How you pay your vendors can have ripple effects throughout your organization and theirs.
You want to make on-time payments to show your vendors you’re a trustworthy partner, but you don’t want to rush the process for fear of making an inaccurate or unnecessary payment that pinches your liquidity in the short term.
When it comes to paying vendor bills, you need to find a system that is both efficient and thorough, allowing you to make accurate and timely payments without overlooking fraud or discrepancies.
As you continue reading below, we’ll outline the vendor billing process, how it works, and share some tips and best practices for managing invoices efficiently.
What is vendor billing?
Vendor billing is the accounts payable process of paying companies who have provided you with goods or services.
When running smoothly, this process supports trusting relationships with your vendors and ensures you are not over or underpaying any bills or missing due dates.
The stages of the vendor billing cycle
The vendor billing cycle consists of a few key steps to ensure you’re making accurate and timely payments.
Sometimes referred to as vendor invoice management, this process consists of each step you take to pay vendors, starting from when you receive the invoice until the payment is processed.
Here is a more in-depth look at the main steps of the vendor billing cycle:
Invoice receipt
After fulfilling your order, the vendor will send you an invoice for the goods or services rendered, which kicks off the billing process.
At this point, you need to complete invoice capture, which is when you extract important data from the bill so you can input it into your accounting or financial software.
This includes information like:
- Vendor name
- Invoice number
- Due date
- Quantity of goods/services delivered
- Unit price
- Total price
Accurate capture of invoice data is crucial so you can keep track of what you’re paying for, how much you’re paying, and when the payments are due.
Invoice validation
Following invoice receipt and capture, the accounts payable team will perform invoice validation.
This process involves comparing the incoming vendor bill against other documents like the corresponding purchase order (for two-way matching) and delivery receipt (for three-way matching) to confirm its legitimacy. There's also four-way matching which includes a quality inspection report.
As a result, you can ensure you’re only paying for goods and services you’ve actually received.
Otherwise, you could fall victim to invoice fraud, paying invoices for orders you may have never placed or vendors you’ve never done business with.
According to a recent survey, just 4.5% of businesses reported having zero cases of invoice fraud over the previous year.
In other words, the overwhelming majority of businesses deal with invoice fraud on an ongoing basis, making the validation process an essential part of the vendor billing lifecycle.
Of course, your team may discover honest mistakes during the validation process that weren’t made intentionally by the vendor to deceive you.
Their team may have accidentally transposed values on the invoice or sent a duplicate bill by mistake. However, it’s equally important for your team to recognize and correct these errors before invoice processing to keep you from overpaying.
Invoice approval
Once your team has confirmed an invoice for accuracy and legitimacy, it is submitted through the proper approval channels before the final payment can be made.
Just like the validation process, invoice approvals add another layer of protection for your business against fraud and overpayment.
Depending on the size of your organization, you may route invoices to multiple parties for approval.
But, for smaller organizations, invoice approvals are typically completed by the finance department or someone on the administrative team. In other words, each business will have its own protocols for outlining the invoice approval process.
After the necessary stakeholders have had the chance to review and approve a vendor bill, the payment can be scheduled.
Vendor payment
The final step of the vendor billing life cycle is invoice payment.
After completing each of the previous steps, you should have a high level of certainty that the vendor bill is legitimate and related to goods or services that you’ve received.
At this point, you can schedule the invoice to be paid by the due date. When running efficiently, vendors receive full payments when they’re expected, and you can avoid late fees and penalties.
The benefits of effective vendor billing management
A smooth-running vendor billing process provides benefits for both you and your vendors.
Take a look below as we discuss some of the main advantages you can uncover with solid vendor billing management:
Cost savings
An efficient vendor billing system can save you money.
Even though this might sound counterintuitive for a process where you’re actively parsing out cash to your vendors, an inefficient or tedious invoice processing system can cause you to incur additional costs and unwanted fees.
For instance, if you don’t have a set system in place, it could be easier for your team to lose or misplace invoices, leading to late payments and fees.
Additionally, an inefficient process that’s full of redundancies may result in higher direct labor costs as your team spends more time processing vendor invoices than is necessary.
Stronger vendor relationships
Your vendors don’t want to have to chase you down to receive the payments they’re owed.
Instead, paying your bills accurately and on time helps you foster trust and properly manage vendor relationships by showing that you respect their payment requirements.
With an efficient vendor billing management process, you know you have the systems in place to retrieve the appropriate approvals and schedule the payment by the due date.
This allows you to eliminate some of the guesswork around who still needs to be paid, which approvals you have yet to secure, and when the due dates are–all of which can lead to vendor frustrations if you miss a payment or don’t send the full amount.
