Automated invoice processing guide [updated for 2024]

What is invoice automation?

Invoice automation applies software to the tasks involved in receiving, capturing, approving, and paying vendor invoices. 

Here is how a typical invoice automation workflow would work: A business receives an invoice from a vendor via email or mail. Instead of manually entering invoice data, a finance team member would send the invoice file to a dedicated email or upload a file. 

From there, the software would scan the invoice using OCR technology, extract line item data, and transfer the invoice information (including payment details) to a bill, comparing the information to a purchase order (PO) if available. 

The invoice is posted to the general ledger, and invoice data is sent to the approver(s).

After approval, the invoice is paid, and the accounts payable balance is reduced in the general ledger. The bank account is reconciled at month-end, and financial statements are generated. 

Why is invoice automation important? 

Invoice automation allows your business to complete far more tasks in less time and reduce the risk of error. With automation, even the leanest finance teams can pay hundreds of vendors on time and scale – making their accounting easier and vendor relationships stronger.

An automated invoice processing solution generates reliable accounting data, and the financial statements accurately state the cash, accounts payable, and expense account balances. 

Automation also improves internal controls and reduces the risk of paying duplicate or fraudulent invoices.

What are the challenges with manual invoice processing?

Manual invoice processing presents several challenges, particularly for growing businesses. 

Time-consuming

Invoice processing is especially time-consuming because every vendor is unique. Some may have payment deadlines and requirements that differ from other vendors. An automated process can manage differences between vendors much more efficiently.

Missing data

A manual system has a much higher risk of data getting lost during processing. If incoming invoices are mailed or emailed to different individuals in the AP department, data can be recovered or deleted in error. Sending paper invoices and hardcopy templates to approvers isn’t a reliable method.

High error rates

The risk of error is higher when the AP staff has to input data manually. Automated systems can use artificial intelligence to scan and collect data without manual intervention.

Data is not centralized.

AP staff and approvers may have to manually search for data in physical files and emails. Accounts payable automation platforms can provide a central location for invoices, supporting documents, and all communications.

Businesses that process invoices manually will need help to scale.

Invoice automation vs. AP automation

Invoice automation applies technology to capture invoice data, review, approve, and process payments. 

AP automation is a broader term that includes invoice automation, vendor management, and financial reporting. For example, the AP team must post journal entries and perform month-end account reconciliations. These business processes are included in AP automation.

What are the benefits of automated invoice processing?

Automated invoice processing provides several advantages:

• Time savings: Automation reduces the time needed for data capture and processing invoices, so your team can focus on tasks that add more value.

• Fewer errors: Software reduces the risk of manual errors and the time required to locate and correct them.

• Improved vendor relationships: With automation, vendors can be kept informed on the status of each invoice and any questions or missing documentation. You can pay vendors on time and retain strong relationships.

• Better cash management: The AP staff can take advantage of early payment discounts and avoid duplicate payments, improving cash flow.

Invoice processing can be time-consuming. Every manual step, from receiving and coding invoices to navigating approval bottlenecks and processing payments, translates to minutes your finance staff needs to dedicate to higher-value work. Automate to free up your staff’s time.

With automation, you can manage complex AP processes, including multiple locations that require a more complicated general ledger structure. AP automation can also flag unusual transactions or discrepancies and reduce the risk of fraud and theft. 

Invoice automation cons

Business owners must consider moving to an automated invoice processing system carefully because the change requires detailed planning. Here are some potential downsides to invoice automation:

Implementation costs 

Your AP software vendor should clearly state the cost of installing the platform and the time required to train staff and start using the software solution. If the vendor does not deliver what is expected, stakeholders may lose confidence in the invoice system.

Poor integrations with other systems

Ideally, the invoice automation software should integrate with your bank accounts and your accounting software or ERP system. If not, you may have to spend additional time and money to build an integration or continue to operate without full automation.

Customer support needs to be more responsive.

You need an experienced and responsive customer support team that will resolve problems promptly. If issues aren't resolved quickly, vendors may not be paid on time, and your financial statements may be incorrect.

Limited customization

An invoice automation platform must be able to handle more complex tasks as you scale. The platform should be able to do complex invoice coding, increase the volume of invoices, and create customizable approval workflows. 

The best platforms continually add new features to manage more complex tasks. You should not have to change to a new platform to meet your needs as you scale.

