What is invoice processing? A complete guide

Key takeaways

• An invoice is a business document communicating detailed information about a transaction or sale between a buyer and a seller.

• While manual invoice processing is time-consuming and prone to human error, automated invoice processing automates the most critical and time-consuming steps, such as data extraction, invoice coding, and approval routing. 

• Automated invoice processing solution reduces payment processing times, provides more accurate data, enhances visibility, improves vendor relationships, and simplifies reconciliation.

Invoice processing can be a significant time drain, from managing your cash flow to ensuring your vendors are happy with timely payments. If you're focusing on growing your business, it's important to choose a reliable and efficient invoicing solution.

The right platform will easily handle invoicing from global suppliers, multi-currency transfers, and overall global employee and company spend management as part of an end-to-end financial solution.

Let’s explore what invoice processing is and the steps businesses can take to reduce the time and effort their teams have to spend managing it.

What is an invoice?

An invoice is a business document communicating detailed information about a transaction or sale between a buyer and a seller. An invoice’s main purpose is to request payment for goods or services that a seller has provided to a buyer.

Invoices typically include several information items:

• The seller’s information: including the name, address, and contact information of the seller, often including identification numbers like a tax ID in the US, a Value Added Tax (VAT) number in the EU, or an Australian Business Number (ABN) in Australia.

• The buyer’s information: including the name, address, and contact information of the buyer of the goods or services.

• The date of issue: the date the invoice was issued.

• The invoice due date: the date the buyer must pay the invoice by.

• Description of the goods or services: including detailed information about what the seller has provided, including the quantity, cost, and total charges.

• Total amount due: the total amount the buyer needs to pay the seller.

• Payment terms: any terms and conditions that the buyer and seller have agreed on, such as how the payment will be made and whether there will be any discounts for early payment or penalties for late payment.

Invoices play a critical role in bill payments and the wider accounting process. They act as an official legal record of sale and are important for managing accounts, tax compliance, inventory tracking, and ensuring businesses are tracking their cash flow and overall financial health properly.

What is invoice processing?

Invoice processing is a business function usually performed by an organization’s accounts or finance department. Let’s examine a traditional invoice processing workflow that relies on manual work.

• The buyer receives the invoice: Invoices are usually received via email or a digital automated invoicing system and are sent to the finance department.

• The finance team verifies and validates the invoice: They ensure the invoice is correct and includes the seller's details, invoice number, date, and total amount due. They also check that the goods or services provided match the purchase order.

• The team codes the invoice: They assign the appropriate general ledger codes to the invoice to categorize the expense. The team also determines if the invoice needs to be allocated to a specific department or project.

• The team sends the invoice for approval: They forward the invoice to the relevant manager or department for approval. The manager or department ensures it aligns with the budget and authorizes it for payment.

• The team prepares the invoice for payment: They enter the approved invoice into the accounting system and schedule it for payment according to the due date.

• The team pays the invoice: They process the payment via cheque, bank transfer, electronic funds transfer like Automated Clearing House (ACH), or other methods. They record the payment and update the accounts payable ledger.

• The team files and archives the payment: They store the invoice and related documents in the general ledger for future reference or auditing purposes.

How does invoice processing work?

You can process invoices via both paper-based workflows and automated methods using invoice processing automation software. Automated accounts payable processes and cross-border payment solutions offer global businesses a wide range of benefits, including less room for human error, faster payment processing, more accurate records, streamlined approval workflows, and improved financial reporting insights.

How manual invoice processing works

In paper-based invoice processing workflows, accounts payable teams physically receive invoices and manually review them for accuracy, including the vendor’s information and payment amounts.

They then code the invoice to the appropriate account or general ledger code and send it to the relevant manager for approval. Once the invoice is approved, they make the payment, often by bank transfer, electronic funds transfers like Automated Clearing House (ACH), or cheque. The finance department then manually enters the invoice’s data into the accounting system and files a physical paper copy for record-keeping.

This time-consuming process leaves businesses open to human error, lost invoices, slow approvals, and physical space being taken up by paper records.

How automated invoice processing works

Automated invoice processing revolutionizes the manual process. It eliminates tedious data entry tasks by automating the most critical and time-consuming steps, such as data extraction, invoice coding, and approval routing.

Using technologies like Optical Character Recognition (OCR) and integrations with other small business accounting software, automated invoice processing removes inefficient processes to save time. Here’s where automated invoicing can improve processes:

Teams receive invoices by uploading or emailing them

Your staff likely spends hours every week gathering, chasing up, organizing, and scanning invoices into your current invoice processing system. Automated invoice processing gives your team this time back to focus on more strategic tasks by making it easy for them to upload or email bills to the platform.

OCR captures and extracts data automatically

Once your automated system receives your invoices, Optical Character Recognition (OCR) technology will capture and extract the invoice data. This means no more tedious manual data entry and fewer errors.

APIs are used to automate general ledger coding

Integrating an Application Programming Interface (API) with your invoice processing software lets you synchronize your invoices with your financial system. They’ll automatically be categorized and coded according to your general ledger.

Three-way matching is automated

Financial teams usually follow the three-way matching process to prevent fraud. This process involves verifying an invoice against the purchase order and the goods receipt to ensure that only authorized purchases are made. Approving invoices manually can become very time-consuming.

