Quantum Mechanics of the Invoice

As interest in electronic invoicing (e-invoicing) peaks, many online and print publications carry articles and whitepapers extolling the benefits of a paperless financial supply chain (FSC). Their focus ranges from treasury and finance through to procurement and supply chain, and each article has a different perspective on the physical or financial aspects of supply chain activities.

In many ways, this is due to the broad spectrum of service providers that provide similar e-invoicing services, each with its own perspective on the market. They range from business-to-business (B2B) e-commerce and dedicated e-invoicing companies, through to commercial banks, trade finance providers and SWIFT.

These different perspectives raise a number of questions: Where does the invoice belong? Is it a FSC or physical supply chain (PSC) document? Is the invoice within the sphere of banks, trade finance or treasury and therefore belonging to the financial domain? Or is it a physical document engrained in supply chain activities within the domain of e-procurement or B2B e-commerce?

Is there a point in the process where the invoice moves from the PSC to the FSC, and transforms from a business document to a financial one? As in quantum mechanics, where electrons jump from one state to another, does the invoice have a ‘superposition’ that allows it to be part of both worlds? Is there a clear indication of where the PSC ends and the FSC begins?

An Invoice is a Physical Document

Once an invoice arrives at accounts payable (A/P), it is the culmination of several activities, starting with procurement through to the delivery and inspection of goods. Within the PSC, direct materials are the raw components that become part of a product sold to customers and indirect materials are the goods or services that facilitate the day-to-day running of a business. Whether dealing with critical direct material spend or in-direct materials, there are various steps required to electronically enable the PSC.

Assuming procurement activities have concluded, both trading partners must be onboarded and integrated with each other to send and receive electronic business (e-business) messages. By doing so, a trading relationship is established between buyer and supplier. This is repeated many times, with the most successful B2B integration providers connecting large networked global communities.

The supply of goods or services starts once trading partners have established a trading relationship. A purchase order (PO) is sent and received, the goods are produced and shipped, and the invoice is issued. The buyer receives the invoice, ensures the goods were delivered in good order, at the right quantity, match to the PO, and the supply has been approved by the appropriate business user. In short, once the approval is given, the invoice has a status of ‘ready to pay’. This is just one very simple scenario out of many complex industry-centric supply chain activities, such as PO changes or advanced shipping notices (ASNs).

All of these B2B processes rely on a level of integration externally between suppliers and buyers and internally within their respective organisations. How do suppliers receive electronic POs, and how do they integrate this data into their enterprise resource planning (ERP) systems? Once the supply is completed, how does the supplier issue an invoice?

This supplier/buyer connectivity across the PSC is the cornerstone of B2B e-commerce and integration. Service providers specialise in the technical connections between trading counterparties – automating the physical process for both direct and indirect materials – starting from POs all the way through to invoicing.

An Invoice is a Financial Document

An invoice signifies the completion of physical activities, in which supply has been fulfilled and payment is subsequently due. At this point the distinction is blurred as to whether the invoice is a financial document. Although it is within the domain of the finance team, payment will not be made until a number of validations are complete and business controls are applied.

Many companies have purchasing compliance policies that mandate three required steps in the process:

  1. Initiate a PO.
  2. Match the incoming invoice against the PO.
  3. Issue a goods receipt notification (GRN).

If the match against the PO and GRN is 100% (or within a specified tolerance) the invoice is made ‘ready to pay’.

Not all companies have achieved full PO compliance, or even issue POs. In this case, the incoming invoice is matched against any available GRN and requires approval from the business user who purchased the goods or services. These validation checks assure the buyer that all risk is mitigated from the supply and the supplier can be paid. Once all the checks are complete and the invoice is ‘ready to pay’ it can be viewed as a commitment in financial reporting and cash management tools.

The A/P department now schedules invoice payment depending on internal payables policies or payment terms from the supplier. The invoice may be eligible for supply chain financing (SCF) by banks or commercial financing companies. Irrespective of whether the invoice is financed, the buyer must pay the supplier and, if possible, provide remittance data for the payment.