Platform not reliable

The software platform must be fully operational 24/7 without glitches or processing lags. Processing interruptions costs your AP team time and increase the risk of supplier invoices needing to be posted or duplicated.

How does invoice automation work?

Invoice processing refers to the accounts payable process where businesses receive, digitize, review, approve, and pay invoices for goods and services from vendors. 

Invoice automation applies technology to each step, and all transactions, supporting documents, and communications can be accessed in a single location. Accounting, banking, and vendor management are integrated within the platform.

The top invoice management tasks to automate

To maximize the efficiency of an automated invoice processing workflow, each of these tasks should be automated:

Invoice capture and coding

Once vendor invoices are received – physically or digitally – data must be captured and coded into the platform. The software should use AI-powered invoice scanning to automate data extraction, post the correct data, and record journal entries in the general ledger.

Invoice matching

Invoice data is automatically matched with a purchase order (PO) to verify that the invoice matches the customer’s instructions on the PO. This process is commonly referred to as two-way matching and helps ensure that data is consistent to mitigate the risks of costly errors. 

Not all invoices include a PO, but most larger purchases require a PO as an additional control over spending.

Some businesses elect to add another step to the verification process, matching electronic invoices and purchase order data to shipping receipts (or sales receipts), known as three-way matching. 

Approval routing

The AP department then sends the invoice, PO, and shipping receipt (if required) to the designated approvers for payment processing approval. This is typically a CFO, business owner, or head of finance — depending on the organization's size.

Many businesses require multiple approvers for large dollar purchases. 

Automating approvals is important to eliminate paper files, lost or unread emails, and siloed data. Platforms can send approval notifications and track invoices that have not been approved, speeding up processing time and avoiding late payments.

Payment Scheduling

The documentation and proof of approval are given to a manager, possibly the CFO, who authorizes payment by check, wire, ACH, credit card, or other methods. The AP staff then processes each payment, and the vendor receives a copy of the invoice.

The invoice software is linked to your bank accounts so that payments can be sent quickly after authorization.

General ledger activity

When an invoice is received, the accounts payable are increased. When a payment is processed, the accounts payable and cash accounts in your general ledger are reduced by the payment amount. 

The general ledger entries for credit card payments are slightly different. When a business pays by credit card, the company increases an expense account and a credit card payable account. When the credit card balance is paid, the credit card payable account and the cash account are reduced.

ERP system sync 

Transactions are often synced to your accounting software or ERP system. Confirm the steps required to sync data with your vendor. 

Accounting reconciliations

At the end of each month, all general ledger accounts are reconciled to generate the financial statements. An automated reconciliation process compares bank account transactions with credit card statements and other data, speeding up the month-end close.

Recordkeeping

Companies must file all general ledger activity and the AP supporting documentation to establish an audit trail. The records may be reviewed during a financial statement audit or by various regulatory agencies. Automation can file data as it is created and changed, and all documents are in a central location.

A sample invoice automation process

To illustrate the benefits of invoice automation, assume that Julie is the co-founder of Seaside Beverages, a CPG company.  Here are the steps Seaside uses to process an invoice from Midwest Supply: 

• Invoice receipt: Midwest sends an invoice to the email address designated by Seaside. The invoice details are based on a purchase order (PO) approved by Seaside. The platform uses AI to scan the invoice and post data in the software.  

• Invoice validation: The platform compares the invoice with the PO and the shipping receipt, both stored in the software. This process confirms that the goods ordered match the items received.

• General ledger coding: The approved invoice is used to post an expense and a payable transaction in the general ledger. Other coding, including the company division, is posted in the accounting system.

• Approval management system: Invoices are run through Seaside’s approval processes. The approver receives the invoice, PO, and shipping receipts and sends automated alerts until the invoice is approved. The AP team will also be alerted when the invoice is approved.

• Payment: The approved invoice and other documents pay Midwest according to their preferred payment methods. Seaside can pay by ACH, wire, check, or virtual card using the software. Accounting entries are posted to reflect the payment.

At month-end, bank accounts are automatically reconciled, and all transactions, communications, and documents are stored in the platform. 

How to get buy-in for invoice automation at your company

This Harvard Business Review article explains that internal buy-in will make or break your growth strategy. The author explains: “The smartest growth strategy in the world will fail if the people central to its execution don’t have the motivation, skills, and resources to get it done.”

People are resistant to change and are comfortable with existing processes. The staff may need to be made aware of automation tools that could make work easier. Use these strategies to get buy-in for invoice automation.

Document the current process.

