What Is Invoice Processing: How to Process Invoices, Best Practices & More

Invoice processing is a cornerstone of efficient accounts payable (AP) operations. It ensures accurate and timely vendor payments, supports healthy cash flow, and fosters stronger vendor relationships. However, effective invoice management goes beyond simple record-keeping—it involves leveraging innovation to reduce processing times, improve visibility, and enhance overall operational efficiency.

This blog will explore the intricacies of invoice processing in accounts payable, including its steps, challenges, and methods. Additionally, we’ll explore the transformative potential of automation in helping businesses streamline operations and maintain a competitive edge. 

What Is Invoice Processing in Accounts Payable?

Invoice processing in accounts payable is the structured method of managing vendor invoices, ensuring accurate and timely payments while maintaining compliance with fiscal policies. This process is a cornerstone of the accounts payable department, forming the final stage of the procure-to-pay (P2P) cycle.

It begins when an invoice is received and concludes when the payment is recorded in the general ledger. Traditionally handled manually, businesses today increasingly rely on invoice automation software to streamline operations, reduce errors, and enhance efficiency. Invoice processing is essential to maintaining vendor trust, optimizing cash flow, and leveraging benefits like early payment discounts.

What Are the Key Steps in Invoice Processing?

Invoice processing involves a structured approach to managing vendor invoices, ensuring accuracy, efficiency, and compliance. Here’s a detailed breakdown of each step in the process:

Step 1: Receiving the invoice

The first step is receiving the invoice, which can arrive through various channels:

• Paper documents via mail
• Email attachments
• Fax or scanned copies

Best Practices:

Implement a centralized system for collecting all invoices to avoid missed documents.

Use automated tools like OCR (Optical Character Recognition) to digitize paper invoices and extract key data.

Key data to capture:

• Invoice date
• Vendor details (name, contact, tax ID)
• Description of goods or services
• Quantity and pricing
• Total amount payable, including taxes and additional charges (if any)

Step 2: Verifying and matching the invoice

This step ensures the invoice’s accuracy and validity. The three-way matching process is commonly employed here, which involves cross-referencing:

1. The invoice with the details of items or services delivered.
2. The purchase order (PO) to confirm the agreed pricing, quantities, and terms.
3. The goods receipt note (GRN) to ensure the goods or services were delivered as ordered.

Steps involved in verification:

• Match the quantities, descriptions, and prices with the PO.
• Confirm that goods or services have been delivered as ordered.
• Address any discrepancies, such as incorrect totals or unauthorized fees.

Measures to avoid fraud:

• Confirm the authenticity of the vendor and invoice by checking against a pre-approved vendor list.
• Use automated software to identify duplicate invoices or suspicious activity.

Discrepancies must be flagged immediately, and the vendor should be contacted for clarification to avoid delays.

Step 3: Resolving invoice disputes

Discrepancies found during verification must be resolved quickly. Common disputes include incorrect pricing, missing items, or unauthorized additional charges.

Steps involved in resolving disputes:

• Clearly document discrepancies and provide evidence, such as a copy of the PO and delivery receipt, to the vendor.
• Communicate with the vendor to clarify or adjust the invoice details.
• Leverage automation tools that notify vendors instantly and track dispute resolutions.

Step 4: Approving the invoice

Once verified, the invoice requires approval before payment. The approval process may vary based on the invoice amount.

Steps involved in approval process:

• Small invoices may be automatically approved
• Higher-value invoices may require multiple levels of approval from department heads or finance managers.

Step 5: Processing the payment

Once approved, payment is scheduled according to the agreed terms. Payment methods typically include:

• Checks for local vendors.
• ACH (Automated Clearing House) transfers for domestic payments.
• Wire transfers for international transactions.

Steps involved in payment processing:

• Verify payment terms (e.g., Net 30, Net 15).
• Check for early payment discounts, such as a 1% discount for payments within 10 days.
• Confirm the payment details match the vendor’s banking information

Step 6: Recording and archiving the invoice

Finally, the invoice and payment details are recorded in the financial system and securely archived for future reference.

Steps involved in recording and archiving:

• Record the payment in the general ledger under the correct category (e.g., cost center or department).
• Archive the invoice, PO, GRN, and payment confirmation in a secure, searchable system for future reference.

Benefits of proper archiving:

• Simplifies audits and enhances compliance.
• Improves the accuracy of financial reporting

Types of Invoice Processing Methods

Businesses usually process invoices using one of two methods: automated invoice processing or manual invoice processing. Each method has its own workflow, benefits, and challenges, which we will explore below in detail.

Manual invoice processing

Manual invoice processing is a traditional approach where every step of the workflow relies on human effort. Invoices are typically received as paper documents, email attachments, or faxes and must be physically sorted and tracked. 

