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Finance glossary

What is invoice approval?

Bristol James
5 Min

Invoice approval is the act of reviewing and authorising vendor invoices before a payment is made against them.

The primary objectives of this process are to:

  • Prevent unauthorised payments.
  • Increase transparency, and
  • Maintain timely and regular payment cycles.

The invoice approval process

Invoice approval processes vary from one industry and business to the next, but most have a few common steps.

Invoices may be approved manually or automatically with specialised AP automation software.

Let’s take a look at the manual invoice approval process first.

Step 1 – Invoice receival

The process starts when the business receives an invoice from a vendor via email or post.

Step 2 – Invoice matching/verification

The invoice is then matched with other documents to determine its accuracy and validity.

Many companies will match invoices with a purchase order (PO), but some may also include a goods receipt bill in a process known as three-way matching.

Nevertheless, invoice matching is a critical step because it verifies the amount payable, ensures accurate record keeping and validates the goods or services received.

If the invoice cannot be matched, the purchasing manager must resolve the problem and enter the invoice back into the approval process.

Step 3 – Invoice approval

All matched invoices are routed to a staff member with the authority to approve them.

In smaller companies, manual invoice approval is the norm and the responsibility of someone in finance or even admin. These staff may also have the authority to pay the invoice itself.

Larger businesses, on the other hand, utilise accounts payable (AP) teams or employ specialist personnel whose primary role is to match and approve invoices.

These staff tend to work under specific policies. For instance, one company may decide that any invoice over $5,000 needs to be signed off by both the head of procurement and the head of AP.

Other companies may alter the capacity to approve invoices using the segregation of duties approach. Essentially, providing the opportunity for multiple stakeholders to be involved in the approval and payment process to ensure due diligence and caution has been taken.

Lastly, there may also be vendor-based rules. Pre-vetted vendors or those with which the company has built a relationship may not require special approval.

Although some companies take a more manual approach to invoice checking and approval, with the increase in cyber threats and potential for human error, it’s more common today for companies to leverage an automated approach. Eftsure‘s technology is loved by AP teams across Australia and recently the US, as we provide a safe and reliable way to check invoices and ensure safe and secure payments to the right people.

Step 4 – Invoice payment

After the invoice has been entered into ERP software or some other accounting system, it is forwarded to the relevant department where payment is processed.

Benefits of paperless invoice approval systems

Aside from the obvious improvements in efficiency, there are a few other benefits of automating invoice approval.

Avoidance of invoice fraud

In business, invoice fraud does not discriminate. Between 2013 and 2015, Google and Facebook were fleeced of over $100 million by a Lithuanian man who impersonated a Taiwanese hardware supplier with fake invoices and a company of the same name.

Less elaborate types of invoice fraud take many forms. Fraudsters may send invoices to a company for products or services that were neither requested nor delivered.

Others may look to capitalise on administrative errors. Duplicate invoices may be sent to see if the business will pay for the same product twice. Other fraudsters will quote more than was agreed upon and hope the discrepancy goes unnoticed.

Whatever the source of fraud, automated invoice approval establishes strict internal controls that match invoices to purchase orders and other immutable documents.

Paperless invoices are also less likely to be impacted by other types of fraud such as forgery or alteration.

Improved cash-flow

Consider that the average manual invoice approval process has 15 steps and takes as many as 25 days to process.

This contributes to poor cash flow for several reasons:

  • Human error – manual processes require data entry, data validation, and data extraction. Each introduces the potential for typos, overlooked details, and miscalculations.
  • Cost – data entry is also expensive and businesses must also pay employees to handle unnecessary paperwork. This increases labour costs per invoice.
  • Time – a manual invoicing system is prone to approval bottlenecks. This was exacerbated by the pandemic-induced remote work trend where staff lacked the resources to approve invoices at home.

So how does automation improve cash flow?

Automated invoice approval is more efficient and leads to faster payment timeframes.

No longer at the mercy of manual processes, AP staff can process invoices in days or in some cases, minutes. For businesses with hundreds of invoices to process, the time and cost savings are substantial.

Automation also improves cash flow because it provides clarity. Businesses understand when their invoices are due, which means they avoid late fees.

Another benefit of automated invoice approval is accuracy, with invoiced amounts correct for the goods or services purchased. This reduces financial losses from human error as well as instances of fraud.

Better vendor relationships

Though it perhaps goes without saying, it is in the company’s best interests to pay suppliers promptly and consistently.

Invoice approval is a core component of vendor relationship management (VRM) – a framework companies use to track their vendors with cost-saving KPIs, foster mutually beneficial outcomes and improve product quality.

Furthermore, companies that model good behaviour by honouring vendor contracts are more likely to receive similar treatment in return. In some cases, vendors may offer early payment discounts or provide priority access to goods or services when in short supply.

Summary:

  • Invoice approval is a critical part of the accounts payable process where a company reviews and authorises payment for an invoice submitted by a supplier or vendor.
  • There may exist a conflict in larger companies between a need for secure invoice approval and broader organisational efficiency. To address this conflict, automated invoice approval is key.
  • Automated invoice approval offers a raft of benefits. These include avoidance of invoice fraud, better vendor relationships, and improved cash flow.

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