What are Invoices?

An invoice is a commercial document issued by the seller to the buyer before or after fulfilling the buyer’s order. The invoice contains the details of the service offered or goods delivered to the buyer and the prices of those services/goods at which the buyer agreed to pay earlier.

 In simpler terms, an invoice is nothing but a request of payment by the seller for the service provided or goods delivered to the buyer.

Invoicing Processing

Invoice processing starts when an invoice is received and ends after the payment to that invoice is made. It is nothing but the handling of invoices by the accounts payable team. Before explaining the invoice processing, let’s first discuss related key terminologies:-

What is Purchase Order(PO)?

A purchase order (PO) is issued by the buyer to the seller. It contains the list of products and their prices at which the buyer agreed to pay the seller.

In general, there are two types of invoices based on the purchase order.

i) PO-based invoice

Quite often businesses are aware about the prices of key products and services which are included in the company's budget. Whenever there is a demand for any specific service or goods, the business sends the PO to the vendor. This PO is the official document given by the customer against which invoice is matched for the payment after delivery of service/goods.

 ii) Non-PO-based invoices

Non-PO based invoices are also called expense invoices. These invoices arise because of the payments outside the budget. State, federal taxes, permits fee, etc., are examples of expense invoices.

How Does Invoice Processing Work?

Invoice processing plays a major role in the business. Without effective invoice processing, there is always a chance for late payments, missing invoices, payment dues, and frauds. With a growing business, invoice processing becomes much harder to handle with the manual process, resulting in various errors. Let’s see how a typical invoice processing works.

Step 1: Receive Invoice

Invoices may be sent in a paper or pdf format. Once an invoice arrives, the account payable clerk checks and ensures that the received document is an invoice.

Step 2: Verifying the Information

Later, an account payable clerk classifies and sorts the invoice based on the type or department. After invoice classification, it is sent to the account payable processor responsible for the invoice. The invoice is matched against the purchase order to confirm that the amount is paid accurately. The amount in the invoice is compared with the goods received to avoid discrepancies.

Step 3: Data Entry

After verification, the information in the invoice is entered into the accounting system. It can be done manually or automated. Entering the data manually consumes a lot of time. The human error involved in this process is high.

Step 4: Approval and Payment

The invoice is then sent to a group of individuals who are responsible for the approval process. The payment is processed as soon as the approval process is completed.

2-way / 3-way Matching Invoice Processing Methods

Matching invoices is crucial in invoice processing to avoid discrepancies. If the invoice is matched with the purchasing order, then it is called a 2-way matching process. If the invoice is matched with the purchasing order and goods/services receipt, then it is called a 3-way matching process.

The 3-way match process is more efficient but it takes a lot of time when done manually.

Fields in an Invoice

 A typical invoice states the below details:

• Invoice Owner
• Subject - This indeed tells that the particliar document is an invoice
• Sales Order
• PO (Purchase-Order)
• Taxes (GST, VAT, Excise duty, etc.)
• Date of the Invoice
• Sales Commission
• Account Name

• Contact Name
• Status
• Created By
• Modified By
• Billing address/Shipping address
• Quantity/Price/Product name
• Total
• Terms & Conditions
• Description

Invoice can be processed manually or the process can be automated. It depends on the number of invoices you’re processing a month. If you’re processing thousands of invoices per month, it’s high time to look for an automated solution. Let’s see how automated invoicing solution has an upper hand over manual processing:- 

Manual vs. Automated Invoice Processing‍

Automated invoice processing is a method in which the process of data extraction from invoices and populating the extracted information into an accounts payable system is automated. If used effectively, automated invoice processing can save a lot of time and money for a company’s account payable department. Automating invoice processing not only decreases the manpower but also improves the accuracy and invoice processing speed.

Invoice processing software such as Docsumo.com can automate  key functions like data entry, 2 way matching, and processing of documents. The process involves automation of price matching, managing purchase orders, and streamlining the workflow.

Automated invoice processing workflow

Automating Invoice Processing involves four phases. In this chapter, we’ll talk about all these phases in detail. Let's get started:-

Phase - 1: Capturing Invoice

The received invoice can be in different formats (paper format, pdf, email or photocopy). With the help of intelligent data capture mechanisms and AI, data is extracted from these invoices. After capturing the data, the next step is data entry and coding.