Data from the invoices is manually entered into accounting systems, a labor-intensive process prone to errors like typos, missed fields, or duplicate entries. Verification is conducted by cross-referencing invoice details with purchase orders (POs) and goods receipt notes (GRNs). Any discrepancies require manual investigation and communication with vendors, often leading to delays. 

Approval workflows involve routing paper copies or email attachments to approvers, which can be time-consuming and inefficient. Payments are also processed manually, requiring additional checks to ensure accuracy.

While manual processing may work for businesses with minimal invoice volumes, it becomes increasingly challenging to scale. The method is time-consuming, error-prone, and often results in higher costs due to inefficiencies and the need for extensive human resources.

Automated invoice processing

Automated invoice processing utilizes advanced technologies like Optical Character Recognition (OCR), machine learning, and Enterprise Resource Planning (ERP) systems to streamline the entire workflow. 

Invoices can be received through multiple channels, including physical mail, email, electronic data interchange (EDI), or vendor portals, and are instantly digitized and logged into the system. 

Data extraction tools automatically capture details like invoice numbers, vendor names, amounts, and payment terms. The system validates this data against predefined business rules, ensuring alignment with purchase orders (POs) and goods receipt notes (GRNs). 

Discrepancies, if any, are flagged for review, reducing the risk of duplicate payments or fraud. Approval workflows are automated, notifying relevant personnel and routing invoices seamlessly. Once approved, payments are scheduled and processed automatically through methods like ACH transfers or wire transfers.

The result is a highly efficient process that saves time, improves accuracy, and ensures compliance with financial policies. Automation is particularly advantageous for businesses handling large volumes of invoices, offering scalability and cost-effectiveness.

Comparison: Automated vs. Manual Invoice Processing

Aspect	Automated Invoice Processing	Manual Invoice Processing
Receiving invoices	Centralized and digitized through OCR and EDI systems.	Paper or email-based with manual organization.
Data entry	Automatically extracted and entered into systems.	Requires manual input, prone to errors.
Verification	Automatically validates against POs and GRNs with predefined rules.	Manual cross-referencing of documents.
Approval workflow	Seamlessly automated, with real-time notifications to approvers.	Delayed due to manual routing and follow-ups.
Payment processing	Automatically scheduled and processed.	Manual payment processing requiring repetitive checks.
Scalability	Effortlessly handles large invoice volumes.	Difficult to scale for high-volume processing.
Error rates	Minimal due to automation.	Higher error rates from manual data entry and checks.
Cost-efficiency	Reduces processing costs by up to 80%.	Higher costs due to labor and inefficiencies.

Why Should Businesses Automate Invoice Processing?

For B2B organizations, where invoice volumes are high and accuracy is critical, automating invoice payment processing is a necessity. Let’s understand why automating invoice processing is necessary.

1. Eliminate manual errors

When invoices are handled manually, mistakes can happen, like paying the same bill twice or entering the wrong information. These errors can harm trust with vendors and damage relationships, which might disrupt the supply chain and reduce profits.

2. Save time and improve productivity  

Processing invoices the traditional way is often slow. It may require several approvals, causing delays in operations. This means accounting teams can’t focus on important projects, which can hold back innovation and make it harder for the company to respond to market changes.

3. Lower operational costs  

Sticking with manual processing comes with high expenses, averaging about $10 for each invoice. This inefficiency cuts into profits and takes away funds that could be used for growth or improving customer service.

4. Get real-time insights and control  

Without automation, companies can’t track invoices in real-time, which might lead to cash flow problems and missed payments. Not being able to quickly fix errors can result in late fees and strain relationships with vendors.

5. Build stronger vendor relationships  

Using manual processes can hurt vendor trust due to mistakes and payment delays. This can create tension in partnerships and could disrupt services, putting the company at a disadvantage compared to competitors.

Benefits of Invoice Processing Automation

As businesses grow and transaction volumes increase, automating invoice processing becomes essential. This approach enhances efficiency, accuracy, and compliance. Here are some key benefits of invoice processing automation:

1. Enhance accuracy with zero manual errors  

Invoice automation reduces errors like duplicate payments and incorrect entries, fostering strong vendor trust and maintaining supply chain efficiency.

2. Boost efficiency and productivity  

Automation streamlines workflows, allowing accounting teams to focus on strategic initiatives and respond quickly to market changes.

3. Lower operational costs  

Automated processing saves over $10 per invoice, freeing funds for growth opportunities and improving customer satisfaction.

4. Achieve real-time visibility and control  

Gain real-time tracking of invoices to manage cash flow effectively, preventing late payments and maintaining vendor relationships.

5. Fortify vendor relationships  

Reliable automated processes minimize payment delays, strengthening partnerships and enhancing competitive positioning in the market.

