E-Invoicing: How It Works and Why Your Business Needs It

As the drawbacks of time-consuming and error-prone manual invoice processing become increasingly evident, more and more companies are switching to electronic invoicing as a convenient alternative. With e-invoicing, the process of generating and distributing invoices is automated – meaning neither the vendor nor the buyer has to key in or send anything manually.

Discover the numerous benefits of e-invoicing, learn how it works, and explore tips to implement it effectively.

Keep reading to learn:

• What is e-invoicing?
• What are the benefits of e-invoicing?
• How does e-invoicing work?
• Common categories of e-invoicing systems
• Tips for smooth implementation of e-invoicing
• Frequently Asked Questions

What is e-invoicing?

Electronic invoicing, also known as e-invoicing, is the automation of the invoicing process using a specialized e-invoicing tool. Suppliers or vendors can implement it to create and send invoices more efficiently, whereas their customers adopt such a system to automatically match invoices with related documents. Additionally, both parties can approve and track invoices faster and with more accuracy.

E-invoicing effectively addresses these challenges, and in the last few years, public entities in many European countries have been required to use e-invoices instead of manually processed documents. An e-invoice is a digitally formatted invoice that is transmitted electronically from suppliers to customers via a specialized system.

Typically, it’s delivered in a standardized format, such as XML or JSON, ensuring consistency and facilitating seamless data exchange between systems. However, while some regulations, like the EU directive, mandate structured digital formats for e-invoices, others, like HMRC in the UK, also accept unstructured formats like PDF, which may require additional processing using optical character recognition (OCR).

Nevertheless, e-invoices should include everything required for a paper invoice:

• Invoice number
• Number of the related PO
• Issue date
• Payment due date
• Supplier’s name and address
• The customer’s name and address
• Item type
• Product number, model number, or SKU
• Quantity and price of goods or services
• Total amount due
• Payment terms
• Taxes (if there are any)
• Discounts (if there are any)

E-invoicing emerged as a viable alternative to conventional invoice processing. The latter presents numerous inconveniences and challenges for both suppliers and their customers, namely:

• Manual data entry errors: Human errors in data entry are nearly unavoidable, particularly with the increasing volume of documents. These mistakes range from simple misspellings to incorrect item codes or duplicate entries.
• Delays in internal invoice approvals: Physical invoices must undergo a manual routing process across various departments or individuals for approvals, resulting in approval bottlenecks if someone is unavailable.
• Limited visibility: Stakeholders in the manual invoicing process don’t have real-time visibility into the status and progress of invoices, which leads to uncertainty about when invoices were created, approved, sent, or paid.
• Impaired productivity: Receivers of invoices must manually cross-check them with the corresponding purchase orders (POs) and receipts. When performed manually, this three-way matching process consumes significant time and often leads to delayed payments.
• Fraud risks: Manual invoice processing is susceptible to fraud, including duplicated, inflated, or fake invoices.

In contrast to these manual pain points, let’s explore what advantages e-invoicing can bring to companies.

What are the benefits of e-invoicing?

Let’s see what benefits companies can reap from adopting a reliable e-invoicing solution.

Time savings

E-invoicing saves time for all parties involved in the transaction. For suppliers, it reduces the time spent on data entry. E-invoicing software offers users templates for simplified document creation, and some systems even let suppliers create invoices from POs and send them through the approval pipeline.

For customers, a good electronic invoicing tool simplifies invoice reconciliation. It automatically cross-references invoices with related POs to identify discrepancies between product quantity, price, or payment terms. The company receives instant notifications when a discrepancy is detected, so there’s no room for fraudulent or duplicated invoices.

Increased accuracy

E-invoicing minimizes the risk of errors that often occur with manual data entry. Since invoices can be generated from POs, many fields are automatically pre-filled. Furthermore, some systems store supplier and item catalogs, minimizing the chance of misspelling supplier names or product details.

Tracking and traceability

An e-invoice system provides a transparent audit trail for each invoice and eliminates the problem of lost documents once and for all. Moreover, it allows users to track invoice status, approvals, and payments and allows stakeholders to monitor progress and identify bottlenecks in the process.

