for the invoice, as well as the date the invoice was created and sent.
4. An accounts payable specialist or clerk performs two-way matching, comparing the invoice to the purchase order, or three-way matching, comparing the two documents to the shipping document. If items are back-ordered, the accounts payable specialist will make the necessary corrections in the ERP system and track when the items should be delivered.
5. Invoices that have been checked are sent to accounts payable manager or team for review and payment.
6. The accounts payable manager enters the invoice and schedules payment into the company’s general ledger system (typically an ERP). Typically, invoices are labelled “Net 30 days,” indicating that payment for goods is due 30 days from the invoice date. Suppliers may offer an early payment discount, such as “2/10 net 30,” which provides a 2% discount for payments received within ten days.
7. The accounts payable manager submits payment requests and anticipated cash flow to the chief financial officer for approval. This is frequently a Controller or Chief Financial Officer.
a. He or she then signs off on the payment and starts the process of making checks to send to the vendor.
b. Numerous accounts payable departments continue to manually process invoices. However, the associated costs vary considerably: paper, postage, staffing requirements, and a variety of other factors place the true cost of manual invoice processing between $12 and $30 per invoice.
c. This is before several other hidden costs associated with invoice processing are considered, such as missed early payment discounts, late fees, and accounting errors.
Invoice processing is broken
As a business grows in size, the problem will only get worse. Increased invoice volume can overwhelm an accounts payable department. Additionally, accounts payable departments are frequently understaffed, resulting in lengthy data entry sessions.
Even if alternatives to manual invoice processing are offered, the IT team will be hesitant to implement them in favour of legacy software and other processes. Many IT departments are overworked and don’t have the resources to take on more projects, so many technical projects are put on hold.
Purchasers may believe that Electronic Data Interchange (EDI) software can resolve the majority of these issues adequately. The reality is that EDI, for a variety of reasons, fails to significantly reduce the cost of invoice processing. As a result, these businesses waste thousands of dollars each year without making any significant improvements to their current business processes.
The ERP factor
Accounting software is critical to the success of any accounts payable department. Indeed, many organisations base their AP automation strategies on their ERP solutions’ integration capabilities.
ERP systems maintain a central repository for all accounts payable documents, including open purchase orders, shipping documents, invoices, and receiving reports. The best invoice processing software can use data from an ERP to improve business processes even more.
However, not all automation solutions are compatible with all ERP systems. It’s even worse when the invoice processing software exports a file that doesn’t work with the ERP.
Neither of these issues is likely to alleviate the accounts payable team’s headaches. However, when data is integrated seamlessly, it can be used to provide a comprehensive view of the accounting department.