6. Go paperless

Shifting to a paperless invoicing system reduces environmental impact and saves storage space. Digital records not only declutter the office but also support sustainability efforts.

7. Centralized data

Automation centralizes invoice data in one secure location, making it easily accessible. This organization improves workflow and enhances data security for sensitive financial information.

8. Efficient reporting

Automating invoices enables real-time analytics and reporting. Businesses can quickly identify spending trends and make informed decisions, supporting growth and profitability.

9. Audit-ready records

Automated systems provide clear, organized records for audits and compliance. A well-maintained audit trail simplifies the review process and showcases financial integrity.

10. Scalable processes

As transaction volumes increase, automated systems can easily handle growth without needing additional resources. This scalability allows companies to expand efficiently without sacrificing quality.

Beyond efficiency: strategic insights with automation

Automation doesn’t just streamline operations; it provides actionable insights into your financial health:

• Cash flow management: Real-time analytics offer a clear view of cash inflows and outflows.
• Supplier performance metrics: Evaluate vendor reliability and identify opportunities for early payment discounts.
• Operational trends: Track processing trends to refine workflows and improve efficiency.

What Are the Challenges in Invoice Processing & How to Overcome Them?

As businesses grow, inefficiencies in invoice processing can lead to issues like missing documents, data inaccuracies, and routing delays. These inefficiencies inflate costs, disrupt workflows, and weaken vendor relationships. HighRadius accounts payable automation offers technology-driven solutions to address these challenges and optimize your processes.

Challenge	Problem	Solution	How HighRadius AP Automation Software helps
Missing Documents	Missing invoices or supporting documents result from disparate systems that fail to maintain a unified record of files and attachments.	Centralize all invoices into a single repository.Use cloud-based platforms for real-time access and secure storage.	AI-based invoice capture ensures 100% data capture from various formats and channels, storing and organizing invoices automatically in a centralized AP Inbox.
Inaccurate Data	Manual data entry and inconsistent formats cause invoice errors, such as incorrect client details or miscalculations, leading to delays.	Leverage OCR and machine learning for automated data capture and validation.Automate checks against POs and GRNs for accuracy.	Automated invoice processing eliminates manual entry, validates invoices against rules, and flags anomalies like duplicates or incorrect pricing.
Invoice Status	Unknown Lack of visibility into processing workflows causes bottlenecks, late payments, and vendor relationship issues.	Use workflow automation tools for end-to-end visibility.Implement dashboards to track approvals and pending payments.	Reporting & analytics provides 360° AP process visibility via customizable dashboards. Automated alerts ensure timely actions on overdue tasks, preventing workflow disruptions.
Routing Errors	Manually routing invoices increases delays, misplaced approvals, and higher administrative costs.	Automate routing with AI tools to assign invoices to appropriate approvers. Configure escalations for unapproved invoices.	The Approval Workflows feature automates routing based on role-based thresholds, ensuring invoices reach the correct approvers.

How Can You Improve Efficiency of Invoice Processing?

By addressing inefficiencies and adopting best practices, businesses can optimize their workflows and enhance financial management. Here’s a comprehensive guide on improving invoice processing efficiency.

1. Evaluate your current process

Start by assessing your existing invoice processing workflow. Map out every step, from invoice receipt to payment, and identify inefficiencies or bottlenecks. Collect key performance metrics such as:

• Average processing time per invoice
• Error rates in data entry or approvals
• Percentage of late payments

Consult team members involved in the workflow to gather insights into their challenges. Compare your process with industry best practices to pinpoint gaps. For example, are you leveraging automation? Are your approval workflows optimized? A thorough evaluation lays the groundwork for targeted improvements.

2. Standardize invoice formats

A standardized invoice format ensures clarity and reduces errors, making the process smoother for both businesses and clients. A professional invoice should include:

• Company logo and contact details
• Unique invoice number and issue date
• Client details and payment terms
• Itemized list of services or products
• Applicable taxes and total amount due

Standardization helps avoid confusion, speeds up processing, and reinforces brand consistency. Automation tools can simplify this by applying predefined templates across all invoices.

3. Opt for electronic invoicing

Electronic invoicing, or e-invoicing, digitizes the entire invoicing process, eliminating the need for physical paperwork. Benefits include:

• Faster delivery: E-invoices reach clients instantly via email or invoicing platforms.
• Improved tracking: Digital systems provide real-time updates on invoice statuses, including when they are viewed.
• Data accuracy: Automated data entry and reconciliation reduce errors compared to manual methods.

4. Set clear payment terms

Transparent payment terms foster trust and ensure timely payments. Key elements of effective payment terms include:

• Due dates: Specify whether payments are due upon receipt, within 30 days, or another timeframe.
• Accepted payment methods: Include options like bank transfers, credit cards, or online platforms.
• Incentives for early payments: Offer discounts for payments made within a specified period, e.g., 2% off for payments within 10 days.
• Late payment penalties: Clearly state consequences for delayed payments, such as interest charges or late fees.