Reduced costs

It’s obvious that e-invoicing lowers the overall cost of invoicing by eliminating expenses related to paper, printing, and postage for companies using paper invoices. However, it goes further than that, as automation also reduces labor costs related to manual tasks, leading to substantial cost savings over time. In fact, it is estimated that switching to e-invoicing results in savings of up to 80% of the total costs associated with manual invoicing.

Improved cash flow

E-invoices speed up the invoicing process, helping suppliers receive payments more quickly. By shortening the payment cycle, companies reduce their Days Sales Outstanding (DSO) and improve their cash conversion cycle. This accelerated cash turnover not only benefits suppliers but also enhances customer experiences, as they can utilize automatic invoice validation to promptly settle payments with vendors and take advantage of early-payment discounts.

How does e-invoicing work?

Let’s look at the concrete steps involved in the creation and management of invoices when e-invoicing is used:

Invoice Creation:

• The supplier generates an electronic invoice using the e-invoicing software. They input relevant details such as invoice number, date, item descriptions, quantities, prices, taxes, and buyer information in the document template. Moreover, some systems allow suppliers to convert the received purchase orders into ready-made invoices.

Validation and Approval:

• The e-invoice undergoes validation checks within the system to ensure compliance with formatting requirements and business rules.
• If necessary, the invoice may be routed through an approval workflow, where designated personnel review and approve the invoice electronically.

Transmission:

• Once validated and approved, the e-invoice is electronically transmitted to the buyer’s e-invoicing system or accounting software.
• Alternatively, the supplier may send the e-invoice via email or upload it to a designated portal for the buyer to access.

Receipt and Processing:

• The buyer’s e-invoicing software receives the e-invoice and automatically processes it, extracting relevant data and integrating it into the accounting or ERP system.
• Upon processing, the e-invoice is matched against the corresponding PO and receipt to ensure accuracy and compliance.
• The system flags any discrepancies or exceptions for further review or resolution by authorized personnel.

Payment and Reconciliation:

• Once validated, the invoice is scheduled for payment according to agreed-upon terms and payment cycles.

Archiving and Storage:

• After payment, the e-invoice is archived within the e-invoicing system or transferred to a secure storage repository for record-keeping and audit purposes.

Common categories of e-invoicing systems

There are several types of e-invoicing solutions, each with its own features and capabilities. Let’s explore the main ones:

Point-to-point connection

An electronic invoice system employing a point-to-point connection utilizes a direct connection between the buyer and seller. It’s commonly used for EDI (Electronic Data Interchange) invoicing, which transfers highly standardized information in predefined XML data files. This method requires both parties to have compatible systems for generating, sending, and receiving invoices. While it provides a secure communication link and offers a direct and often efficient way to transmit invoices, it can become challenging to scale as the number of trading partners increases.

Network model

In the network model, businesses connect to a centralized e-invoicing platform where multiple buyers and sellers can exchange invoices. These platforms often offer standardized formats, compliance checks, and value-added services such as invoice financing or dispute resolution. The benefit of these systems is uniformity, as all users exchange e-invoices in the same format. This model is also expected to experience significant growth due to scalability and efficiency benefits.

E-invoicing module as part of a comprehensive software

Some procurement software solutions incorporate e-invoicing functionality as part of their broader suite of modules. Typically, these platforms use invoices in PDF or XLSX formats. For private businesses not mandated to utilize structured e-invoice formats, procurement software is the most advantageous choice for managing supplier invoices. This is because procurement tools can provide companies with comprehensive data and tie their e-invoicing with PO and receipt management, expense control, supplier relationships, and inventory management.

