E-invoicing: The Time has Come

The concept of sending purchase orders and invoices electronically is not new. Electronic Data Interchange (EDI) has been allowing trading partners to exchange business transactions since the 1960s. Through the 1970s and 1980s, various initiatives brought degrees of standardisation to various data formats, but EDI remained a costly option and the preserve of large organisations. It was only with advancements in technology, the emergence of the internet and the development of collaborative networks that the cost and complexity of exchanging electronic documents were reduced. Critics would argue that despite these huge advances, there has not been a proliferation of electronic document exchange.

The benefits of replacing paper are well documented. Through the elimination of costly and slow paper-based processes, trade documents are delivered near instantaneously to the point of acceptance or approval. In order to fully understand the benefits of electronic invoicing, the functions of accounts payable (AP) and accounts receivable (AR) can be addressed separately.

Accounts Payable

The AP department is concerned with inbound invoices. Often, companies have disparate procurement processes and the introduction of an inbound invoicing service can deliver rationalisation opportunities in the related outbound purchase order process. A standard procurement process can be enforced and a preferred supplier list maintained.

In moving away from the labour-intensive and error-prone manual entry of invoices received on paper, the utopian solution would be one where suppliers’ invoices would flow into the enterprise resource planning (ERP) system with no human intervention. The reality will lie somewhere in between these two ends of the spectrum. Through the configuration of powerful workflow processes to replace the manual entry of invoice data, significant performance improvements can be realised. The workflow needs to be configured around the buyer’s requirements and can encapsulate the following optional elements:

  • Validation: This ensures that the data conforms to certain rules and that inbound invoices are complete, correct and contain mandatory fields to meet a buyer’s business processes, tax requirements and system criteria for loading into the ERP.
  • Matching: This can match the invoice, purchase order and receipt.
  • Enrichment: This helps automatically add missing data to the invoice.
  • Approval: This routes invoices to one or more individuals, often detached from the AP department, for approval to pay.
  • Query management: This provides a platform for dialogue between buyers and suppliers to address and resolve queries and disputes quickly and easily.
  • Exception handling: This establishes rules for handling documents that fail one of the validation or matching checks. Various options will exist, such as pass to the supplier, pass to the buyer or auto-reject.

Every attempt should be made to keep the data that enters the ERP as clean as possible. Invoices that give rise to exceptions within the buyer’s ERP can be harder for the buyer to handle. Exceptions should therefore be handled between the supplier and the electronic invoicing platform thereby reducing or eliminating buyer-side effort to resolve.

The benefits are not all to the buyer however. The two most common questions that suppliers have of an AP department are ‘Have you received my invoice?’ and ‘When are you going to pay it?’ Through the provision of a web portal, accessible 24×7, suppliers can see the progress of their invoices and see immediately if they have failed validation. Gone are the days when, weeks after an invoice submission, a rejection letter arrives informing the supplier that they missed a PO number from their invoice. The reduction in enquiries to the AP department is yet another example of where resource costs can be reduced.

Accounts Receivable

The AR department sends invoices out. Companies that deliver invoices electronically to their customers will enjoy reduced days sales outstanding (DSO). With the real-time delivery of invoices and the quicker resolution of queries and disputes, even shaving off a few days of time until receipt of payment can have a significant impact on the balance sheet of a large biller.

Customers have access to the underlying data of their invoices, which can be useful for importing into their ERP systems. Likewise, access to related documents can be made available, providing proof of delivery, bill of lading or waybill. These can all help a customer reach the point of approving the document for payment more quickly. Provision of a diverse range of payment options built into the customer portal will encourage the customer to pay online.

Companies that have grown by acquisition will often have several legacy billing systems. An e-billing service provider can help such organisations rationalise the outbound feeds from all of these systems and deliver invoices to customers in a unified format. The customers no longer need to receive invoices in different formats from different parts of the same organisation. This service can often be provided at significantly lower cost than the migration of multiple legacy systems to one platform.

The Future

As the number of invoices delivered by electronic means continues to grow, companies will encounter more and more requests from their trading community, customers or suppliers, to join an electronic trading network.

Different networks operated by different service providers will have different requirements, ranging from the technical (what can be sent/received and how) to the commercial (who has to pay and how much). Given the large number of service providers, the burden of managing these different relationships could become quite onerous. In this situation, companies can seek their own electronic invoice provider to manage these relationships and establish processes that fit around their business, rather than having to make changes at the behest of individual members of their trading community. A progressive service provider will be able to interoperate with its competitors. Suppliers and buyers who belong to one service provider’s network will be able to reach suppliers and buyers who belong to another service provider’s network. Bilateral interoperability agreements between service providers will make this a reality.

By delivering invoices to the point of approval more quickly, the first steps in supply chain finance have been taken. The intrinsic opportunities presented by having a large pool of invoices and connected parties acting in real time can then be leveraged. Any student of accounting will understand the concepts of working capital and the relationships between managing current assets and liabilities. The adage of ‘revenue is vanity, profit is sanity and cash is reality’ has never been more valid and electronic invoicing provides one of the key tools for businesses of all sizes to focus on its cash cycle.

Reverse factoring and dynamic discounting become more attractive as the period between invoice approval and due date is lengthened. Buyers can achieve double-digit annual returns on capital when taking advantage of early discounts with suppliers. Buyers’ working capital can be optimised as days payables outstanding (DPO) is lengthened. Trading relationships are improved as buyers effectively share some of their own credit worthiness with suppliers, and ensuring that the supplier is paid more quickly can help secure the whole supply chain. These are particularly important when dealing with suppliers who may have a poor credit rating but whose offerings are nonetheless critical to the buyer’s business. Several initiatives in this area are being actively progressed by governments, banks and specialist service providers.

Over the next few years, we will witness electronic invoicing becoming a standard business operation with service providers allowing buyers and suppliers to optimise their working capital and access the embedded information within the invoices, gaining a far deeper understanding of their trading relationships. These will undoubtedly include analysis of spending and price comparisons across the network of similar items.

Geographical analysis of trading networks and ‘digital finance’ initiatives will allow third party finance providers to innovate and transform what is arguably one of the most important functions in a business. Companies do not fail due to a lack of ideas but for a lack of cash. Electronic invoicing is an idea that all businesses should take forward.

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