5. Maintain accurate records

Accurate record-keeping is fundamental for efficient invoice processing. This involves organizing all invoices and related data, including:

• Invoice numbers and issue dates
• Client details and payment terms
• Payment statuses and amounts due

Regular audits of your records can help identify inconsistencies or discrepancies. Use reliable software for data management and create backups to safeguard against data loss.

6. Seek client feedback

Engage with your clients to identify areas for improvement in your invoicing process. Use surveys, direct communication, or feedback forms to ask questions such as:

• Was the invoice format clear and detailed?
• Were the payment terms easy to understand?
• Were there any delays or issues in receiving the invoice?

Implementing client suggestions not only enhances efficiency but also strengthens business relationships.

7. Stay updated on best practices

Keep abreast of the latest trends and technologies in invoice processing. Join industry forums, attend webinars, and network with peers to learn about emerging tools and strategies. Staying informed helps you maintain a competitive edge and adapt to evolving business needs.

8. Implement automation tools

Automation is a game-changer for invoice payment processing. Tools like accounts payable automation software streamline tasks, reduce manual effort, and ensure accuracy. Automation can handle:

• Data extraction from invoices using OCR and machine learning.
• Automatic validation of invoice details against purchase orders (POs).
• Seamless approval workflows by routing invoices to the correct approvers.
• Real-time tracking of invoice statuses and payment progress.

For example, AP automation can instantly flag discrepancies, send reminders for overdue payments, and generate reports. Integrating automation tools with ERP systems further enhances consistency and data accuracy.

How HighRadius Can Help?

HighRadius streamlines invoice processing by addressing common inefficiencies through advanced automation and AI-driven solutions. Here are the benefits that enhance the invoice processing workflow:

1. AI Invoice capture

With HighRadius, you can enjoy 100% accurate invoice data capture, eliminating the hassle of manual entry. This means you’ll save valuable time and resources, while also ensuring that no invoices are overlooked, leading to smoother cash flow management and timely payments.

2. Invoice matching & policy checks

Automated three-way matching means that you can trust your invoices are verified against purchase orders and goods receipt notes in real time. This reduces costly delays and errors, ensuring that your financial processes are compliant and efficient, which ultimately enhances your bottom line.

3. Exception resolution & approval workflows

Fast and efficient resolution of discrepancies ensures that your payment cycles remain uninterrupted. With streamlined approval processes, you can experience faster decision-making and turnaround times, allowing your team to focus on strategic initiatives instead of getting bogged down by exceptions.

4. Automated invoice processing

Enjoy comprehensive automation that minimizes manual intervention at every step of the invoice lifecycle. This leads to quicker processing times, reduced human errors, and an overall increase in operational efficiency, enabling your team to allocate their time to high-value tasks.

5. AI-powered AP inbox

The centralized AI-powered AP inbox simplifies invoice-related communications, improving vendor relationships and responsiveness. By intelligently managing inquiries and classifying emails, you can ensure that all invoices are organized and processed without delays, fostering trust and collaboration with your suppliers.

6. Reporting & analytics

Gain real-time visibility into your invoice processing lifecycle with customizable dashboards. This insight allows you to quickly identify and address bottlenecks, optimize workflows, and make informed decisions that enhance overall process efficiency and drive continuous improvement in your accounts payable operations.

FAQs on Invoice Processing

1. What are the 3 main steps involved in invoice processing?

The three main steps in invoice processing are: 

• receiving the invoice (via mail, email, or software)
• verifying it (matching it with purchase orders and delivery receipts), and 
• payment approval (routing it through workflows before processing payments). 

These steps ensure a smooth invoice payment processing workflow.

2. How long do invoices take to process?

Invoices usually take about 8 to 10 days to process because they need to be checked and approved. But if we use automation, this can be done much faster, in 1 to 3 days. 

3. How many invoices can be processed in a day?

The number of invoices processed varies based on the method used. Manually, a single AP clerk can handle 20-30 invoices daily. Automated systems can process hundreds or even thousands of invoices daily, depending on the software’s efficiency and the invoice processing steps involved.

4. What is the average cost to process an invoice?

The average cost to process an invoice manually is about $10 due to labor and error correction. With automation, this cost drops to $2 or less, making it a cost-effective solution for streamlining invoice processing in accounts payable.

5. How to reduce invoice processing time?

You can reduce invoice processing time by automating the invoice payment processing workflow, using tools with OCR for data capture, implementing centralized systems, and streamlining approval processes. These steps optimize how to process invoices efficiently and quickly.