Inbound Electronic Invoices
There is a lot of interest these days in AP (accounts payable) optimization initiatives. Many companies that I have spoken with over the past few weeks and months are very interested in reducing the costs of paper processing and data entry that are associated with traditional manual processing of inbound invoices. In addition to cost reduction, CFOs are also seeking ways to speed up the processing of invoices so they can take advantage of early payment discounts with their key vendors. It is worth noting that many companies cannot take advantage of early payment discounts because the manual processing of paper invoices takes too long.
Paper does not easily give up it’s information. Somehow the information on the paper invoice must be read, understood, extracted and entered into the AP software application, approved or rejected and payments made. Sometimes this takes 45 days just to complete this process.
I have spoken to a number of CIOs and CFOs recently that were seeking to out-source the entire process of handling inbound paper vendor invoices. They wanted the following:
- Reduce the costs of processing the paper (labor, IT, facilities, etc.)
- Scan/OCR the data on the inbound paper invoices to quickly digitize it
- Have a human review the scanned data and fill-in any missing or unreadable data from the original paper copy
- Submit and route the digitized invoice for approval
- Convert as many paper invoices to electronic EDI or B2B file transfers as possible to achieve the speed and efficiency of real-time integration
- Electronically archive the scanned documents to reduce storage space
What were these executives wanting to fix?
- Slow paper processing may prevent receiving early payment discounts
- High postage costs
- Mail room and document handling costs
- Document copying costs
- Document storage costs
- High data entry costs to transfer the data on the document into a computer system
- Human data entry introduces additional errors that cause invoice disputes
- Invoice disputes cause supply chain friction
- Lack of visibility because of slow paper processing prevent real time visibility into accounts payable liabilities
- Prevent various business units from manipulating financial reports by slowing down invoice processing
In addition to fixing and improving these processes, the automation and digitizing of the invoice process enables the CFO to have more tools for cash management. When invoices can be processed quickly the CFO has the ability to negotiate different and better payment terms and discounts. Slow processing removes these options.
The CFO’s office wants the benefit of all-of-the-above, but not necessarily the headcount and associated IT costs that may come along with an in-house solution. As a result, a number of service companies have developed a BPO (business process outsource) service model that offers these services and solutions on a subscription model.
Once the AP process is optimized, the CFO will have lower costs, faster processing, better visibility, and flexibility to take advantage of various early payment programs.
Outbound Electronic Invoicing
We have all seen it with our own personal invoices and bills. Companies are encouraging their customers to accept electronic invoices/bills and to pay online. There are huge savings that can be realized by companies that can convert their customer base to accepting electronic invoices. Here are a few:
- Reduced or eliminated postal fees
- Eliminate the latency caused by using the postal service
- Customers receive their invoices faster and pay faster
- Reduces Days Sales Outstanding (DSOs)
- Reduce Cash Conversion Cycles
- More accurate electronic data reduces the number of disputes
- Invoice disputes are discovered and resolved quicker
- Reduce Print & Postage costs by as much as 60% –from $5 to $2 (Gartner)
- Lower Call Center Volumes–Up to 60% of calls relate to invoice disputes
- Reduced errors that were previously caused by poor hand writing
- Increase in electronic payment when online invoices and bills are presented with this option
- Reduce call center calls by archiving invoices online and making them available to your customers
The list above details some of the obvious business efficiencies that can be realized, but electronic invoicing can be difficult. Companies that engage in electronic invoicing globally must be compliant with all the laws and regulations that governments and tax authorities require (see Mexico e-Invoicing). This can be a resource intensive task. Often it is easier for a company to engage an expert global service provider that can provide tight ERP integration for electronic invoicing, and let them implement the service and monitor it for compliance with all the governments and tax authorities.
What does the process look like for implementing electronic invoicing with your business partners?
- You should first contact your customers and ask them to accept electronic invoices
- In most countries your customers must sign an agreement stating they will accept electronic invoices. This is typically done via a letter and/or email sent to the accounts payable department that directs them to an online portal where they can agree to accept e-Invoices.
- Once the online form is completed and the customer agrees to accept invoices electronically, a copy of the agreement should be automatically emailed to the customer for reference.
- The online form should also include a survey of the customer’s electronic data exchange (B2B)capabilities. The online survey form can ask if your customer is able to exchange EDI or other B2B data formats, or do they want to exchange invoice information only via email or a web portal?
- Once your customer is ready – an email should be sent to them with a link to a secure website where they can login and view current and past archived invoices. This reduces the customer support and accounts payable workload. This portal should also enable the company to see when their customer’s read and/or download the invoices. Unread invoices should be flagged and the company alerted that more customer training may be necessary.
- Electronic invoices must be archived most often for 5-10 years. The length of time that electronic invoices must be archived differs widely depending on local regulations.
- The portal should also enable both you and your customers to verify the integrity of the digital signature included on the electronic invoice. The portal should have integrated functionality to send a verification request to the digital signature authority and receive a response. This ensures that the invoice on record and in the archive is valid.
- If your customer is a high volume customer and can support EDI or other B2B data exchanges, then the portal may be useful to check on the status of invoices, but a fully automated B2B process may be more efficient. Electronic invoices may be sent to your customer via email as a PDF attachment, or as a link in the email. The link would take them to the invoice stored on the online archive where it could be viewed and printed.
- Automating the process of implementing electronic invoicing with your trading partner community is very important for companies with large numbers of customers. Self-service portals where customers can self-register can save enormous time and costs.
Some e-Invoicing service providers focus on either inbound or outbound e-Invoicing only, but a number offer support for both. In addition, some provide complete EDI and B2B managed services as well. Some will try to remain agnostic to any ERPs, but a few such as Crossgate (a company co-owned by SAP) provides a very SAP-centric approach which can offer a tighter integration and additional advantages to SAP customers.
The ROI for e-Invoicing
With many solutions and services finding and documenting the ROI can be complex, difficult, subjective and abstract. That is not the case with implementing electronic invoices. There are well documented costs and savings available and the savings are easy to calculate. Here are some examples from Aberdeen (in 2007) from best-in-class companies that focused on AP optimization and invoice processes:
- Invoice processing costs were 88% lower
- Invoice processing cycle times 52% faster than their peers
- 66% higher rates of on/time payments
- The cost to process a single invoice for the best-in-class companies was 2$, average companies $8.36, and for industry laggards it was $ 29.38 per invoice (OUCH!)
- Time to process a single invoice: best in class 8.6 days; industry average 17.4 days; laggards 20.3 days
- Exception rate: best in class 7.4%; all others 11.6%
- On-time payments: best in class 82%; all others 59%
- On-time payments that earn discounts: best in class 79%; all the rest 48%
In the area of DPO (Days Payment Outstanding):
- Best in class:46 days
- Average: 42 days
- Laggards: 32 days
As these numbers demonstrate, there are a lot of different areas around invoice processing that can be improved to provide cost reductions, process improvements and better cash manage options for CFOs.