Phase - 2: Data Entry and Coding

In this phase, the AP automation tool feeds the extracted data into the ERP system. The automation tool also captures line items for GL coding.

Phase - 3: Validation

After data entry and coding, the software applies a 2-way or 3-way mechanism to validate the data. After successful verification, the next phase would be approval routing. But if there is an issue in the validation process, the system routes it to the AP for manual verification.

Phase - 4: Approval Routing

After validating, the invoice is forwarded for approval before the payment is made. During the approval routing, the processed documents are auto-assigned to respective team members.  ERP systems are used to manage the notifications.

Summing it up, the automated invoice solution works in these steps:- 

1. The invoice (in any format or layout) arrives. 

2. The automation solution extracts invoice info. 

3. The program later validates the details with purchase orders & delivery notes. 

4. Once confirmed, it is sent for approval

Now, let us have a look into different data capture methods used and which one might suit you.

Data extraction methods from invoice

i) Template Based Optical Character Recognition (OCR) method

OCR uses pattern recognition to extract the data from invoices. It accurately captures the data from invoices. This technology is most suitable for areas where there are document format changes are less (ex- postal services, sorting systems, business with less or the same vendors). This method is suitable for companies that have less number of vendors. The reason is that OCR has to be coded with rules to detect a particular type of invoice. As the number of vendors increases, it gets difficult to develop templates as it is a time-consuming process.

 ii) AI-Based or Cognitive Extraction

AI tries to mimic the human decision-making process with the help of machine learning and deep learning. In the cognitive data capture method, artificial intelligence is used to automate invoice processing.  

Cognitive data capture method is suitable for a company that receives invoices with different formats. This is a self-learning technology. With the increase in the processed documents, the accuracy of the system improves. There is no need to create templates like OCR technology.

iii) Combining Machine Learning & Template-based approach

This method combines both worlds. It remembers the vendor based templates without the user specification and defaults to a machine learning algorithm when a new vendor invoice arrives. There is no need to create a template when a new vendor arrives. The software does this part in the background without user interference. Like AI-based extraction, this technology also improves its accuracy after using it for a short period.

Now, let’s take this opportunity to answer the question - “Which Data Automation method should you adopt?” 

The answer is a software that combines both a rule based approach and a machine learning based approach. Because you want the reliability of a rule based extraction while having the generalized applicability of a machine learning model on newer formats. This is something that Docsumo does, it applies both machine learning and rules based approach to automate invoice processing. 

According to the International Institute of Finance and Management, invoice processing costs anywhere between $1 and $21 per invoice. This cost depends on the method of invoice processing the company is deploying. If the company adopts automation, the cost may be on the lower band. On the other hand, processing invoices manually can cost you from $15 to $21.

Factors driving higher costs

Let us look into factors that drive higher invoice processing costs.

Employee costs - If a company uses manual methods for invoice processing, it has to go through various tedious steps before payment gets approved. This involves different levels of employees to process the invoice from data entry to payment approval to maintain full-time employees to do these processes without mistakes.‍

No 3-way matching technology - 3-way matching is essential to avoid discrepancies in the process. Without an automated 3-way matching technology, more resources are required for the account payable team to manually process the matching. This ultimately drives not only costs but also human errors.‍

Paper-based approval process - Usually, AP teams have a limit up to which they can approve the payments. If they receive any high payment invoice above this limit, they need an approval before making the payment. If the company is using a paper-based approval process, the task becomes cumbersome. The reasons are plenty. For example, on budget, owners might be on leave or on vacation (where it's hard to send papers for approval). The paper approval process costs not only money but also a valuable time for budget owners.

‍Storage costs - If a company is using manual processes, it needs to store the approved papers for future audits, securing these important papers’ costs. These costs can be avoided if the company deploys an automated system. 

Invoice automation benefits/Ways to cut invoice processing costs

According to the Institute of Finance and Management (IOFM), 63% of companies state that reducing costs involved in invoice-automation is their priority and this is made possible with intelligent automation software. By adopting automation, tedious tasks such as data capturing and manual data entry can be avoided. AI or cognitive based data extraction costs 20 cents to $ 3 per invoice.

