How Does Automated Invoice Processing Work?

invoice automation software

Last Updated September 13, 2023

Processing invoices is no simple task. Most businesses handle at least 500 invoices per month, and 66% of businesses say that processing invoices takes five days of work per month.

Whether the invoice is received by mail, email, or e-invoicing software, if the average business isn’t utilizing invoice automation, it’s going to require a lot of labor to manually process those invoices.

Large businesses with large accounting teams may be able to delegate responsibilities efficiently in order to process invoices manually. However, building out a team dedicated strictly to accounts payable is a luxury that many business owners do not have. Small business owners have to wear multiple hats, and sometimes, accounts payable is one of those hats.

This is what makes automated invoice processing so helpful for so many business owners. Optimizing accounts payable processes can impact profitability and improve cash flow, which is of utmost importance for small businesses.

What Is Invoice Automation?

Invoice processing automation is the exercise of using invoice automation software to pull all the invoice data from your accounting system and putting it into an ERP (enterprise resource planning) platform. The ERP software analyzes, organizes, and stores the invoices. It matches purchase orders and receipts with their respective invoice numbers, ultimately processing the invoice and sending payment to the seller once manually approved.

Invoice automation drastically speeds up invoice processing, reducing a significant portion of the manual labor that typically would have been needed to verify, organize, and send the invoices for approval.

How Does Automated Invoice Processing Work?

With automated invoice processing, once the invoice is scanned into an accounting system, the invoice automation software will handle most of the rest of the steps by extracting the data, converting it into a text document, and mapping it into an automated management system.

From there, the automation software captures the fields that you would find written on a standard invoice (such as supplier name, invoice number, quantity and description of goods received, date issued, etc.) and registers those fields into an ERP system.

Once-manual tasks such as reviewing invoices, matching invoices, and reconciling invoices can be automated, proving a huge benefit for small business owners and accounts payable teams.

Automated invoice processing transforms the accounts payable process from start to finish. Traditional invoice processing involves:

  • Manually matching the invoice
  • Manually approving the invoice (often requiring multiple approvals)
  • Manually entering the invoice into the accounting system
  • Manually posting for payment
  • Manually issuing payment

… and so on. In fact, there are up to 15 steps involved with manual invoice processing. Thanks to automated invoice processing, the majority of these steps are eliminated no matter what type of invoice you’re sending or paying.

What is Invoice Automation Software?

Invoice automation software is the key that unlocks automated invoice processing. Typically, invoice automation software has capabilities that include sending, receiving, reviewing, matching, and approving invoices. Through these capabilities, and being able to ingest and match data from multiple channels, invoice automation software completely transforms accounts payable (AP) workflows and eases AP management efforts.

Best Automated Invoice Processing Software

Given that 71% of people believe invoice automation will be the biggest e-invoicing trend of 2023, it’s important to get one step ahead by looking into some of the best automated invoice processing software, such as AirBase, Stampli, and Tipalti. These invoice automation platforms are regarded as some of the easiest to use, which small business owners may want to prioritize since they will likely be the ones working directly with the software.

Invoice Automation Benefits For Accounts Payable

Some businesses receive up to 1,000 invoices per day. For those businesses, invoice automation might be an obvious option. However, even small businesses that handle just a handful of invoices per day can reap its benefits since automated invoice processing can deal with invoices in less than half the time it takes peers who process invoices manually.

Let’s take a look at more of the benefits invoice automation provides to accounts payable.

Cheaper Than Manual Invoice Automation

AP automation software will cost you money, but it is significantly cheaper than handling invoice processing manually.

According to Stampli, an AP automation tool, to find the true cost of manual invoice processing, you should add the following factors:

Total invoice processing cost = labor + paper processing and storage + errors + fraud + late payment fees + regulatory penalties.

When errors are found, fraud occurs, or late payment fees are imposed, this process can become expensive for your business.

Even if your business gets away with only paying for labor and paper processing, by managing invoices manually, you may need to pay for an additional employee to handle your accounts payable. That’s tens of thousands of dollars out of your pocket each year.

Most AP automation software companies charge around $1-$2 per invoice. If your business is handling 200 invoices per month, that equates to $2400-$4800 annually — significantly cheaper than if you were to expand your accounting team by hiring a new employee.

Reduces Manual Labor

Most invoice automation software companies’ main marketing message is geared around reducing the amount of manual labor for business owners and their employees — and for good reason! Automating your invoice processing system can result in much less manual work for you and your team.

If your business is one of the 66% that finds that processing invoices manually takes up to five days per month, it’s time to make a change. Those are five days that employees — or you, the business owner — could instead be spending on revenue-driven projects dedicated to increasing sales or improving cash flow.

Eases The Approval Process

Invoice approvals are the most commonly fully automated task among AP, and there’s a reason for that: almost half of U.S. businesses require more than one person to approve an invoice.

Invoice approvers can get tired of being regularly pinged about approving invoices. Plus, when there’s a dispute regarding an invoice or invoice payment terms, it can lead to endless back-and-forth over email that can cause tension among the workforce.

Invoice automation solves these problems. Most automation platforms provide an online portal, so all the invoice approvals happen in the same space. Employees can also communicate via this portal, thus allowing for a more clear and swift communication process rather than doing so over email.

Lessens Chances of Human Error

A single error on an invoice can cause a ripple effect that eventually slows down a business’s cash flow, which can be particularly detrimental for small business owners.

It’s well documented that the No. 1 mistake small-to-medium-sized businesses make when invoicing is relying too heavily on manual systems.

Automating your processes whenever possible — not just pertaining to invoicing — is good practice. Automated invoice processing prevents common human accounting errors, such as misspelling a business’s address, miscalculating goods, and matching invoices incorrectly. All three of those examples can lead to an invoice not being received on time, which can lead to late payment, which can then lead to cash flow problems. It will also show when each invoice’s payment is due, so accounting teams don’t have to manually calculate invoice due dates.

Speeds Up Accounts Payable

Invoice automation is more than 80% quicker than manual invoice processing, so it’s no wonder that 26% of businesses are working toward having fully automated invoicing processes by 2024.

Many tasks that come with invoicing are simple yet monotonous and extremely time consuming. Accounts payable can have just as much oversight over the invoicing process with invoice automation while eliminating those monotonous tasks. Paying your invoices quicker can help your business stay on track, plus it ensures your business partnership continues running smoothly as it allows your business partner to maintain a high cash conversion cycle.

Differences Between Manual and Automated Invoice Processing

To summarize, here are the key differences between manual invoice processing vs. invoice automation:

Manual Invoice Processing Automated Invoice Processing
Requires entering data, verifying information, and storing documents Accounts payable handlers do not have to manually enter, verify, and store data and documents
Approval process can be complex, with back-and-forth emails and needing to attach or send proof of approval with the invoice Invoices are routed directly to the approver(s). Approval process can also typically be customized by invoice or type of invoice
Payment processing often requires physical, paper copies of invoices, signatures, etc. Payment processing always occurs in the same online system, allowing involved parties, such as approvers, to manage and schedule payments in one place – the online portal
Requires business owners to budget for employees to handle invoice processing Requires business owners to budget for the purchase of invoice automation software
More opportunity for human error Less opportunity for human error than manually processing invoices
Typically far more time consuming than automated invoice processing Significantly reduces time and manual labor dedicated to the invoicing process