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What Is Invoice Processing?

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Updated on:
August 2, 2023
August 2, 2023
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Processing invoices is an essential part of managing the finances of a small business (and even for solopreneurs).

But what is invoice processing, and how does it work? 

This article simplifies the process and breaks down exactly what invoice processing entails. We cover:

  • What invoice processing is
  • Why invoice processing is important
  • A step-by-step guide to how invoice processing works
  • Issues you can run into when manually processing invoices
  • How to simplify invoice processing with Bonsai.

Let’s dive in!

What is Invoice Processing?

Simply put, invoice processing is the process by which small businesses approve supplier invoices.

There are four main steps: receiving the invoice, checking and confirming the details, authorizing the payment, and then completing the payment.

The Importance of Invoice Processing

Once your client have generated an invoice, you will have to do invoice processing – but why is it so important?

  • Accuracy: Accurate processing makes sure you’re only paying for products and services you actually receive. It’s easier to correct a mistake on an invoice before you pay it, rather than afterwards.
  • Timely Payments: Processing your invoices on time helps you maintain good relationships with your suppliers, as well as avoiding any late payment fees. It also helps you predict your cash flow patterns more easily.
  • Compliance: When you use correct invoice processing procedures, you can be sure you’re keeping to all financial regulations. This is particularly useful during tax season, as you can be confident all your paperwork is accurate.
  • Cost Control: Keeping close track of invoices lets small business owners track expenses and discover any areas of overspending. This helps manage cash flow and ensures you stick to your budgets.
  • Financial Visibility: When you have proper invoice processing procedures in place, you have clarity about your outgoing funds. This improves your financial forecasting and overall financial visibility
  • Streamlined Operations: Invoice processing reduces the number of errors and improves the payment cycle, allowing you to spend more time on other areas of your business.
  • Vendor Relationships: Good vendor relationships are essential, and ensuring your invoice processing is prompt and professional is a great way to keep these relationships positive.

The Elements of Invoice Processing: How It Works, Step-by-Step

1. Receiving the Invoice

The first step in the process is receiving the invoice. Suppliers send invoices after providing either goods or services. As a business owner, you must make sure you have a system in place to organize and keep track of all invoices you receive.

2. Validating the invoice Information

Before you move on to processing the payment, you need to validate the invoice information to make sure everything’s correct.

Matching with Purchase Orders

Compare the invoice you received with the purchase order. As with invoices, it’s essential to have a system for organizing purchase orders, so you have them available to refer back to when doing your invoice processing.

This way, you can be sure that the amount the supplier has billed you for is the same as what was ordered.

Checking for Errors and Detecting Fraud

Check carefully for errors – the most common one being miscalculations or errors in the amount of goods provided.

It’s also important to check that the invoice is legitimate; compare the document to previous invoices you’ve received from the company to ensure the branding and payment details are the same.

3. Approval Workflow

The third major step in processing invoices is the approval stage. The specifics will still depend on the size of your business and the complexity of your transactions, but generally, the approval stage involves someone reviewing the validated invoice.

If the validated invoice checks out, the authorized individual will then formally approve the invoice and forward it to the relevant department (or team) for payment authorization.

4. Payment Authorization

Once the invoice has earned its stamp of approval, the next step is payment authorization!

Again, the specifics will depend on a number of things such as the payment method you and the supplier have previously agreed upon, whether this is done manually or automatically, and so on.

What’s key is that at the end of this stage, the invoice is deemed to have already been paid.

5. Record Keeping and Archiving

The final step of invoice processing is archival. Simply put, this is where the invoice is recorded onto the ledger and stored in an organized manner!

It’s also a good idea to make a digital copy of your invoices in case your physical records are damaged.

For the ledger, you can use either a spreadsheet or accounting software; this depends entirely on your preferences and the complexity of your business. What’s important is that you have all the important information ready for tax season!

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When can aniInvoice be processed?

As a business owner, it’s a good rule of thumb to process invoices as soon as you have all three of these documents: the invoice, the purchase order, and the delivery receipt.

You shouldn’t proceed with invoice processing if you haven’t received the goods or services in question.

Another thing to note is that all invoice processing should cease when the three-way matching reveals inconsistent details.

For example, if a supplier claims on the invoice that they delivered 1,000 units of an item but the delivery receipt comes up short, it’s vital to first clarify this inconsistency with the supplier!

Your next consideration is the availability of funds to pay the invoice. If you currently don’t have sufficient funds, defer the processing of the invoice until after you have raised enough money.

Of course, you should avoid this as much as possible as it’s important to process invoices as soon as possible and settle payments in a timely manner!

Types of Invoice Processing

Businesses have two options when it comes to processing their invoices: manual and automated.

1. Manual Invoice Processing

As the name implies, manual invoicing involves managing the entire process without the aid of any automation.

This is a very time-consuming, hands-on process, and you’ll often need to spend a lot of time encoding data and doing the painstaking task of manually verifying details.

Often, manual invoice processing requires the use of a spreadsheet to make the gargantuan task a bit more manageable.

Cross-checking the accuracy and consistency of details between purchase orders, delivery receipts, and invoices will consume a lot of resources – so expect a slower processing time!

This approach also requires a strict, highly-structured organization system to make sense of all the documentation and to keep track of your payment deadlines.

As a result, even though manual processing seems easy at first, it almost always leads to errors — particularly in the long term and when you’re dealing with a huge amount of invoices!

Over time, you’ll run the risk of missing payments, making miscalculations, and committing other costly errors.

2. Automated Invoice Processing

In contrast to manual processing, automated invoice processing relies on available technology to streamline the invoicing process. This approach has a two-fold goal: greater accuracy, and better efficiency!

With the help of automation, you can immediately encode data from your invoices and other related financial documents, track your payments, manage expenses, and more.

As technology takes up more of the workload, you can spend more time on other (more important) aspects of your business.

Among the sea of choices out there, Bonsai stands out as a platform designed to help freelancers and small businesses simplify their invoicing!

Our invoicing software is intuitive and does all the boring tasks so you don’t have to, from creating invoices to requesting payment.

As a plus, Bonsai’s software also allows you to create recurring payments – especially useful if you have a set number of supplies to provide regularly to your clients.

The Bottom Line

Invoice processing is crucial – period. Whether you’re just starting out as a freelancer or an established business owner, processing invoices properly will make sure you’re on top of your finances and business transactions.

Accuracy and efficiency are key principles behind effective invoice processing, and these are difficult to achieve if you’re doing everything manually!

Through automated tools like Bonsai, you’ll greatly streamline your invoice processing – leaving you fully confident in the accuracy of your finances!

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