FSC processes rely on a level of integration between banks, commercial finance providers, electronic payment (e-payment) vendors, and the buyer organisation. How do suppliers receive finance offers, how are they paid, and how do they reconcile against their receivables? This supplier/buyer connectivity across the FSC is the cornerstone of banks and e-payment companies. These service providers specialise in trade financing and the movement of cash between trading counterparties that allow companies to fund their business.

What Would Dirac Think?

The principle of a quantum superposition as described by Paul Dirac, a theoretical physicist, is that if a physical system is in one configuration, and if this system could be in a different configuration, then it is in a state that is a superposition of the two. A physical system, such as an atom, can exist in different quantum states that correspond to electron waves. These electrons can jump from one quantum state to another by absorbing a photon’s energy difference, and during this jump the electron wave transforms from one state to the other.

If our physical system is the invoice, then can it exist in different states simultaneously? If our electron wave is the order-to-pay (O2P) lifecycle, then in order to change the invoice from a PSC configuration to a financial configuration we need a photon, or a trigger, to make the electron wave jump, and for the corresponding physical system (the invoice) to exist in a different state.

When arguing if an invoice is a physical or a financial document, we described business controls that both end and start the respective processes. These business controls are significant in that they are the Rubicon, a point of no return, for an invoice crossing from the physical process to the financial. These controls trigger approval for payment, either manually or through automation, and at this point the invoice moves from the physical to the financial. The approval is our photon – the trigger that causes the transformation from one state to another – and it is at this point the invoice finds its superposition.

E-invoicing: Banks or B2B?

Admittedly we are being light-hearted and not exactly describing an arrangement of particle fields and revolutionising the field of science in this article. But the principle of a superposition raises an interesting question when describing the status of an invoice during the O2P lifecycle.

An organisation wishing to move to e-invoicing is faced with a fragmented landscape. There are over 500 e-invoicing service providers in Europe alone. Ranging from banks, B2B and business process outsourcing companies, to venture capital funded start-ups, all claiming to offer the optimal e-invoicing solution. So how does an organisation choose which service provider best meets their needs?

What motivates an organisation to choose e-invoicing? Interestingly, the primary business driver is process efficiencies. This was recently verified by a GXS survey where the majority of respondents indicated that process improvement was their biggest driver, closely followed by the cost savings gained by removing paper from the process. An increasing trend is working capital optimisation, driven by SCF – both domestically and cross-border – either by leveraging a company’s own balance sheet, or by involving a third party such as a bank.

There are clear delineations between the PSC and FSC. Each is a specialised area subject to its own expertise, process standards, and regulations. A B2B service provider struggles with the financial regulations around lending and trade finance, and a bank struggles with the intimate knowledge of managing PSCs and bringing companies together through systems integration.

The theory of an invoice superposition is interesting. Does it mean that the invoice is in both the physical and financial worlds simultaneously? If your company is evaluating service providers, which vendor perspective is best suited to meet your requirements and deliver your objectives?

It can be argued that there are multiple crossover points within the PSCs and FSCs. For example, banks are beginning to offer pre-shipment finance based on mature electronic processes and new financial instruments such as the bank payment obligation (BPO). However, these are relatively new offerings and rely on the sharing of information across the PSC.

The reality of day-to-day PSC and FSC activities is that they are fundamentally different, but at the same time interwoven. To complete the physical process, suppliers must be paid and to ensure payment at the end of the financial process, the supply must be proven. The blurring of these lines has been driven primarily by the emergence of SCF models powered by electronic B2B communications. To acquire the data required to enable these new finance options, an intimate knowledge of end-to-end supply chain activities combined with system integration capabilities is essential, and this remains the domain of B2B companies.

If your company is evaluating the implementation of an e-invoicing solution combined with a SCF solution, then consider each of your potential partners’ strengths. If you truly wish to capture all the benefits of an automated PSC and PSC then consider the superposition and find providers that either work in both domains, or that can work together simultaneously.



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