When a business receives an invoice from a vendor, a process begins to turn that invoice into action, resulting in the final steps of making a payment and recording the transaction.
This process is a large part of what accounts payable teams do every day. For some organizations, this process is a black box of mystery that doesn’t get a second look unless something has gone wrong.
But as with any repeated process, businesses should understand and be critical of it. In this guide, we’ll cover the need-to-know information behind what the process is and how it can be improved.
What is invoice-to-pay?
Invoice-to-pay refers to the end-to-end process occurring between receiving an invoice from a supplier to the point of payment. It’s a subsection of the accounts payable process flow and generally includes invoice receipt, processing, approval, payment, and transaction reconciliation.
Think of the term “invoice-to-pay” as meaning “from invoice to payment.” Everything that occurs between those two bookends is part of invoice-to-pay.
Understanding and effectively executing the invoice-to-pay process ensures that the business is maintaining clean financial records and making payments on time.
What is the invoice-to-pay process?
The invoice-to-pay process can be broken up into [x] key steps:
- Invoice receipt: The vendor submits an invoice to the business for the goods or services that were delivered.
- Invoice capture: Data from the invoice is extracted and entered into the accounting system or the accounts payable platform. This could be done manually or using a digital solution that scrapes text from a document.
- Invoice validation: The information on the invoice is reviewed for accuracy, often being matched against supporting documents like a purchase order or delivery receipt (called two-way or three-way matching).
- Reconciliation and routing: The invoice is coded with the general ledger account the transaction belongs to (e.g. an office supplies ledger for a purchase of printer paper). Once categorized, it’s forwarded to the right people for approval.
- Invoice approvals: The invoice is passed through any stakeholders who need to approve payments based on the expense type. For example, an invoice for graphic design work may be routed through the marketing team head and the finance team.
- Payment authorization: Once approved, the invoice is submitted for payment, which may be completed individually or in bulk.
- Payment execution: The payment is processed using the preferred payment method such as check, ACH transfer, wire transfer, or virtual card.
- Payment reconciliation: The payment is recorded in the accounting system and reconciled with the bank statement. The accounts payable balance should reflect the payment made.
- Archiving all documents: The invoice as well as any supporting documents (such as a payment receipt, purchase order, or delivery receipt) are filed for safekeeping.
Depending on the size and complexity of the operations, your invoice-to-pay process might look different. You may want to look to leverage automation if your process is taking too long or has too many steps.
Why does the invoice-to-pay process matter?
No one enjoys paying bills, but how a business pays bills impacts its bottom line. These factors are reasons why you need to think critically about your invoice-to-pay process.
Fraud protection
Fraudsters use invoice fraud tactics to con businesses out of their hard-earned cash. Through tactics like fake invoices, rerouting payments, and social engineering, cybercriminals attempt to get businesses to act fast and think later.
A robust invoice-to-pay process uses checkpoints to catch suspicious activity before it causes damage. Sticking to an approval process and document matching ensures an invoice is valid and the money is going to the right place.
Cash flow management
Businesses master cash flow by timing payments strategically and keeping a healthy amount of working capital.
If your invoice-to-pay process is efficient, you can take advantage of early payment discounts and avoid late fees that unnecessarily eat away at your cash levels.
But there’s also the consideration of when a payment is made. Compare an invoice processed early, leaving multiple weeks to make a payment, versus an invoice processed close to the due date: in one case, the business has significantly more time to strategically time a payment than the other.
Labor and operational costs
Depending on manual methods inflates the costs of processing an invoice. Each invoice requires more touch points and processing, taking up more time and paid labor hours.
Learning to automate and standardize the workflow for quick execution keeps costs down. And as the business scales up and starts processing more invoices, there’s a solution in place, saving the need to hire additional headcount.
Breaking down the invoice approval process
The invoice approval process is one of the most time-consuming parts of the invoice-to-pay process, especially when it’s a manual process. This is because it’s prone to bottlenecks and depends on fast action from stakeholders.
For example, an invoice for raw goods used in manufacturing may need to go through the head of manufacturing, an inventory manager, the finance team, and potentially even an executive, based on the business structure. Each person is juggling their own tasks, and an invoice approval may slip their mind.
To keep the invoice approval process streamlined, consider some of these tactics:
- Clearly define roles: There should be one person held accountable at each step of the process.
- Standardize the process: All communication should be done through the same channels and the stakeholder should know exactly what to do when their approval is needed.
- Run a training session: To get everyone on the same page, host a training session that outlines the process and each individual's responsibilities.
- Embrace automation: An automated AP system streamlines workflows and sends regular follow-ups if an invoice is pending approval.
Optimizing the payment approval process
Once the invoice is approved, it moves into the payment approval process. Payment approvals are more than simply sending the money, there’s nuance about when and how the payment is made.
There are two main components to consider and optimize in the payment process.
Payment timing
A key component of cash flow is when money enters and exits the business. Time your payments strategically and you’ll save the stress of trying to make a payment with low cash levels.
Take into consideration the upcoming due dates, payment terms, and payment schedules to find the optimal time to send money to your vendors.
To maximize efficiency, look for opportunities to process payments in bulk. Grouping payments saves time on the payment processing step and helps with the strategic timing of the cash outflows.
Payment methods
The vendor may have their preferred payment method, but if you have a say, it’s important to know your options.
The payment method you choose will impact your operational costs based on how labor-intensive it is. There’s also the wrinkle of the processing fees and whether they’re paid by the sender or the receiver. Both aspects impact the cost of sending a payment.
The most commonly accepted payment methods to consider include:
- Cash: While it’s easy to misplace and difficult to track, cash is widely accepted and saves you the transaction fees. But the logistical challenges of making payments in cash prevents it from being a scalable option.
- Check: A check saves you from having to count coins and get to an exact amount, but it comes with the costs of ordering checks plus the labor of manually filling them out.
- Credit card payments: You can only pay with a credit card if the vendor uses a payment processor that accepts them. If they do, they are an easy way to make payments at your convenience.
- ACH payments: An ACH transfer sends money from one bank account to another and can be completed in just a few business days. However, both banks must be American-based, and the fee is paid by the payment sender, not the receiver.
- Wire transfers: A wire transfer is a good alternative to an ACH transfer if it’s not an option. But beware of high processing fees and longer processing times.
- Third-party payment processors: Payment platforms like Stripe or PayPal offer the ability to pay by card or directly from a bank account with the receiver paying the fees. But this is only an option if the supplier uses the platform.
Expediting the invoice-to-pay process with automation
The most impactful way to minimize the invoice-to-pay process is through automation.
Accounts payable automation impacts every step of the invoice-to-pay process, from data entry to payment processing. Technology like optical character recognition (OCR), machine learning, and reminders keeps workflows running smoothly and minimizes the necessary inputs to process an invoice.
Automation also cuts down on human error. As with anything manual, there’s always the chance that a mistake is made, leading to payment delays, and looking for the small details that need corrections.
The switch will help your business grow sustainably. As the volume of invoices processed increases, automation keeps the workflow to a minimum so people can focus on their high-value work rather than menial AP tasks.
Why choose BILL for your invoice-to-pay needs
For every step in the accounts payable process, BILL is there to support and automate. There’s a reason why 95% of customers agree their AP process is more automated with BILL.
Whether it’s invoice capture, document matching, approval workflows, or transaction syncing, BILL is equipped to save time and streamline. No more manual data entry or waiting on the approval that’s a bottleneck, just a smooth invoice-to-pay process.
Book a demo to see our platform in action and learn more about how it can fit into your invoice-to-pay process.