Reduction in Employee & Back-office costs

Because of automation, human resources involvement will be reduced. Since, there is less human involvement, the costs involved with full-time employees can be reduced drastically. Invoice automation can help in eliminating back-office costs. 

Not only that, automation prevents you from becoming prey to frauds. Scammers try to exploit weak spots in the manual AP process such as poor control or lack of communication. With an automated invoice processing solution, fake invoices can be detected, and the account payable team can focus on high-value activities without worrying about any fraud.

Reduction in human errors saves money

Automating invoices can reduce human errors and improve the accuracy of data extraction. The manual approval process, invoice handling, and error corrections take up to 61% of invoice processing costs that can be significantly reduced with automation.

Late payment fines can be skipped

Since the manual process is slow, sometimes payment dates are made after the due date. Late payments can incur fines and this can be avoided through automating invoice processing.

Improves relationships with vendor

Intelligent automated software helps to make payments on time. This improves the relationship with the vendors and  there is always a chance of getting some discounts.

APP2P network compared the costs involved in manual and automated invoice processes. The results states you can achieve an 85% reduction in the monthly accounts payable processing costs with automated invoice processing. It is a lot of money which can be saved. Besides reducing costs, automation can improve employee productivity.

Once you’ve decided to replace the manual invoicing with automated invoice processing, the real question is to figure out which features do you need in your automated solution based on which to find out which solution to go for. In this chapter, we’ll answer all the questions.

To start with, here’s the list of features you should be looking into while choosing the invoice automation solution:-

Efficient Document Classification Capability

Businesses receive multiple documents and not of them are invoices. It can be a contract statement, HR application form, or expenditure statement. Any document processing software should be able to classify these documents and assign them to the respective department. 

Flexibility in formats

Companies often have different requirements for different file formats. The software should have the capability to scan information across several standard file formats.‍

Speed

Large organizations receive a lot of invoices in a month. If the software cannot handle the load and becomes slow, it affects the payments. So, one should look for the processing speed of the software.

Accuracy

Now you got speed, but what about accuracy? A software that processes with a great speed but lacks accuracy is not worth investing in. ‍

Adaptability

For small organizations with limited number of vendors adaptability is not a problem. They can opt for traditional template-based OCR software. But if the organization is large enough processing thousands of invoices in multiple formats, any template-based OCR technology won’t do the job. In this case, invoice processing software with AI capability comes in handy. Neural networks use machine learning and deep learning and become adaptive over time, handling different kinds of documents.‍

Cloud Support

The software should have cloud support. The reason is simple. In large organizations, during audits, it becomes difficult to gather the required documents. So, if the software supports the cloud technology then it becomes easy to back up and store documents.‍

Security

With technology advancement, come cyber threats. So, one should be careful about the permissions that are given to the processing software. There should be tracking tools to monitor individuals with access to an organization's private data.‍

Integration Capability

Invoice processing software should have integration capabilities. Imagine software that cannot integrate with the ERP system. In this case, again an AP professional should enter all the data into the system. To avoid this scenario, one should choose software with integration capabilities.

Data Privacy Policies

This is not directly related to the software but it is to ensure that invoice automation company that you’re going for, complies with business privacy policies. Also, check for the duration for which the invoice processing software stores the data. The reason for this is that some data needs to be stored for audit purposes while others need to be deleted because of privacy policies. ‍

Pricing

Along with all the above capabilities, the price of the software should be reasonable. It shouldn’t be exorbitant.

Now let us look into the features and services of some of the invoice processing automation software.

‍Where does Docsumo stand in this picture?

Docsumo’s AI software with Intelligent OCR technology helps you convert unstructured documents such as pay stubs, invoices and bank statements to actionable data. Works with documents in any format with minimal setup.

DocSumo intelligent software is 50 times faster than humans. It helps not only in reducing 70% of processing costs and but also in attaining 99% accuracy. Docsumo can easily be integrated with your current workflow and when it comes to security docsumo offers enterprise-grade data protection.

So, what are you waiting for? Talk to us today, to automate your invoice processing workflow!