Better financial control
Lastly, an effective billing process can provide you with better visibility and control over your finances, particularly with your cash flow.
Vendor payments often make up a large portion of your expenses each month, so ensuring you’re only making accurate and legitimate payments can support better cash flow management.
Again, invoice fraud is a common challenge for modern businesses of all sizes. An effective vendor billing management system helps you be proactive in detecting and preventing fraud and avoiding duplicates or overpayments that could pinch your liquidity in the near term.
In addition, this makes it easier to strategically time vendor payments so they’re favorable to your cash flows–not just whenever you get around to a particular invoice.
Common challenges for SMBs in vendor billing
Accurate and on-time vendor payments are essential to the billing process and upholding strong relationships. In practice, creating an efficient invoice processing system may not be as simple as you’d like it to be.
These are some of the frequent challenges that small and medium-sized businesses face when it comes to vendor billing:
Invoice mismatches
In a perfect world, you’d only receive invoices from vendors that are complete and accurate, allowing for quick approvals and payment processing.
However, these processes are prone to human error, especially when managed manually. So, part of the vendor billing process requires you to validate invoices for accuracy, as we described above.
When you uncover a discrepancy, it needs to be brought to the vendor’s attention immediately so a revised copy can be sent over. In turn, this slows down the process and can lead to payment delays until the issue is resolved.
Some of the mismatches you may discover include:
- Incorrect amount due
- Pricing errors
- Incorrect item quantities
- Duplicate invoices
- Incorrect tax calculations
Late payments
Though not ideal, many small businesses face making late payments to vendors as they deal with cash flow shortages or administrative bottlenecks.
Put simply, if you’re receiving late payments from your own customers, your ability to pay vendors on time becomes more difficult without the proper cash on hand to complete the payment.
This can strain your relationships with vendors, resulting in late penalties or fees in addition to less favorable terms or prioritization from them going forward.
Cash flow management
Another common issue that smaller organizations face with vendor billing is related to cash flow management.
Though it may seem logical to pay vendor bills as soon as they come in and take advantage of all early payment discounts that they may offer, this may not always be the best choice from a cash flow perspective.
Especially for a larger invoice, you may need to wait until you’ve received certain incoming payments from customers to ensure you can fully cover the bill–even if that means you won’t receive an early payment discount.
This can be tedious no matter how many incoming invoices and vendors you’re managing. It becomes even more complex when you expand operations and work with more businesses.
In general, any fluctuations in sales or unexpected expenses can impact your ability to meet payment obligations to suppliers given your cash flow constraints.
3 tips to improve vendor billing
As we mentioned above, a streamlined vendor billing system can help you tap into better cost savings, improved relationships with vendors, and more control over your business’s finances.
The following tips and suggestions will help you enhance the vendor billing process for better accuracy and efficiency.
1. Automate invoice processing
One of the best options for improvement is to use automated invoice processing.
Completing the vendor billing process by hand may be feasible when you’re in the earlier stages of your business and are only dealing with a handful of vendors.
But, as you scale operations and start to work with a growing number of suppliers and vendors, efficiently processing invoices becomes a massive chore that your team may not have the capacity to handle.
With automated accounts payable software (like BILL), you can reduce your reliance on manual data entry throughout the entire vendor billing life cycle, from invoice data capture to approvals and scheduling payments.
As a result, you can mitigate the risk of human error when making payments, free up your team’s time for more engaging and strategic tasks, and ensure vendors are always paid accurately and on time.
2. Adopt electronic payment methods
Another way to enhance this process is to adopt electronic payment methods.
Certain vendors may still prefer paper checks over electronic-based payments like ACH transfers or online credit card transactions.
However, using electronic methods allows for quicker and more secure payment processing and can improve cash flow management for both parties.
Electronic methods also make it easier to schedule payments and can result in a lower administrative burden for your team, providing further cost savings.
3. Set up a vendor portal
It can also be helpful to set up a self-service vendor portal.
Here, they can submit invoices and track approval and payment status at their convenience.
This means vendors can access all the critical information they need without having to reach out directly to your team.
With BILL, you can add vendors to your network, which acts as a centralized hub for managing your interactions with vendors, supporting easier collaboration and better transparency for both teams.
How accounts payable software can help with vendor billing
Managing vendor billing by hand may not always be a practical solution for your business.
As you expand and start to work with a growing number of vendors, keeping all invoice details organized and staying on track with payments becomes extremely difficult.
Rather than bog down your AP team with manual invoice processing, you can improve your vendor billing system with accounts payable software like BILL.
Our platform automatically pulls and stores important information from invoices and schedules on-time payments to vendors. The result is better billing accuracy, financial visibility, and better efficiency for your team.
Learn more about how our invoice processing automation can help improve your vendor billing system.
