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Payment Automation

What is E-Invoicing?

Jen Ittenbach

What is E-Invoicing?

At its most basic level, e-invoicing is a form of electronic billing used to send and track transactions between two parties, such as buyers and suppliers. E-invoicing software, a paperless solution, streamlines the entire accounts payable process and mimics the current approval process that your company might have in place today.

Traditionally, invoicing has been a paper-based process. Employees in the AP department retrieve data from paper invoices and manually input it into the company’s financial or bookkeeping system. This method eats a lot of time and labor resources and is prone to human error. The result is increased costs, longer processing times for buyers, and suppliers on standby to get paid.

There have been other attempts to digitize invoices, but these should not be confused with true e-invoicing. Some companies scan and use optical character recognition (OCR) of paper-based invoices. Others send PDF invoices via email. These methods may digitize storage of invoices, but the accounts payable (AP) department still had to capture data from the PDF, either by OCR or by manually keying in data from a PDF image.

According to CFO magazine, the average cost per invoice processed ranges from $4.98 per invoice for top performers and $12.44 per invoice for bottom performers.

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Even OCR invoices are prone to errors. OCR software must be “trained” by defining at which location key data fields are expected. When a buyer receives invoices from hundreds of suppliers, each with their own invoice format, training the software is challenging.

E-invoicing streamlines this system electronically so that any data on an e-invoice is automatically entered into an AP system without requiring any input from the AP team. In short, it makes sending and receiving invoices more efficient, accurate, convenient, and ultimately, simpler.

E-Invoice Trends

1. Moving Quickly to E-Invoice Software

According to a 2016 study by the Federal Reserve Bank of Minneapolis, only about 24 percent of the 25 billion invoices generated annually in the U.S. were electronic, but by 2024, that figure is expected to grow to 38 percent.

Part of that growth will come from the U.S. Federal Government, the nation’s largest single purchaser of goods and services. The U.S. processes over 19 million invoices each year, and, as of 2015, approximately 40 percent are e-invoices. The Office of Management and Budget (OMB) issued a mandate requiring vendors to move to e-invoicing by the end of 2018. The move is expected to be beneficial for the government and taxpayers, providing heightened accuracy, and increased efficiency, and an estimated annual savings of $150 million to $260 million.

But the U.S. is still lagging behind Europe and Latin America, where e-invoicing growth rates are much higher, mostly due to government mandates and broad, coordinated private industry-led efforts. For example, in 2002, the European Commission identified e-invoicing as an opportunity and began pushing businesses and governments to adopt e-invoicing in order to respond to the challenges of globalization.

In order to maintain competitiveness in the global economy, innovative approaches needed to be developed to ensure that the value chains within the economy would promote efficiency and certainty … As Europe adopted the Single Euro Payments Area (SEPA), i-invoicing became a logical area to promote efficiency and certainty for B2G and B2B payments.

In other words, e-invoicing is not an idea of some far off future economy. It’s the current and near-future.

2. Reduced Costs and Errors

Most of the shift toward e-invoicing has come from large corporations and government entities who want to gain efficiency benefits, faster processing, and lower costs.

In 2015, PayStream Advisors surveyed over 200 individuals in a wide variety of industries to get their thoughts on e-invoicing. When asked what factors drive organizations to consider an e-invoicing solution, 54 percent of companies cite a reduction in labor and processing costs, 31 percent cite a reduction in lost or missing invoices, and 30 percent cite quicker approval cycles.

Sterling Commerce commissioned a study on electronic invoices of 169 accounts payable departments in eight countries. The study found that by moving from manual, paper-based invoice processes to fully automated e-invoice processing, businesses can realize:

  • Cost savings of 90 percent on the AP side
  • Cost savings of 44 percent in accounts receivable (AR ) departments
  • Error reduction of 37 percent on all types of invoices
  • Storage cost saving of up to 67 percent for AP and 32 percent for AR

3. Keeping with Technology

A recent Gallup survey found that 43 percent of Americans spend at least of their time working remotely. When the AP department depends on paper-based processes, work completed out of the office often means delayed or missing payments.

Electronic services have the benefit of adapting to technology and the anytime, anywhere workforce in ways that paper-based environments cannot. October of 2016 marked a major milestone for mobile usage. For the first time, mobile and tablets were used to access the internet more often than desktop computers (51.3 percent versus 48.7 percent). Employees work from anywhere, at any time, and instantly communicate with people around the world. That’s why it’s imperative that invoices and checks can be accessed on mobile devices so users can view and approve invoices and check payment status.

4. Companies Don’t Choose One Method

While about 50 percent of companies say most of their invoices are received by paper, companies do accept other formats, including fax, email, and electronic. That pendulum is beginning to swing, however, as about 5 percent of companies don’t accept paper invoices at all.

