Many Businesses STILL Aren’t Doing This . . . Here’s Why They Should!
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 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”, which is simply the days that invoice takes to transit from the supplier, through the mail or email system, until it 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 Consulting of Scottsdale, Ariz., which provides business process solutions.
In such a model, invoices are submitted in electronic form via EDI, or submitted to the buyer through a vendor portal or supplier portal either by using a web form on the portal, or via a file from the supplier’s billing system.
“Suppliers who can submit invoices through electronic means generally can get paid faster and experience less payment issues from keying errors in the buyers 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:
#1: Capturing Digital Invoices
Invoices received in e-mail or paper format introduce unnecessary costs and complexities into the AP process. For invoices received via mail, the documents must be sorted, routed, opened, sometimes scanned, and keyed into an AP system. For invoices received via e-mail, 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. Receiving invoices in electronic format allows your company to perform automated data capture and enable touch-less processing or minimize the human intervention in getting the data to your ERP or back-end systems for payment.
#2: Validating Automated Invoices
Many AP organizations perform validations on the invoice before processing for payment and approval. These validations generally consist of making sure the supplier is an existing supplier in good standing, the vendor name and number match. The terms match the vendor master, if it’s a PO based invoice that the appropriate PO information is on the invoice, etc.
When processing electronic invoices, 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.
#3: 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 can be expressed as a percentage or as a dollar amount. For instance, an organization may consider a match anything 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.
#4: Vendor Self-Service
Perhaps the most costly aspects 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 of the invoice. Following the approval, the supplier may follow up again to inquire about the actual payment date. And once received, if there are any discrepancies or errors, there can be significant interface between the supplier and buyer to resolve these issues. 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 supplier portal or vendor portal which offers vendors the ability to check the status of approval processing or planned payment, collaborate on-line 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.
#5: Cash Management Is Enhanced
For the supplier organization, their 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 — 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 and are paid late with no discount taken, or worse yet — as happens all too often — the invoice is paid late and the buyer still takes the discount!
#6: Account Reconciliation Is Enhanced
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 $5,000 during a single month, but received a single payment for $20,000, or for less than the total of the consolidated invoices if their is a deduction or short pay. 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, buyers 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.
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 electronic invoice submission process, but we have highlighted the main ones here. The return on investment potential makes it well worth your time to look into and ICG Consulting can help. Contact ICG today to schedule a demo or get more information.