Why You Should Utilize E-Invoicing
Every year buyers and vendors exchange millions of invoices in the supply chain without using an e-invoicing solution. This creates inefficiencies for the buyer’s Accounts Payable (AP) organization, and can thus increase the Days Sales Outstanding (DSO) for the supplier. The increased DSO results from “mail float” or even “email float”, which is simply the days the invoice takes to transit from the supplier, through the mail or email system, until it is received and input by the buyer AP team.
“Considerable cost savings can be realized by migrating suppliers to submitting invoices in electronic formats,” said Jim O’Rourke, Director of Business Development for ICG, which provides business process solutions. “The business tools on the market today to facilitate electronic invoice submission make the business case a slam dunk.”
In such a model, companies submit invoices via EDI, or through a vendor portal either by web form or via a file from the supplier’s billing system. The system automatically extracts and imports PDF invoices emailed to the buyer’s ERP.
“Suppliers who submit invoices through electronic means generally can get paid faster and experience fewer payment issues from keying errors in the buyer’s AP department,” according to O’Rourke. “On the buyer side of the equation, the efficiencies of working with electronic invoices versus paper-based or files submitted through emails can be compelling.”
More and more businesses are going the electronic invoicing (or “e-invoicing”) route, and here are six key benefits to doing so:
Capturing Digital Invoices
Invoices received in traditional email or paper format introduce unnecessary costs and complexities into the AP process. For invoices received via mail, documents are sorted, routed, opened, and keyed into an AP system. For invoices received via email, the documents must be saved, stored, and depending on the process in place, potentially printed and keyed if no front-end imaging or automatic data extraction technology is in place. An e-invoicing solution allows your company to perform automated data capture and enable touchless processing or minimize the human intervention in getting the data to your ERP or back-end systems for payment.
Validating Automated Invoices
Many AP organizations perform invoice validations before processing for payment and approval. These validations generally consist of making sure the supplier is an existing supplier in good standing and that the vendor name and number match. The terms match the vendor master if it’s a PO-based invoice the appropriate PO information is on the invoice.
With an e-invoicing solution, AP departments can use readily available AP Automation and business process management (BPM) or workflow management, as well as data capture technologies such as OCR, EDI, and document assembly for email invoices to perform these validations automatically that would otherwise require data entry and some manual validation.
Automated Matching
One of the more complex validations performed is the matching process for PO-based invoices. There are generally three matching processes:
- 2-way match: Invoice > PO
- 3-way match: Invoice > PO > Receiver
- 4-way match: Invoice > PO > Receiver > Inspection or some other verifying document
Most matching processes involved tolerances where organizational policy dictates an invoice shall match, even if it doesn’t exactly match individual line items or the total at the header level. Tolerances are shown as a percentage or as a dollar amount. For instance, an organization may consider anything a match under a $20 discrepancy or anything less than 3% of the invoice total, whichever is less.
These calculations can be complex, but with electronic invoices, the technology exists to capture all of the data necessary to perform the calculations and validations necessary to either send the invoice through for payment without any human intervention or approval or if it falls outside the tolerance or fails any required validations, automatically route the work item to a knowledge worker for corrective action.
Vendor Self-Service
Perhaps the most costly aspect of invoice processing is not the capture or validation of the data, but supporting calls and vendor inquiries about payments. After submitting an invoice, the collections and AR teams within a supplier will typically contact the buyer to confirm receipt and approval. Following the approval, the supplier may follow up again to inquire about the actual payment date. Once received, if there are any discrepancies or errors, there can be a significant interface between the supplier and buyer to resolve these issues. Vendor calls and invoice inquiries are a costly and time-consuming burden
A key element of any e-invoicing solution should be a vendor portal which offers vendors the ability to check the status of approval processing or planned payment, collaborate online with the buyer to resolve any payment disputes, submit invoices through the portal, or upload any supporting documentation, or even participate in dynamic discounting and other supply chain finance programs through the vendor portal.
Enhanced Cash Management
The supplier organization’s paper or e-mail-based invoices take longer to become visible in AP systems. Without visibility of invoices in the approval process, cash managers lack the comprehensive data necessary for forecasting.
A large invoice, undiscovered by the treasury organization until shortly before payment, could result in a significant cash deficit relative to the forecast. As a result, a business may need to borrow funds at the last minute at a relatively expensive premium. By processing invoices electronically, all upcoming payments become visible to the finance and treasury organizations in the accounting system — thus improving forecast accuracy.
When it comes to the discounting process, both the supplier and buyer benefit from the cash management benefits of electronic invoice processing. Suppliers often offer discounts for early payments on invoices as a way to get cash in quicker and avoid factoring and other expensive financing options. The buying organization benefits from these discounts by getting goods and services at a discounted rate. However, neither party receives any cash management benefit if paper invoices languish in the system.
The processing benefits of electronic invoice submission may also allow you to implement a dynamic discount program where the buyer offers early payment terms for a reduction in the amount due on an invoice-by-invoice basis or by vendor, category, or any other criteria you determine. The key element to implementing dynamic discounting is the incoming invoice must go through the approval process quickly.
Enhanced Account Reconciliation
Suppliers must often reconcile the payments they receive from customers against the original invoices they submitted. A supplier may submit 4 invoices for $5,000 during a single month, but receive a single payment for $20,000, or for less than the total of the consolidated invoices if there is a deduction or short pay. To reduce banking fees, customers frequently consolidate payments for multiple invoices into one transfer.
Additionally, customers may claim deductions against an invoice due to shipment problems such as damaged or missing items. Upon receiving a consolidated payment, confused suppliers will frequently call the buyer’s AP department to inquire about the details behind the funds received.
To simplify account reconciliation for suppliers, buyers should send electronic remittance advice along with a payment that provides a detailed accounting of the invoices paid, as well as debits, credits, or adjustments taken.
Ready to get an e-invoicing solution?
There are many more benefits to both the supplier/AR and buyer/AP from transitioning the invoicing and invoice payment processing from a paper or email-based system to a true e-invoicing solution, but we have highlighted the main ones here. The return on investment potential makes it well worth your time to look into and ICG can help. Contact ICG today to schedule a demo or get more information.