Key Steps in AP Invoice Processing Decoded

Cash flow keeps a business alive. It’s all about the money coming in and going out, and how you manage these flows can make or break your success. A big part of handling your outflow involves dealing with invoices whenever you buy something. 

Here’s how it usually goes: You buy a service or a product, and the seller sends you an invoice. Your finance team logs this under accounts payable. When the bill is paid, that amount moves from accounts payable, gets noted as an expense like utilities, and is deducted from your bank balance. 

This whole routine is part of what’s called the accounts payable or AP process—it’s basically how businesses keep track of and pay their bills. 

Stick around to get the lowdown on AP invoice processing steps, challenges, and how you can start streamlining your AP processes today. 

Understanding AP Invoice Processing 

Handling invoices means keeping track of, managing, and paying for everything your business needs—from software to raw materials and services. It’s an essential part of what’s called the procure-to-pay (P2P) process, which typically involves a whole department in larger companies, known as accounts payable. 

Think about it like this: If your marketing team decides they need new software, the procurement team will go out, find the best fit, and make a purchase. The invoice for this software then goes to your accounts payable folks. Once it’s paid, your marketing team is all set to use the new software. This complete flow is referred to as Source-to-Pay. 

Or, let’s say your manufacturing team needs a bunch of components. They order, the shipment arrives, and the invoice lands in the lap of your accounts payable department. They handle the payment within the necessary timeframe. That’s your Procure-to-Pay process in action. 

Step-by-Step Breakdown of AP Invoice Processing Workflow 

1) Receiving the Invoice 

When an invoice hits the accounts payable department, the ball starts rolling. This formal request, often referred to as an invoice to pay, kicks off the payment process. 

Invoices can land in your lap in several ways: 

• Paper documents via mail 
• Email attachments 
• Faxed documents 
• Electronic formats via AP software 

Regardless of how they arrive, having a centralized system to handle all invoices consistently is crucial. Different workflows can lead to inefficiencies, increased mistakes, and more confusion. 

It’s also essential to have a solid process in place to quickly and accurately gather data from these invoices. The AP team needs to check details such as: 

• Invoice date 
• Contact information for both parties 
• Description and quantity of the product or service 
• Pricing and the total amount due 

Sometimes, the invoice includes other payment details like terms of sale or shipping info. All this data must be cross-checked with other documents to confirm the invoice’s accuracy before moving to the next step. If there are discrepancies, the AP team needs to get in touch with the vendor right away. 

Note that some vendors might send a pro forma invoice, which is more of a preliminary quote than an actual bill and isn’t processed in the same way as a regular invoice. 

2) Recording and Matching the Invoice 

Once accounts payable gets an invoice, the first thing they do is record the details and line it up with the necessary paperwork for approval. Every invoice is tagged with a general ledger (GL) code and needs to be matched with its purchase order, any delivery receipts, and sometimes an inspection report, if that applies. 

The charged amount on the invoice should match the amount on the purchase order. If the numbers don’t add up, accounts payable will need to sort it out with the vendor before moving forward. Since the purchase order is created first, it’s usually the go-to document for accurate figures. 

Here’s what the accounts payable team focuses on to make sure everything checks out: 

• The fees, totals, and taxes to make sure the math adds up for tax amounts, shipping fees, and any other charges. 
• The overall total is double-checked, and they make sure it’s assigned the right general ledger codes for the right accounting period. 

Double-checking the Order: They also verify the invoice to make sure what’s being charged was actually ordered and received, checking everything from the number of items to their quality and the price that was agreed on. 

Looking Out for Fraud: Every invoice also gets a fraud check. This means making sure the vendor is on the approved list and watching out for any signs of double-billing or repetitive line items across different invoices. 

They also look into: 

• Who the vendor is 
• The terms of payment 
• What the invoice is actually for 
• The right category codes for accounting 

For companies still working with paper invoices, keeping things organized is crucial. They should have an easy-to-navigate file system and keep several copies of each invoice to handle any future disputes easily. 

Keep in mind, manual data entry can lead to mistakes like typos or duplicated entries, which aren’t just annoying—they’re costly. Switching to digital methods can save a lot of time and money, so it’s worth considering an upgrade to streamline the verification steps in your accounting. 

Discover practical strategies to measure and cut down your AP processing costs—read the full blog now! 

3) Approving the Invoice 

Once the invoice details are checked and ready, the next step is getting approval. How this is done can vary widely depending on the company’s size, the industry, the type of invoice, and the company’s own rules. Some invoices zip through an automatic approval process, while others require a thumbs-up from one or more top execs before payment can go out. 

Back in the day, approving invoices could be painfully slow. Paper invoices might have shuffled around in interoffice mail, landing in someone’s physical inbox, and then, we moved on to emails with digital invoices attached. However, neither method was particularly efficient, and both were prone to causing delays, miscommunications, or invoices just getting lost in the shuffle. 

Automating the approval process is a game-changer. It keeps everything within a set system and on a clear schedule. This way, everyone in the accounts payable department can track how long an invoice has been pending, see if it’s stuck with someone, and understand what’s needed to move things along to payment. This transparency and speed help avoid the late fees and frustrations of the old ways. 

4) Processing and Submitting the Invoice for Payment 

After an invoice gets the green light, it’s payment time. To settle up with a vendor, the accounts payable team will need a few key pieces of information: 

• The total amount due 
• Vendor contact details 
• Payment identifiers such as an account number or invoice number 
• Accepted payment methods 

Not long ago, checks were the standard way to pay vendors, but now, ACH or wire transfers are more common, particularly for companies dealing internationally. 