These buyers often require high-volume suppliers to send invoices in an XML, EDI, or similar formats straight from their billing system. However, this presents challenges for some suppliers that have a process in place for sending invoices. When a buyer asks them to submit invoices another way, it interferes with their process by creating a procedural exception—a timely cost. That’s why it’s important to look for e-invoicing tools that are easy to use and let your suppliers send invoices in their preferred way, even if it’s fully electronic from the buyer’s perspective.

The ‘Real-Time’ Economy

We live in a real-time economy, where financial transactions are processed instantaneously. About half of companies prefer electronic payments for transactions now.

Manual processing of invoices can involve up to 15 steps, and invoices can take more than a week to process. Making matters worse, AP departments are swamped with supplier inquiry calls. Suppliers want the ability to track the status of their invoices and get paid quickly, but paper invoices don’t offer such visibility.

When business owners and financial executives think of the cost of sending paper invoices, they often think solely about tangible costs such as paper and postage. While those costs can be significant, the real cost of paper is time. Time spent issuing, reviewing, scanning, approving, handling, and processing paper invoices is extensive and expensive.

Automation allows processes to move five to ten times faster, and use, on average, 37 percent fewer resources. That’s more time for your staff to focus on productive tasks. Automating the invoice process will keep you in the real-time economy, where most businesses are now operating. E-invoices can severely reduce the number of calls your AP department receives because suppliers have real-time access to the status of their invoices online.

E-Invoicing Has Become Best Practice

Today, businesses in every industry are being asked to do more with less. Escaping the paper-heavy processes in your AP department makes that difficult, if not impossible. Two out of three companies report wasting between one and eight hours a week addressing invoice management issues in their AP departments. So freeing up those hours to focus on value-added activities could be a game-changer.

In 2016, Ardent Partners released the results of their study, “ePayables, 2016: Eyes on the Prize,” which comapred the cost of paper invoices for the average company to “Best-in-Class” organizations that have leveraged technology to streamline the AP process. According to the study, it costs the average AP department $13.04 and 12.2 days to process a single invoice and only 24.5 percent of invoices are processed “straight-through,” meaning approved without any human intervention. But Best-in-Class organizations achieve per-invoicing costs of only $2.87. Invoices are processed in 3.9 days and 57.1 percent of invoices are processed straight-through.

Dispelling Common e-Invoicing Myths

Isn’t e-invoicing only for large companies?

About 20 years ago, electronic invoicing wasn’t very popular in the B2B space, and for good reason. Not only was e-Invoicing difficult to set up, but it was also expensive.

Only large businesses with thousands of invoices a month were taking advantage of the solution. Today, electronic invoicing software can be simple to implement and very cost effective—you just have to choose the right provider.

Switching to electronic invoicing is something you can do right now that will have an immediate, positive impact on your AP process as a whole.

Is e-Invoicing more secure than paper?

Cyber security has become an increasingly popular topic, but oftentimes the cause of these scares is human error. Electronic invoicing gives organizations control over the security of their data because the software includes many internal safety features such as validation requirements, duplicate/error scans, and various degrees of approval requirements. Modern AP automation also involves banks and vendors. When it comes to transferring electronic funds involving banks, there are numerous legal policies in place to ensure that the proper transaction, value, and payment method are protected and executed correctly.

Companies of all sizes have come to trust and depend on the security of electronic transactions handled by their accounting software and banks. The security that electronic invoicing provides is now a comforting benefit. When paired with data encryption and firewalls that should already be in place, electronic invoicing software is as secure as any other professional software system.

Isn’t e-Invoicing expensive to implement?

To compare the cost of an electronic invoicing solution to your current processes, you first have to determine how much your current system costs. Oftentimes, paper-based processes make it difficult to accurately calculate costs. What may not be so apparent on first thought is the many manual tasks that are “buried in paper.”

For example, how much time does it take people in your organization to manually enter invoice data? How much does your company pay in late fees every year, because invoices get lost or take an exorbitant amount of time circulating through snail mail for approval and payment? These questions make an accurate cost-estimation extremely challenging.

While there is a cost associated with electronic invoicing and automation, the most expensive line item for any company is inefficiency. Determining how much paper really costs your company will help you compare your current process with an automated process accurately. To get started, take a look at the following:

  • The time it takes to process and mail invoices, including sorting, categorizing, and manually entering invoices into your accounting software
  • Time spent reviewing invoices
  • Time spent trying to find and fix data entry errors
  • Shipping costs if invoices must be sent to a corporate office or for outsourced scanning
  • Time spent responding to vendor calls regarding status of payment
  • Missed early-pay discounts while invoices were being processed manually
  • Late fees when invoices are not processed timely
  • The cost of storing paper invoices, including the room, cabinets, folders, and other furniture and supplies

In the end, most of AvidXchange clients find that they save over 60 percent on processing costs every year. They also feel that they have a competitive advantage now that they’ve adopted a process that’s scalable for growth.