Review your current invoice process, including the pain points and inefficiencies that complicate the process. Estimate the time your AP staff, approvers, and other stakeholders spend on invoice processing.

Building a case for automation

Quantify the potential cost savings if invoice processing is automated. What manual tasks will be eliminated, and how much time will that save? How much time is spent locating lost documents, reviewing unread emails, and correcting errors?  Use that data to estimate the labor cost savings. 

Addressing concerns and objections

While your organization may understand the economic benefits of automating, they will be concerned about implementation and training. The people most impacted by the change are those who use the platform each day.

You must clearly state the requirements for implementing the platform and how much training users will need to use the software. Businesses also need to explain how the vendor provides customer support (via phone, chat, email, etc.) and how long it will take customer support to resolve issues.

Holding the vendor accountable

The vendor must follow through on their implementation, training, and customer support statements. If not, invoice automation stakeholders will lose trust in the platform. 

Address vendor issues immediately so that automation stays on track. If the vendor cannot provide what was promised, you may need to reevaluate and choose another solution. Refrain from using a flawed system will frustrate your staff and help productivity.

How to pick the best invoice automation software

Your AP staff will spend the most time using AP software, and you need a user-friendly interface that is easy to navigate. 

As mentioned earlier, the best AP automation solution eliminates nearly all manual tasks. The best platform streamlines the end-to-end process with the least financial investment, minimal implementation complexity, and a short learning curve for users.

Here are just a few questions you should consider as you evaluate different offerings: 

• How does the platform work, and does it meet my requirements? 
• Does the platform’s workflow mesh well with my organization, or will some change management be required? 
• What level of customizability does the platform offer for my organization? 
• What positive (or negative) downstream effects could the platform have on my business’s other finance processes, like month-end close?
• Does the platform integrate with my ERP?
• What features does the platform offer? 
• What are the drawbacks of the platform? 
• How much does the software cost? 
• Is there a mobile app for employees on the go?
• Will my employees love the experience? 

Perform research online and pay particular attention to third-party review sites. Talk with peers in your industry about the invoice automation platform they use. Put together a list of questions, select vendors to provide demos, and get answers to your questions.

Finally, get feedback from all stakeholders (AP staff, approvers, etc.) before making a final decision.

What is invoice automation software?

Invoice automation software is an application that streamlines the invoice process across intake, management, and payment, helping finance teams save significant time by eliminating manual processes.  

With automation, invoices are received electronically, and invoice data is scanned into AP software and posted to the general ledger. Approvers are notified, documents are sent within the platform, and all communications are stored for future reference. 

The AP team is notified when an invoice is approved, and payment is integrated into the accounting system.  The platform should be able to apply multiple payments to one invoice or one payment to multiple invoices.

Month-end bank reconciliations and credit card statement reviews are largely automated. The best AP automation systems are synced to the user’s ERP so that the ERP system remains the source of truth for invoice-related data.

FAQs about invoice automation

What problems does invoice automation solve?

Invoice automation reduces the risk of manual input errors. These platforms also manage invoices, documents, and communications in a centralized location. Automation eliminates the problems caused by deleted or unread emails and issues with lost documentation.

What is the three-way match of invoicing?

Three-way invoice matching refers to matching the invoice and purchase order data to shipping receipts (or sales receipts). Matching is performed to verify that the data on all three documents is consistent and to ensure that the correct items are received before processing the payment.

How much does AP automation software cost?

Software can be priced based on the number of invoices processed, the number of users, or a combination of the two. Users may also pay fees for checks, ACH, wire transfers, and other services, and many companies pay more as their needs increase.  

Most AP platforms do not publish their pricing and ask businesses to contact them for a quote. To evaluate the price, consider your current cost to process each month’s invoices (AP staff’s labor cost, paper files, etc.) and compare that to the cost of automation. Automation makes financial sense if the cost savings are greater than your current processing costs.

Wrap-up: all about invoice automation

After reviewing the different invoice automation software solutions on the market, think about the features and tools that are most important for your business.

And if you still need help choosing the best invoice-processing software, let's make this easy.

If:

• End-to-end finance capabilities
• Bank-powered AP with faster, more trackable payments
• A scalable platform that grows as you grow

All wrapped up in unbeatable pricing and 24/7 customer support sounds nice to you, so you should consider Rho.

Schedule time with a Rho payments expert today!

Competitive data was collected as of March 12, 2024, and is subject to change or update.