Blog|6 min

The Complete Guide to Invoice Processing

Kelly Kipkalov, Sr. Director, Product Marketing

Every business survives on cash flow—your income and your expenses. Payments come in from customers and clients. Payments go out to vendors and contractors. To a large extent, those inflows and outflows determine the health of your company. Tracking them is critical to your success, and invoice processing is a big part of that.

Most companies keep a close eye on their income, often using accounting software to keep those records. As a company earns money, those amounts become "accounts receivable," meaning money that the company is expecting to receive. When the company is paid, those amounts are deposited into the company's bank account.

Invoice processing tracks the other side of a company's health—its expenses. Whenever a company buys just about anything, from office furniture or internet service to parts and goods, the money the company owes for those products or services becomes "accounts payable," meaning money the company is expecting to pay.

The company receives an invoice from the product or service provider for the amount it owes. The accountant, finance officer, or in some cases the business owner, records that amount in accounts payable. Then, when they pay the bill, they move that amount out of accounts payable, record it as an expense (such as utilities costs), and subtract that amount from their bank account.

That's why invoice processing is often called the accounts payable or AP process. All of these terms refer to the process a company goes through when it pays its bills.

This comprehensive guide will walk you through the various important aspects pertaining to invoice processing including:

Definition of Invoice Processing

Invoice processing is the workflow used by a business whenever it receives an invoice. The essential steps of invoice processing include:

  1. Receiving invoices

  2. Checking those invoices for accuracy

  3. Entering them in your accounting system

  4. Collecting approvals (or rejections)

  5. Sending and recording payments

  6. Storing records for future reference

Every company uses some form of each of these steps, even if the workflow isn’t completely formalized. But the more a company grows, the more important it is for the invoice processing system to be fully defined.

Invoice processing steps explained

1. Receiving invoices

For most companies, bills come in through a lot of different channels, so the first step in invoice processing is to collect them in one place.

Paper invoices arrive as snail mail. Recurring supplier invoices might get emailed to the accounting department while individual vendor invoices are emailed to different department heads. Some bills even show up as employee receipts that need to be reimbursed.

Collecting all those bills and invoices can be a hard process to streamline, and getting visibility into everything that needs to be paid can be a real challenge.

2. Checking invoices for accuracy

As each invoice arrives, it needs to be checked to make sure the invoice data is accurate. This includes things like:

  • Checking the invoice number to make sure the bill hasn’t already been paid

  • Checking the amount against a purchase order or contract

  • Checking the billing address to help prevent check fraud

This is just as important for electronic invoicing as it is for paper. E-invoices can be phishing attempts, also known as business email compromise, hoping to convince your team to send a check to a fraudulent address.

If a red flag is discovered, your invoice processing system should lay out a set of defined steps to handle that issue.

Whether an error is innocent or not, your team also needs a way to make sure that any repeat invoices, such as a second notice for payment, will also be flagged.

3. Entering invoices in your accounting system

Also called invoice capture or invoice data capture, entering each invoice requires “capturing” that data and entering it into your accounting system, specifically under accounts payable (AP).

But manual data entry is time-consuming. For some companies, monthly invoices run into the hundreds, totaling hundreds of thousands of dollars in cash outflows. In fact, some companies have entire payable departments dedicated to managing the payable process.

Unfortunately, that kind of volume only increases the chance of human error. Even if your accounting system is a modern ERP system, manual data entry still requires a human being (or many human beings) to type in that information.

Even worse, staff turnover can leave new, unseasoned staff entering data and trying to watch for mistakes or fraud.

4. Collecting approvals (or rejections)

Just because a bill has been verified as accurate, that doesn’t mean it’s ready to be paid. Many invoices will still need to be approved for payment for a variety of reasons:

  • Was the product or service received to the company’s satisfaction?

  • Is the amount large enough to require executive sign-off?

  • Should you pay the bill early to benefit from vendor discounts?

  • Or do you want to hold onto that cash until the actual due date?

Invoice approvals may require different approval processes depending on the amount and nature of the bill. Do you just need email approval from a department head? Or does the CFO need to sign off on it with a literal signature?

Approval workflows need to evaluate and route each invoice to the right people according to the underlying business processes that define the approval rules. This is another place where manual invoice processing can become bottlenecked with inefficiencies:

  • Chasing down busy executives for physical signatures can delay payments

  • Collecting and storing a variety of email approvals and physical signatures can be a hassle

  • Finding approvals later can be a challenge, especially if key personnel leave the company

  • Ad hoc systems to handle questions or rejections are hard to manage, making it easy for issues to fall through the cracks

5. Sending and recording payments

Once an invoice is approved for payment, that payment needs to be made and a record of the payment needs to be captured in the company’s accounting system.