Let’s see what users can do in good procurement software, taking as an example Precoro:

• Attach documents to generate pre-filled invoices using OCR (Optical Character Recognition) technology, minimizing manual data entry.
• Create, manage, and store not only invoices but also POs and receipts in one centralized location, with each document pointing to the related one.
• Set up customizable invoice approval workflows and be sure that each approver will get a notification when there’s a document waiting for them. Systems that provide approval thresholds are invaluable, considering that lengthy invoice and payment approval times are a top hurdle that slowed down the AP teams in 2023.
• Quickly identify which purchase order the invoice is associated with, along with details about who created it and when within the company.
• Keep track of the invoice status to see if it has been approved, rejected, paid (partially or in total), under revision, and more.
• Enjoy automatic 2- and 3-way matching to reconcile invoices with the related POs and receipts.
• Conduct the RFP process, supplier onboarding, and communication with vendors directly in the system via the Supplier Portal. Suppliers can also use it to upload their item catalogs, convert customer POs into invoices, and track document statuses.
• Leverage the budget module to allocate budgets for different projects, departments, and periods and see their availability while making new orders and paying for invoices.
• Track spending in real time with a progress bar and pie charts. Plus, users can run reports on invoices to see how much they spent and which suppliers they chose.

Tips for smooth implementation of e-invoicing

For private companies that would also benefit from automation of the above tasks, implementing procurement software is an ideal logical step that goes hand-in-hand with e-invoicing. A comprehensive procurement tool not only handles e-invoicing but also simplifies the management of other related documents and processes. We’ve prepared some advice for companies to help them smoothly switch to electronic invoicing.

Check the software’s integrations

When expanding a software stack, avoid the mistake of selecting siloed solutions that don’t integrate with your existing accounting, ERP, and other financial tools. It’s crucial to ensure seamless migration of documents and transactions between systems and eliminate the need for manual data entry. Integrations enhance visibility across departments and ensure automatic data updates across the solutions.

Opt for customization

Look for customizable features and workflows that align with your organization’s unique needs and processes. Ensure that the system you implement offers complete flexibility to add or remove available modules based on your growth stage. Additionally, the ability to design multi-level approval workflows and generate real-time reports is invaluable for organizing electronic invoicing in the way that works best for your company.

Prioritize security

Security is one of the most important considerations regarding systems that use financial data. Ensure the software complies with relevant security protocols, such as the General Data Protection Regulation or the California Consumer Privacy Act. Additionally, it will be advantageous if the software has passed a SOC 2 audit to guarantee the highest level of protection for all sensitive data.

Conduct training sessions for employees

Although automation simplifies invoice processing, some personnel may resist the shift from familiar procedures (even if they are prone to errors and take more time than e-invoicing). A helpful approach is to designate a person responsible for implementing the electronic invoicing system and make them the point of contact for personnel with questions.

Additionally, it’s a great practice to conduct training sessions for each department that will use the system. These sessions should outline what benefits the system brings and explain how to use it. Companies can streamline the onboarding process by selecting a software provider that designates a dedicated Customer Success Manager to assist with setup and navigation. The software provider can also simplify the user journey by providing access to tutorial videos and a knowledge base.

Frequently Asked Questions

Make invoicing easy

Electronic invoicing eliminates time-consuming, error-prone, and costly manual invoicing procedures. It involves utilizing specialized software to automate the creation, approval, distribution, verification, and storage of electronic invoices.

The adoption of e-invoicing can be beneficial for businesses of all sizes. While larger organizations may experience more immediate cost savings, small businesses will quickly notice reduced paperwork, faster invoice processing, and improved accuracy. Additional advantages include the ability to track invoice status and document history.

With e-invoicing systems, suppliers can automate the creation of invoices from POs, eliminating the need for manual data entry, and enjoy quicker cash turnover as a result of faster invoice processing. Meanwhile, businesses receiving e-invoices can streamline labor-intensive processes, like approving invoices and matching them to purchase orders and receipts.

Companies can transition to e-invoicing through a point-to-point connection or a network model. Alternatively, companies can also adopt a system with an invoice automation module, such as procurement, ERP, or accounting systems.

Precoro is a solution that facilitates efficient e-invoicing implementation. Procurement software seamlessly integrates invoicing into other procurement activities, such as purchase order and receipt processing, expense management, inventory control, and supplier relationships, helping firms take a comprehensive approach to their operations. Key considerations when choosing a system are:

• Integrations with your existing software stack
• Highly customizable modules to match your growth stage
• Compliance with security regulations
• Robust customer support with the provision of training materials for users

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