Once an invoice is approved, it’s lined up for payment according to the terms agreed upon with the vendor. Sometimes, there’s a chance to save a bit by paying early. For instance, terms like “1% net 10” mean that if you pay within 10 days, you can take 1% off your total bill.  

Using AP automation software can streamline this whole process, making it easier to snag those early-payment discounts and improve your bottom line. 

5) Archiving the Invoice Data 

After the payment goes through, it’s time to wrap everything up neatly. This means recording all the final details, like making sure the payments show up as debits in the general ledger and handling any other bookkeeping that needs attention. 

All the related paperwork—such as invoice copies, purchase orders, and shipping receipts—is stored in a secure digital space that’s easy to search. This setup keeps everything organized and ready if you ever need to pull something up for an audit. 

Keeping track of what’s been paid out is super important for making sure your balance sheet is spot-on. 

Challenges in Invoice Processing 

As your business grows and handles more vendors, keeping up with invoices can get tricky. Here’s a rundown of typical snags you might hit and how to steer clear: 

1) Lost Documents 

The most frequent headache in invoice processing is misplaced essential documents needed for vendor payments. This issue tends to pop up in fast-growing companies dealing with numerous suppliers across different payment platforms. A solid system to keep all documents—from paper to PDFs—organized is critical to avoid a total workflow mess. 

2) Errors in Data 

Each invoice carries crucial details like tax IDs, prices, and delivery dates. When these invoices come in various formats, it’s a real pain to pull all the important data accurately. Common slip-ups include: 

• Putting down the wrong client name 
• Fuzzy descriptions of what’s bought or sold 
• Missing critical deadlines 
• Currency mix-ups 
• Miscalculations 

When things like this go wrong, it often means sending the invoice back for corrections, which can reset your entire process. 

3) Invoice Limbo 

It’s often unclear where an invoice is in the approval process, especially with several people involved. Questions such as “Where’s the invoice now?”, “Who’s approving it?”, and “When’s the payment going out?” can create a lot of confusion if your workflow isn’t clear. 

4) Mishandled Routing 

With invoices coming in from different vendors every day, they all need to be sorted and routed for processing. Even the sharpest AP teams can drop the ball here. Misrouted invoices end up on the wrong desk or buried in an inbox, leading to needless repeat steps and wasting precious time—especially tough when deadlines to close the books are looming. 

Explore how to maximize the benefits of accounts payable outsourcing services with actionable insights and proven strategies—read the blog for all the details! 

10 Best Practices For AP Invoice Processing 

Sticking with outdated manual invoicing methods can bog down your business when everything else is zipping along digitally. These methods can lead to hold-ups in approvals, errors from typing things in by hand, and trouble keeping up as your business grows.  

To turn these headaches into opportunities, many businesses are revamping how they handle invoices. By adopting some smart strategies and best practices, you can improve your financial health, build stronger relationships with vendors, and pave the way for growth.  

Here’s a straightforward guide to getting it right: 

1) Centralize Invoice Management: Make sure all invoices come to one place, no matter how they arrive—mail, email, or fax. This avoids any invoices slipping through the cracks and simplifies management. 

2) Clarify Approval Processes: Set clear rules for who approves what, ensuring invoices get processed quickly and without unnecessary delays. 

3) Use Three-Way Matching: Match purchase orders, receipts, and invoices to make sure you’re billed correctly and have received what you ordered. 

4) Automate What You Can: Invest in software that handles the grunt work—like pulling data from invoices, checking for errors, getting approvals, and making payments. 

5) Review and Negotiate Payment Terms: Regularly check and renegotiate your payment terms with vendors. Early payment discounts or better terms can help manage your cash flow better. 

6) Keep Good Vendor Relations: Stay in touch with your vendors. Quickly sort out any issues with invoices and always pay on time. 

7) Organize Your Records: Keep a tidy record of all paid invoices. You should be able to find any invoice easily, which is crucial for managing your finances and for audit times. 

8) Regularly Audit Your Processes: Look over your invoice processes regularly. Identify any slow spots or errors and fix them. Also, make sure you’re in line with all policies and regulations through regular audits. 

9) Train Your Team: Make sure everyone who handles invoices knows what they’re doing. Regular training sessions can help keep everyone up to speed. 

10) Prepare for Growth: As your business grows, so will your invoices. Plan for this by choosing systems that can scale with you and reassess your needs often. 

What’s the Bottom Line?  

Cutting costs on tasks that don’t make money directly gives a business a better shot at growing. Accounts payable isn’t a money-maker, so it’s smart to look for other ways to bring value. Every part of a business, including finance—not just sales and marketing—should think about how tech can make things better. 

For an accounts payable team, being efficient means getting through invoice piles quicker, keeping a closer eye on cash flow, making fewer mistakes, and ditching repetitive tasks. The faster they hit these targets, the quicker the business can expand. 

Leaders might want to keep some old processes, but adding tech like optical character recognition, automated approvals, and quick reconciliations can really sharpen up operations. Reducing costs, working smarter, and saving time—automation can tackle all these challenges head-on. 

Originally published Dec 02, 2024 04:12:31, updated Dec 02 2024

Topics: Accounts Payable Automation, Accounts Payable Optimisation