Is e-Invoicing difficult to implement?

It’s often the fear of the unknown that prevents us from transitioning to new technologies. The beauty of a good electronic invoicing solution, however, is that it will mimic your current process and will actually make it easier operationally.

Electronic invoicing removes the human error from data entry, as it will take the pertinent data from the invoice and transfer it directly into your accounting system. This raises an essential piece of the electronic invoicing conversation: integration.

Integration means that an invoice is sent in a format that can be automatically recognized by your accounting system without any human intervention. Integration is what makes electronic invoicing valuable and different from document management. It’s not just about removing the paper from your process, it’s about capitalizing on the data that’s available when you convert your invoices into an electronic format. When electronic invoicing is coupled with your workflow, then it should follow your current process. If it follows your current processes, then adapting to the change shouldn’t be difficult but intuitive.

How to Transition into an Electronic Invoicing System

Every company has unique business processes, requiring the leap into an electronic invoicing system to involve some degree of customization. That customization may include invoice fields, billing schedules, customer notifications, and approval workflows.

Regardless, the transition is not a process that usually takes years to complete. Most companies will start by focusing first on a group of vendors who have the largest volume of invoices. Letters are sent to those vendors explaining the process change and providing information on how to set up their account online, with help desk contact information should any questions arise.

Those letters are followed by emails and phone calls from the adoption team to ensure vendor participation. Vendors are typically open to converting to electronic invoice submission because it helps them get paid faster, reduces their invoicing costs, and provides visibility into the invoicing process. Furthermore, there is never a charge for vendors to use the AvidXchange platform. This is a huge benefit in getting them on board with the new process.

E-Invoicing Supplier Adoption

Supplier adoption is key to a successful transition to electronic invoicing. The average company that transitions to an electronic invoicing system realizes a 35 percent vendor adoption rate. That number is expected to increase as more companies recognize the cost and time-saving benefits of invoice automation.

Barriers, however, can exist. Some e-invoicing solutions offer only two ways for suppliers to send electronic invoices. High-volume suppliers are typically asked to send an XML, EDI, or similar document straight from their billing system. Smaller suppliers are typically asked to create and send invoices through an online portal. Both of these methods require suppliers to change their billing processes, costing your supplier time and money. When your e-invoicing tool allows customers more options, more of your suppliers will move away from paper.

There are two keys to improving supplier adoption: education and ease of use. The AvidXchange Supplier team, for example, will help educate your suppliers on why it makes sense to convert to e-invoice submission. Once your suppliers understand that submitting invoices electronically won’t require an overhaul to their existing processes, won’t cost them any money, and can be done in a method that easily integrates with their existing systems and processes, you’ll remove the natural resistance to change.

When your suppliers find out that they’ll get paid faster and have total visibility into the status of their invoice, they’ll encourage more of their customers to implement e-invoicing as well.

Save the Environment with Electronic Invoicing

Going green offers benefits for companies of all sizes beyond the dollars saved on paper and postage. With more people caring about the environment, sustainability attracts talent, is a market differentiator and generates goodwill.

If your company receives 100 bills today and converts just 35%, you would have reduced your carbon footprint by the equivalent of:

  • Five kilometers of driving
  • One flight to Bangkok
  • Eight trees planted
  • 51-kilowatt hours (a light bulb consumes 175 kWh per year)

It’s been estimated that paper invoices are responsible for 10 percent of all trees cut down worldwide and creating paper invoices uses as much energy each year as the consumption of 20 million households. A year’s worth of invoices would take up as much space in a landfill as 10 football fields, stacked more than 100 feet deep with paper.

When you consider the impact that paper invoicing has on the planet, it’s easy to see why more companies are moving toward electronic invoicing.

Nicole Claret, Director of Cash Management at National Development, went green by switching to electronic invoicing. Hear her story here.

 

The Bottom Line

Moving to electronic invoicing offers numerous benefits: productivity gains, better visibility into invoices issued and their payments, immediate access to archived invoices, reduced payment times, and most importantly, better customer/supplier relationships. With more businesses and governments moving to electronic invoicing, now is the time to adapt. Remember: It’s advantageous to your business to drive ahead of the transition-curve, never behind it.

 

Electronic Invoicing - Facts vs. Fiction

ABOUT THE AUTHOR

Jen Ittenbach

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