Every year millions of invoices are exchanged between buyers and suppliers in the supply chain. However, most of these invoices are either in paper or e-mail format, which creates inefficiencies for both the buyer’s Accounts Payable (AP) organization and the supplier’s Accounts Receivable (AR) team. Considerable cost savings can be realized by migrating to an electronic invoicing framework. In such a model, invoices are created in electronic EDI or XML format from the supplier’s AR system then transmitted directly to the customer’s AP application for processing. There are ten key benefits that can be obtained from electronic invoices:
1. Digital Invoice Capture – Invoices received in e-mail or paper format introduce unnecessary costs and complexities into the AP and Accounts Receivable (AR) processes. For invoices received via mail, the documents must be sorted, routed, opened and rekeyed into an AP system. For invoices received via e-mail, the documents must be saved, printed, rekeyed and possibly forwarded. Data re-entry is the most problematic of the processes as it is time-consuming and error-prone. E-invoicing fully automates the invoice capture process with data being routed straight from the supplier into the buyer’s AP system.
2. Automated Invoice Validation - Most AP organizations perform validations of line items on the invoice before routing the invoice to Line of Business managers for approval. For example, buyers often require suppliers to list the buyer’s part number, buyer’s purchase order number and general ledger or cost code on an invoice. Such references enable the AP department to quickly identify the goods being purchased and the department responsible. In addition, AP clerks will need to ensure that the arithmetic such as the calculation of extended costs is accurate. There may be a need to validate VAT or GST calculations as well. In addition to capturing the data electronically, most e-invoicing solutions will also perform field-level validations of the content as well.
Automating Accounts Payable Functions
3. Automated Matching - One of the more complex validations performed is the matching between an invoice and the related documents in the procure-to-pay lifecycle. The pricing and terms on an invoice should match those negotiated in the master contract with the vendor. Additionally, the line-item quantities, product descriptions and per-unit pricing on the invoice must match those of the purchase order and the actual goods received. These matching processes can be performed manually. However, the costs, accuracy and time required for the validations can be significantly reduced through automation. A key component of an e-invoicing solution should be matching process between the contracts, PO, invoice and goods receipt notice.
4. Vendor Self-Service – Perhaps, the most costly aspects of invoice processing is not the capture or validation of the data, but staffing call centers to support 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 of the invoice. Following the approval, the supplier may follow up again to inquire about the actual payment date. Significant time and expense is incurred responding to vendor calls and researching the status of invoices. A key element of any e-invoicing program should be a portal which offers vendors the ability to check the status of approval processing or planned payment.
5. Enhanced Cash Management – Paper or e-mail based invoices take longer to become visible in AP systems. Paper and e-mail based documents also have a higher probability of being lost in the approval process. Without visibility to invoices in the approval process, cash managers lack the comprehensive data necessary for forecasting. A large invoice, which is not discovered by the treasury organization until shortly before payment, could result in a significant cash deficit relative to 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 treasury organization in the accounting system improving forecast accuracy.
Cash Management Process for a Multi-National
6. Enhanced Account Reconciliation – Suppliers are often challenged to reconcile the payments they receive from customers against the original invoices they submitted. A supplier may have submitted 4 invoices for $5000 during a single month, but received a single payment for $18,000. To reduce banking fees, customers will frequently consolidate payments for multiple invoices into one single funds 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 funds received. To simplify account reconciliation for suppliers, customers should send electronic remittance advices along with a payment that provide a detailed accounting of the invoices paid as well as debits, credits or adjustments taken.
7. Lower Carbon Footprint – Proponents of e-invoicing also promote the lower carbon footprint of electronic transactions. In theory no paper is consumed. Nor is there any transportation of the paper from supplier to the buyer. Although the digitization of a single invoice does not lower greenhouse gas emissions significantly, the cumulative effect of removing millions of paper invoices from the financial supply chain is impactful.
Benefits 8-10 in an upcoming post…