Business payment processes can take many different forms, from corporate cards to physical checks to wire transfers and more. The more these payments are made on an ad hoc basis, the more opportunity there is for errors to creep in, like a mistaken amount or an incorrect account number.

A single extra zero can cost a company dearly.

There also needs to be a quick, timely system for recording each and every payment. If one person is signing checks and someone else is keeping the books, that communication can break down, leaving the accounting department unsure whether payment went out.

That runs the risk of paying an invoice again if a duplicate arrives.

6. Storing invoices for future reference

Finally, paid invoices and approvals need to be stored for future reference. Invoice storage systems often start out with paper-based filing—or an eclectic mix of paper and electronic records—but those systems don’t scale well as a company grows.

Physical filing cabinets fill up quickly, taking up valuable office space. And off-site storage comes with additional fees, not to mention considerable time delays in trying to find specific invoices or other vendor records.

Ad hoc filing systems, whether paper or electronic, also run the risk of being all but impossible to navigate if the person who created the system leaves the company. Instead, businesses need standardized back-office systems that are easy to use and maintain.

Scaling your invoice management workflow

As companies move into periods of growth, back-office workflows have to adapt and scale too. Otherwise, that growth can outpace the ability of the AP department to keep up.

CFOs need more visibility into cash flow, a growing demand for financing often requires better transparency, and the finance team needs to move away from time-consuming, manual processes so they can play a more strategic role.

To accomplish all these goals and more, many growing companies turn to AP automation for scalable back-office systems.

How invoice processing automation works

Automated invoice processing removes a tremendous amount of the manual effort that can bog down traditional invoice management systems.

From using AI to capture invoice data through storing records in the cloud, automation software gives today’s agile, distributed finance teams the scalable systems they need to support business growth.

1. Automating invoice capture

Automated invoice processing software starts by centralizing invoice collection and minimizing the need for manual data entry.

A centralized inbox provides a dedicated email where vendors can send invoices — at an address that isn’t tied to any specific employee. Paper invoices can easily be added by snapping a photo on your phone.

No matter how an invoice arrives, it gets put into the same system so it follows the same invoice processing workflow.

From the inbox, optical character recognition (OCR) reads each invoice and enters the data, checking it for things like duplicate invoice numbers. The accounting team can simply review the data instead of having to type it in, noting any flags that were raised by the system.

Invoice processing solutions can also sync with your accounting software or ERP so the information flows seamlessly into your accounts payable, with no need for duplicate data entry down the line.

2. Automating approvals

Next, invoice processing automation makes sure each invoice is routed to the right people for approval, and paperless approvals are collected digitally in something approaching real time. Approvers can even review and approve invoices on their mobile device.

If an approver has questions, that communication is all part of the same automation system. Because communication chains are stored with the invoice record, accounting teams don’t have to hunt through emails or filing cabinets to figure out the current status of any invoice they want to look up.

Rejections can also be captured and handled through a standardized AP process, and of course the AP automation solution prevents those rejected invoices from being paid.

3. Automating payments

Once a bill is approved for payment, AP automation includes several options for invoice payment, all flowing from the same convenient system.

For example, you might want to pay by card, ACH, wire transfer, or even check.

For vendors that insist on traditional paper checks, an AP automation solution can print and mail those checks for you from a clearing account. This masks your own banking information and also tends to make your monthly close much quicker and easier.

A clean, simple dashboard makes it easy to see where each invoice is in the process. That increased visibility can give you better control over your cash flow, helping you take advantage of opportunities like early payment discounts.

When the AP automation software syncs with your accounting software, information from your AP system flows into your accounting books automatically without any need to enter that information again.

4. Automating data capture and storage

With AP automation software, every touchpoint with an invoice is captured and stored automatically in a time-stamped audit trail. From communications to approvals to payment, it’s all right there with the invoice itself.

Invoices are stored digitally in the cloud, and even vendor records like contracts can be added to the AP automation system, making it easy to access them whenever and wherever you need to.

That’s a huge improvement over paper systems, but even digital invoice storage can be improved by automation functionality. Instead of having to manually move files in and out of folders, including the risk of accidental misfiling or even deletion, an AP automation system handles it all for you.

In fact, many companies that would classify their entire invoice management system as digital can see significant improvements in efficiency when they automate those systems.

Taking your first steps towards automation

If you’d like to see how accounts payable automation can help your team save time and improve efficiency with a scalable AP process, it’s surprisingly easy to get started.

Sign up for a risk-free trial today with—used by more businesses to automate payables and receivables than any other platform.


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