What is Invoice Processing? A Guide To Challenges and Solutions

Read on to learn more about the challenges AP teams face when it comes to processing invoices, modern solutions to address those challenges, and what the future holds for invoice processing innovation.

In this article, we’ll address:

• Invoice processing definition
• Key challenges in invoice processing
• Technological solutions to invoice

What is invoice processing?

Invoice processing consists of the steps it takes to process an invoice from when it is received to when it is paid. It includes receiving the invoice, matching it to a PO, verifying goods and services, resolving any discrepancies, and remitting payment.

Invoice processing is an essential business function that is typically handled by accounts payable (AP) teams but also involves finance teams, vendors, and suppliers. Efficient invoice processing streamlines the payment cycle and reduces the risk of errors, duplicate payments, or fraudulent activity. It ensures suppliers get paid on time, leading to stronger supplier relationships and preventing supply chain disruptions. It also empowers businesses to make the most of their cash positions, ensures accurate financial reporting, and aids in upholding compliance.

Critically, an efficient and optimized approach to invoice processing has the power to turn your AP team into a strategic asset that helps your company grow through more informed decision-making. As an added bonus, you can stop throwing more headcount at the problem and reduce the burnout of your AP employees.

Additionally, proper invoice processing aids in compliance with regulatory requirements and enables accurate financial reporting, which is crucial for informed decision-making and maintaining the financial health of the organization.

Steps in the invoice processing cycle

1. Initiate the purchase order for goods or services: An employee or team creates a purchase order (PO) detailing the goods or services required, obtains necessary approvals, and places the order with a chosen supplier. The supplier generates and sends an invoice to the purchasing organization.
2. Receive the invoice: The AP department receives the invoice through one of multiple channels. These might include a supplier portal, email, or physical mail. Technologies such as Optical Character Recognition (OCR) can assist in converting paper or PDF invoices into digital formats for streamlined processing.
3. Match the invoice: The invoice is matched with the corresponding PO to verify that the goods or services received align with the agreed-upon terms. Depending on the organization, type of goods or services, or size of purchase, additional matches may be required. Two-, three-, and four-way invoice matching compares the invoice to the PO as well as additional documentation such as receipts and inspection reports.
4. Manage exceptions and resolve discrepancies: Even the most diligent teams will encounter exceptions or discrepancies in the invoices they process. These may include cases where there is no PO because it was forgotten or expedited. Errors in tax information sometimes occur, such as a wrong or missing address. Other times, an invoice may land outside preset tolerance levels, as might be the case if a vendor raises their prices by 20%. AP teams work to resolve these cases through communication with the vendor or internal stakeholders. With invoice automation, teams can establish tolerance thresholds to allow low-risk discrepancies to continue processing or flag issues that fall outside those limits.
5. Approve the invoice: Once matched and resolved of any errors or discrepancies, the invoice may be approved for payment. This may involve one or multiple approvers.
6. Make payment: The AP team initiates the payment process for the approved invoice. Payments may be processed through banking systems, a supplier portal, credit card, or other approved payment methods.
7. Document the audit trail: Throughout the invoice processing cycle, each step should be documented to create a complete, connected audit trail. Maintaining an audit trail ensures transparency, accountability, and compliance with internal policies and external regulations.

Key challenges in invoice processing

Invoice processing, while essential for business operations, can cause headaches for purchasers, suppliers, and AP teams alike. This is especially true for organizations that continue to process invoices manually without the help of invoice automation.

Here are some of the most common challenges AP teams face when it comes to invoice processing:

Manual errors

Humans are prone to error. When teams manually process invoices, it often increases the likelihood of mistakes such as data entry errors or misinterpretation of information. These errors can cause discrepancies that slow down invoice processing, reduce AP team efficiency, and lead to late or inaccurate payments to suppliers — creating a domino effect of negative impacts.

Delayed or missed payments

No one likes being behind on payments — or on getting paid. Slow, inefficient, or error-prone invoice processing often leads to late or missed payments to suppliers. This could result in financial penalties such as late fees as well as strained relationships with suppliers. Over time, it could also impact an organization’s reputation and even cause expensive supply chain disruptions.

Fraud

The risk of fraud looms large in organizations that lack accurate and efficient methods of processing invoices. Even non-malicious, accidental mistakes can be costly. In addition to streamlining the entire invoice processing cycle, automation can shore up gaps in data monitoring, invoice matching, and documentation that leave companies vulnerable. Artificial intelligence (AI) and machine learning (ML) can go further to detect and flag even the most inconspicuous of fraudulent activity.

Compliance

Keeping up with rapidly evolving compliance laws and regulations is no small feat, especially for companies operating across global markets. Failing to adhere to local tax codes and B2B e-invoicing mandates can lead to legal consequences, operational impacts, and expensive fines.

High employee turnover

Repetitive manual tasks, frustrating workflows, and demanding quotas are a recipe for low morale among your AP team. This can lead to high turnover, costlier operations due to hiring and onboarding, and further processing errors. Replacing these manual processes lets teams shift their focus to more meaningful tasks that help grow the business and provide more satisfaction.

Technological solutions for efficient invoice processing

The latest innovations and technological solutions aimed at enhancing the efficiency of invoice processing embrace automation, AI, and advanced analytics to streamline workflows, mitigate risks, and empower AP teams to become strategic assets to your organization.

Automation and invoice processing software

A cornerstone of modern invoice processing, invoice automation software offers a comprehensive solution to many of the challenges encountered in traditional invoice processing methods.

It automates manual, repetitive tasks such as data entry, invoice matching, approval workflows, and more. Not only does this reduce manual errors, expedite processing times, and boost overall accuracy, but it also unlocks new value from your AP team. Freed from manual task lists, they can focus on more strategic initiatives that add value to the overall business. This includes finding and taking advantage of early pay discounts, strengthening relationships with suppliers, and providing clear, comprehensive insight into the organization’s true cash position.

Importantly, invoice automation also ensures compliance with regulatory e-invoicing mandates.

AI and invoice processing

Artificial intelligence (AI) represents the next frontier in advanced invoice processing. AI can analyze massive volumes of data with unprecedented speed and accuracy, and the benefits are immense.

AI-powered insights can detect otherwise hidden patterns, anomalies, and future trends based on a company’s invoice data. AI-powered fraud detection is a prime example. By leveraging machine learning algorithms, AI systems can detect fraudulent activities, such as duplicate payments, with a high degree of accuracy. This helps organizations mitigate financial risks and safeguard against losses.

Adapting to ever-changing compliance requirements can be a drain on any AP team. AI allows for a proactive and hands-free approach to staying on the right side of the law by continuously monitoring and adjusting to tax and legal changes, so organizations avoid penalties and reputational damage.

Finally, AI offers powerful opportunities to provide valuable benchmark data and prescriptive insights — helping companies elevate their performance when it comes to invoice processing. For example, say a company’s average invoice processing time is 20 days. AI-driven insights based on industry benchmark data can reveal that peers or competitors are processing invoices in 10 days. AI prescriptive insights can then offer recommendations to help the company reduce its processing time to match — or beat — the competition.