An understanding of what is invoice processing

An understanding of what is invoice processing

While in somewhat technical terms invoice processing could be described as the process that manages invoices from the point of receipt to their eventual settlement, it has a relevance far in excess of what a definition or explanation can convey.

The slightly strange thing about invoice processing is that it is done not by the party generating it but the other party to the contract who receives the generated invoice and then processes it. 

For the party that generates or issues an invoice, invoice processing is the key to unlocking a supply of a critical resource; cash, which is the central resource in any company, and runs like blood through its various organs and activities. When its client, to whom it has supplied a product or service, processes it, the end result is release of payment which constitutes revenue for them and is the reason for their existence.

For the party that receives the invoice, it is a process that needs to be carefully handled as it ends with having to put their hands in the till and taking out the cash required to honor that invoice. Cash is a critical resource and needs to be carefully managed, as it can be easily misused. Hence, invoice processing often needs to go through approval and authorization processes. Efficient handling can multiply the resources of the company, ensure maintenance of a harmonious relationship with suppliers and get favorable payment terms like discounts and credit periods.

In a critical business process, such as invoice processing, it makes sense to deal with the best in the business. oWorkers, despite its youth, it is only 8 years old in the industry, is already one of the top three BPO service providers in data related processes such as invoice processing, supporting clients from around the world.

 

Types of invoices

An understanding of what you are dealing with can enhance performance and efficiency. While the primary objective remains the same, there can be a bewildering array of invoice types. A part of understanding what is invoice processing lies in understanding the types of invoices. The more common types are discussed here.

Pro forma invoice

A preliminary invoice that is meant to mirror the actual invoice when it is raised later is known as a proforma invoice. It is a way of confirming what the real or actual invoice, when raised, will look like. In that sense, it acts like a surrogate contract. It is also a way of confirming that the supply should be of the goods and services contained therein.

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Timesheet invoice

Many times, the arrangement between a buyer and supplier is based on effort, or the time that they spend doing the defined work. These invoices are particularly popular in the services space where billing for time is common and an important step in understanding what is invoice processing. A lawyer, for example, usually bills an hourly rate and tracks the time he has spent on a particular assignment. Thereafter he will raise a timesheet invoice for the hours and the resulting value.

Commercial invoice

Though all invoices are commercial invoices, this term is used in reference to a document that is used for a declaration at the customs checkpoint, in the case of goods exported across international borders.

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Retainer invoice

A retainer invoice is like a bill that is written for services, generally, or products, occasionally, that are still to be delivered. It is a method through which a client can secure the time and service of an independent contractor by paying him in advance. The payment could also be only a part of the total value. The raising of the invoice before delivering the service, in a way, makes it secure.

Recurring invoice

Subscription services, which are a common form of buying a product or service, are recurring in nature. The invoices periodically raised for the service are known as recurring invoices. If I buy an annual subscription of the National Geographic magazine, I will have to do the same every year if I want to continue my service.

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Credit invoice

Literature on what is invoice processing may not always cover a credit invoice. This is a type of a reverse invoice and used when a supplier needs to give money back to the client. It could be because of faulty products that have been returned or some other reason like an accounting error. The values shown on this invoice will be in the negative.

Expense claims

Employees often spend money from their own pocket for business purposes. It could be for a client dinner or it could be for local travel while on a business trip. These need to be billed back to the company and a reimbursement obtained. The usual method is to raise an expense claim which is in the nature of an invoice.

Volume fluctuations are not uncommon in business. Clients don’t have a responsibility of committing future volumes, unless there is a benefit associated with the commitment. When volumes fluctuate, you want the support of a provider like oWorkers who, with its deeply entrenched community participation, is able to hire additional people at short notice. Without oWorkers, you may have to let go of volumes or follow more expensive options like keeping a bench.

Interim invoice

There are occasions when the contract terms provide for intermittent payments based on certain milestones being achieved. These interim invoices enable the supplier to better manage its cash flows through periodic recovery of dues.