Automated invoice processing software completes three-way matching for you by automatically reading invoice data and then searching your financial ecosystem for matching data in Purchase Orders (POs) or other documents.

Approval routings are automated

Manual invoice approvals can often involve several email ‘forwards’ to ensure the right person approves the invoice and then several follow-ups to make sure they get it done. Automated invoice processing streamlines approval routing entirely, following custom approval workflows to align with company spend policies, increase oversight, and reduce risk.

Global payments are automated

The best automated invoice processing software will make it easier and more cost-efficient to pay your vendors across the globe. It lets you pay hundreds of bills to vendors across countries and currencies in one go – without entering payment details into your bank.

Benefits of automated invoice processing

Automated invoice processing offers a range of operational success benefits, allowing you to streamline your finance function and grow faster and more sustainably.

The best choices for automated invoice processing will also offer businesses access to other solutions, such as corporate cards and expense management tools, as part of an end-to-end financial management platform.

Reduced processing time

With automation, invoices are quickly captured, validated, and routed for approval using custom multi-layer workflows, speeding up the entire process. This efficiency saves teams time and reduces manual labor costs, improving the bottom line.

More cost efficiency

Automated solutions built for global businesses save you money by bypassing foreign transaction fees when you pay invoices from multi-currency balances. For example, with Airwallex, you can hold multiple currencies in your Global Account, only converting funds when needed. When you convert funds for invoice payments, you can access 60+ trade currencies at interbank rates and save up to 80% on FX fees.

More accurate data

Automation minimizes the potential for human error in data entry, ensuring accurate information across systems. This reduces costly mistakes, such as overpayments or missed discounts, and ensures reliable financial records. Accurate data ensures that strategic decisions are made based on solid financial data.

Enhanced visibility into financial data

Fragmented and disconnected systems make it difficult for finance teams to gain a consolidated view of their global spend.

With automated systems, businesses gain enhanced visibility into their accounts payable so they can control their global expenditure. Real-time tracking and reporting allow for more accurate management and analysis of financial data. This visibility also helps ensure compliance with internal controls and regulatory requirements, as automated systems can be programmed to follow strict guidelines and audit trails.

Smoother relationships with vendors

Finally, automated invoice processing fosters improved ongoing relationships between vendors and businesses. Faster, more accurate payments help build trust and strengthen partnerships with suppliers, ensuring timely settlements that could lead to‌ better future terms (and negotiating power).

Easier reconciliation

When integrated with accounting software, automated invoice processing makes things easier for teams during tax time. By importing data like charts of accounts and syncing bills and payments back to accounting software, reconciliation is easier and faster for finance teams to manage.

Invoice processing best practices

Optimizing invoice processing can save finance teams a lot of time, reduce accounting and data entry mistakes, and support organizations to scale faster.

• Adopt invoice processing automation software: Take repetitive tasks like entering data, matching invoices, and routing them for approval off your team’s plate. Choose a system that works well with your existing accounting tools for a seamless experience.

• Standardize invoice formats: Ask your vendors to use a consistent format to capture data faster and more accurately.

• Set up clear approval workflows: The best invoice processing software will allow you to customize invoice approvals to match your business needs. You can create multi-layer approval flows based on bill currency and amount thresholds and set specific approvers or approver roles at each layer to ensure the right people are reviewing and approving. This workflow keeps things moving quickly and reduces bottlenecks.

• Conduct periodic reviews: No matter how automated and streamlined your invoice processing workflow is, it’s still important to audit it regularly to help you spot any inefficiencies, fix errors, and ensure everything’s on track.

• Communicate with your vendors: Make sure they know exactly how to submit their electronic invoices to you and are kept in the loop about any changes. Good communication can prevent any misunderstandings with your suppliers.

Automate your invoice processing with Airwallex

Airwallex Bill Pay lets you upload, approve, pay, and reconcile invoices from a single platform. You’ll reduce costs, improve accuracy, and free your finance team to focus on more strategic work. And, because it integrates with popular accounting software like NetSuite, Xero, and QuickBooks, and supports global payments at market-leading FX rates, you can ensure your operations stay efficient as you scale.

Our solution also integrates with other spend management tools, such as Expense Management and Corporate Cards, giving you total visibility into your company and employee spending. Thus, you can manage your entire global cash flow from one place.

Frequently asked questions (FAQs)

What's the difference between an invoice and a bill?

An invoice is a detailed document a seller sends to request payment for goods or services provided, usually with payment terms and due dates. On the other hand, a bill is a simpler request for payment, often used in everyday transactions, indicating that payment is due immediately.

How long should I keep processed invoices?

Processed invoices should generally be kept for at least seven years to comply with tax and legal requirements. This ensures businesses have a record for auditing, past financial analysis, and any potential disputes that may arise in the future.

What is three-way matching in invoice processing?

Three-way matching in invoice processing involves comparing three key documents: the purchase order, the goods receipt note, and the invoice. This comparison ensures that the details on the invoice match the agreed-upon terms in the purchase order (PO) and the actual goods or services received. By performing this match, businesses can avoid overpayments, detect discrepancies, and ensure proper financial control of their payments.

Can I process invoices electronically even if my vendor sends paper invoices?

Yes, you can process invoices electronically even if your vendor sends paper invoices by scanning or digitizing them. Many automated invoice processing systems can capture the data from scanned invoices using Optical Character Recognition (OCR), making it easy to process them electronically.