Invoices are an inherent part of any business, be it manufacturing or services. In addition, invoice processing is a huge task, especially manual invoicing. The surprising fact is that most businesses around the world still practice the manual processing of invoices. PDFs are still used as a format to send and receive invoices. A large amount of time and resources are required to complete the scan and capture of physical invoices. This causes delays in the invoice process and hinders cash flow visibility.
Businesses must understand that paper invoices are time-intensive and often error-prone. Cycle time for paper invoicing is usually very high. According to a Hackett Group, 2011 P2P Study and Ariba customer results, the cycle time for paper invoicing can take up to 22 days.
It is imperative that you comprehend the steps involved in paper processing to know why paper invoicing is wasteful and digitization/automation makes sense.
Steps in Paper Invoicing
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Even though the details might differ from firm to firm, most businesses go through the following steps when it comes to manual invoicing.
Suppliers would generate and print invoices and mail them to you, the buyer. Once you receive it, invoices need to be sorted and sent to the Account Payable (AP) department. Typically, AP staff manually key in the details into the system.
In order that payments are accurate and payment terms are correct and complete, invoices need to be verified. An AP staff usually reviews each invoice for the accuracy and completeness of the information. For instance, invoices need to be checked for errors such as missing Purchase Order (PO) numbers or incorrect account numbers. Then, invoices need to be validated to confirm that the billing amount matches the order amount and the quantity of goods/services rendered. Finally, the cost center should look at the tax treatment for the invoice.
Most often, invoices need to be approved by one or higher authorities prior to payment. AP staff need to route invoices to the appropriate personnel whose approvals might be required. The whole process needs to be monitored so that delays are minimal. If there are any disputes or discrepancies, the AP staff should call the supplier to clear the same.
The AP staff need to record the expenses in the General Ledger of the firm. They would then file invoices or transport them to archives for storage. This is done so that invoices can be retrieved when needed.
When all the required approvals have been received, the payment is processed by the AP system. The payment might be made through a paper check or Automated Clearing House (ACH).
3 Major Challenges in Manual Invoice Processing
Paper processing or manual processing of invoices presents a number of challenges that result in unnecessary costs while reducing efficiency. Here are the reasons why paper invoicing is a wasteful process:
It Is Labor Intensive:
Apart from the huge amount of time spent on paper handling and data entry, manual cross-reference for validity becomes necessary. This takes up quite a bit of time because AP staffs need to compare the invoice with a PO or contract. If that information is unavailable, then they might have to send it to some other authorities for cross verification. Depending on the size of the firm, there might be thousands or even millions of such invoices being sent around the firm. This is a waste of time for all personnel involved.
High Chances of Errors:
Typically, invoices are received through various means such as mail, courier, fax, email, and other formats. Multiple sources could mean confusion unless these invoices are entered into a single system. This has to be done manually leading to wasteful time and possible errors. Some of the errors include paying invoices without delivery of goods/services, paying the same invoice twice, duplication of invoices, paying incorrect amounts, and entering the wrong PO number.
Difficulty in Monitoring:
Paper invoices get lost very easily. Unless paper invoices are files or stored in the right place, there are chances of them getting lost in the sea of other papers. Monitoring each and every invoice is a tough task and AP personnel usually end up spending too much time tackling queries from suppliers about payment status.
Unlike the past, AP departments are considered as a key to the firm’s bottom line. They are no longer cost centers or processing centers. Therefore, AP staff just cannot afford to waste time and resources that manual processing requires. Most often the aim of the AP department should be to drive savings through various means such as penalty avoidance, discount capture and lower labor costs. They should also look at improving the efficiency with which staff can access payment/invoice information.
Two things would determine the efficiency of your AP department. One is the time taken to process the invoice and another the cost required to process the invoice. The study titled E-Payables Benchmark Series: AP Strategies for Success by Aberdeen found that the best-in-class companies spent an average of 2.8 days to process an invoice, at the cost of $2.18 per invoice. This was when the industry average was 15.8 days at the cost of $9.4 per invoice. How are these firms doing it? This is possible only through automation/digitization/e-invoicing.
Consider this: A study by Billentis titled E-Invoicing / E-Billing: Entering A New Era in June 2015 states that typically electronic and automated invoice processes can result in savings of 60-80% compared to traditional paper-based processing. The study also reveals that companies who make the switch to e-invoicing can normally expect a payback period of 6-18 months. The advantages of automation are:
- Instant information: When invoices are automated, anybody can access the invoice at any time from anywhere.
- Quicker Approvals: Since information on invoices is freely available, approvals for the same can be obtained quickly.
- Save costs: When payments are made on time, penalties are avoided and sometimes-even discounts are given by suppliers for those who pay in time regularly.
- Reduces Or Eliminates Errors: When the automated invoices are integrated with the AP system, workflow gets streamlined and information becomes easily accessible. More importantly, when data is captured, the possibility of errors becomes minimal. Also, the need for constant checking and monitoring of errors gets eliminated.
- Easier Audit: Auditing invoices in case of paper invoicing is very difficult. Sometimes invoices get misplaced or lost or even worse, they would have been destroyed by staff who might not know their importance. In the case of automation, all invoices are available at all points of time, making audit easier.
- Increases Efficiency: When less time is spent on data entry, cross-referencing, getting approvals, and filing papers, the efficiency of the AP staff goes up and they can spend time on other critical aspects of the AP process.
If you are sold on the idea of e-invoicing, you could consider investing in an Invoice Management Solution that would help reduce data entry costs, errors, and time-wasting discrepancies. If you do not want to invest in such a system, you could consider outsourcing your AP process to an expert Accounts Payable outsourcing service provider. The services offered include PO processing; matching PO to invoices, debit memos processing, and aging report preparation, among others. Choose a service provider who has considerable experience and expertise in the process.
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