Account Statement

Yet another arrangement is where a contractor keeps a tally of all services provided during a fixed period. At the end of the period a statement of account reflecting the outstanding at the end of the period is presented, for clearance. This is also recurring in nature but the amount varies each period. This statement of account not only becomes a record of transactions but is also presented in the form of an invoice.

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Why do we use invoices?

Another way to understand what is invoice processing is to make an effort to understand its uses and applications. As we know, a business takes each action for a purpose. If it issues invoices, there must be a purpose behind it. And since it is done, it must be done properly, with adequate checks and balances around it. Hence it consumes time and effort. So, why exactly do we issue invoices?

Transaction record

Not all business contracts are supported by detailed contracts. In many cases, discussions, email exchanges and other communication can also underpin transactions. These distributed records become difficult to locate and assimilate, if required in case of a dispute. An invoice becomes a formal record of a transaction having taken place. It is expected that relevant details of the transaction will be listed on it. This could be classified as the most fundamental answer to the what is invoice processing question.

Notice of expectation of settlement

An invoice often acts as a formal notice, or request, from a supplier to a buyer, for settlement of the money part of the deal, with the products or services, presumably, having already been supplied. Else, there could be delays in settlement of left to interpretation. The invoice sets forth the expectation in no uncertain terms.

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Forms basis for accounting

All businesses follow a system of accounting to keep track of their transactions. Registered/ incorporated entities even have legal requirements to the effect. Accounting processes rely on various pieces of documents and evidence, one of which happens to be an invoice, both the ones that are generated for payment by buyers, as well as the ones received for processing. The accounting system, then, also generates a record of taxation and other statutory liabilities.

Legal evidence

In many jurisdictions, issuance of an invoice is a legal requirement to evidence a transaction. Even where it is not, the issuance and delivery of an invoice can be used as evidence, in the event of need, if legal issues arise at a later point.

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What is invoice processing in a few steps

Every major activity done by a company follows a sequence of activities or steps. Usually these are documented in order that the same thing can be done by everyone and the process does not become dependent on one or two resources.

What are the major steps in processing an invoice?

Verification upon receipt

Upon receipt, it is a good practice to ensure that the invoice has been correctly presented, instead of doing so when it is retrieved for payment. Error correction can take time and the supplier will lose time if done later. Early checking and communication is recommended and is also a good practice for maintaining respectful, harmonious relationships.

The basic details an invoice should ordinarily have include the Purchase Order no. (if applicable), Date, Client Name, Product or Service description, Applicable rate, Reflection of taxes and statutory levies, Tax ID of both parties and indication of how payment needs to be made.

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Creating an entry in the system

In most cases invoice processing begins life as a manual process, since the document is received from a supplier either as an email attachment or as a physical document.

If the company uses a software application for invoice processing, such as an accounts payable system, at this stage the invoice will be ‘born’ or created on the software, after which the rest of the journey will be digital. A digital image is also obtained for the digital storage system, which might be in addition to retaining the original invoice in hard copy format.

Companies doing manual processing can skip this step.

Authorization

The authorization, or approval, step is designed to ensure that money is being paid for a rightful purpose and is not a misuse of the company’s resources. Usually, the relevant approvals are obtained before placing an order, especially where the buyer has a Purchase Order issuance process for placing an order. This reduces delays at the time of payment.

oWorkers is able to access the latest technologies for invoice processing, thanks to relationships with technology companies, nurtured over many years. Companies processing manually should consider engaging an outsourced provider such as oWorkers for efficient processing of invoices.

Payment

The accounts payable team, who processes the invoice, is responsible for effecting the final payment after all necessary steps and approvals have been completed.

The payment needs to be made late enough so that the company does not needlessly go out of funds and loses an opportunity to either earn interest on balances or avoid paying interest on overdrafts. It also needs to be made early enough to maintain a good credit standing and ensure penalties are not attracted. This would complete the loop on what is invoice processing.

Once approvals have been received, payment is usually a formality. With modern digital payment systems, it does not take long for the payment to reach the beneficiary, unlike paper processing days when a check was issued, then physically sent, which was deposited in the beneficiary’s bank account after which it was presented by their bank in clearing to the issuing company’s bank.

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