The key elements of invoice automation

So what does invoice processing automation actually look like? Where does it start, and where does it end? What are the detail steps to be automated?

The basic concept is simple – that is to process all invoices in a common, electronic manner, enabling as many invoices as possible to be processed “straight through” with little or no need for human intervention, and to make the communication required for exception handling as fast and clear as possible.

The main elements of automation are:

Invoice capture
The first step is to turn all invoices received into a standardized electronic record for use in all of the other automation steps. If necessary, paper invoices can be manually keyed, though that process can be streamlined with readily available document scanning and OCR technology. Electronic invoices from trading networks, a supplier portal, and other supporting systems need only be translated into your standard format.

Realistically, you will probably use several different methods of invoice capture, with the goal of reducing the percentage that need to be manually entered over time. But one note: contrary to what some people think, streamlining invoice capture does not represent nearly the savings opportunity as does streamlining the way you process them once you have them captured. Scanning and eInvoicing are only preparatory steps and do little on their own to reduce costs. Automation of the following steps is where the real savings lie.

Invoice validation and coding
This step can be very time and resource-consuming when processing invoices manually. It can also be prone to frequent errors that distort financial and procurement information over time. In an automated process, the system should be able to use invoice information such as the supplier ID, PO#, contract ID, item codes, etc. to automatically determine purchase categories and GL accounts. More sophisticated systems can even “learn” how to code invoices over time to continuously reduce the amount of human interaction that’s needed. For instance, it can “learn” what departments to be charged based on phone numbers in a complex telecom bill. In an automated system, this step should also highlight obvious and not-so-obvious duplicate invoices. Invoice matching and automatic approval.

Again, this can be a big job when processing invoices manually. And it’s a step that may be skipped when Accounts Payable (AP) staff are particularly pressed for time or don’t have ready access to the right information. In an automated process, PO-based invoices can be electronically compared to PO and receipt records from your purchasing system. Non-PO invoices can often be compared to contracts. Invoices that match can be automatically approved for payment.

Of course invoice details like freight charges and taxes can make this more difficult than it sounds on the surface, but a good system will provide sophisticated logic and user-set tolerance ranges that enable a very high percentage of valid invoices to be automatically approved.

Discrepancy resolution and approval
There will always be some invoices that are questionable or need a particular manager’s approval. Even with automated matching, there will still be the need to route a certain number of invoices for review, possible supplier dispute, and eventual adjustment or approval.

The key technology here is electronic workflow. An automated process will enable AP personnel to quickly route invoices to appropriate people via email. In many cases, the system will even automate that. Unlike sending paper, the invoice and all associated information will be instantly available to the reviewer. Simple approvals can usually be done with a single click. The whole cycle may only take a few minutes or hours, rather than days or weeks.

Payment authorization
Once invoices are approved for payment in an automated system, they are passed directly to the financial system for payment scheduling based on the usual factors such as due date and discount date. The good news is that they get to that point far sooner than they typically do with manual invoice processing. That means cash management policies can be exercised as desired and savings from available discounts can be realized. This also eliminates errors that can potentially be introduced by re-keying.

Supplier communication
In an automated system, the status of invoices is always known and accessible electronically. That makes it possible to give suppliers self-service enquiry capabilities via a secure supplier portal. Not only does this significantly reduce the enquiry-handling load on the AP department, it also gives suppliers piece of mind and the feeling that your organization is “easy to do business with”. That and the time you save them when they don’t need to chase late payments may well come into play when future purchases or contracts are negotiated.

Don’t under-estimate the percentage points that can be shaved from your overall purchase costs over time.

Reporting and analysis
Last but not least, an automated invoice processing system enables all kinds of reporting and analysis that is simply not possible when invoices are handled manually. Invoices are electronically captured, validated and coded. Because it’s done sooner, financial managers have much better visibility of near-term cash requirements, enabling better management of working capital. Because it’s done more thoroughly and accurately, procurement has better information for spend analysis, contract negotiations, and supplier relationship management.

In addition to these main elements of automation, there are a few important underlying attributes that are essential to making your invoice processing system effective:
  • A highly flexible filing system - Invoice records and associated information such as scanned documents will need to be viewed and processed in many different ways throughout their lifecycle. The ability to look up, organize, sort, and filter this information according to the criteria that is important to your organization is key to overall productivity.
  • An open architecture - In order to introduce the type of “invoice processing engine” described above without the need to replace existing financial and purchasing systems, the software needs to be designed in a way that enables it to easily access or import information from your existing systems.
  • An intuitive user interface - Even though some of the inner workings of your invoice automation may be quite sophisticated, the system needs to be easy to understand and use by your AP personnel and others. For instance, 3-way matching may involve as many as 20-30 different tests. The system needs to make discrepancies easy to interpret and should provide the ability to take appropriate action with just a click or two. An intuitive user interface design is key to the productivity of individuals.
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