Accounts Payable
Guide: Incoming Invoices
Incoming invoices are important business documents. They represent claims by third parties against the company receiving the invoice. These third parties could be service providers, suppliers or merchants. The automatic incoming invoice process starts when the invoice is received. Find out everything you need to know about digital incoming invoice processing.
Definition
What is an incoming invoice?
An incoming invoice makes financial claims against the company receiving the invoice. This means incoming invoices describe liabilities and request the recipient of the invoice to pay these claims.
What is the difference between an incoming invoice and an outgoing invoice?
An invoice document can always be viewed from two perspectives: that of the invoicing party or that of the invoice recipient.
- The invoicing party generates an outgoing invoice for a service or the delivery of goods. The invoicing party then sends this invoice to
- another company, which receives the same document as an incoming invoice.
Checking incoming invoices
Of course, you and your employees must check all incoming invoices. This is in your own best interest. After all, you only want to pay for services that you have actually commissioned and that have been provided by the service provider/supplier.
During factual invoice verification, the company checks whether the service provided or goods delivered have been invoiced correctly. A comparison of the order confirmation or delivery bill with the incoming invoice makes this check much easier.
Reading tip: Check invoices, but do it right – here are the most important requirements, including a checklist
Important to know: Only the invoicing party may correct an incorrect invoice. Especially if the error is in the mandatory information, such as if the sales tax is incorrectly, the invoice recipient must respond. This is because the invoice issuer is obliged to issue you with a proper invoice.
You are not allowed to correct an incorrect incoming invoice yourself, no matter how simple it is to just reach for the phone. The correct procedure is to simply inform the invoice issuer in a separate document about the information that is missing or needs to be changed and request a new, corrected invoice. As a reasonably practicable way of correcting an invoice, you as the recipient of the incoming invoice send the invoice issuer
- a copy of the corrected document
- and the invoice issuer agrees to the correction in writing.
Modern incoming invoice solutions take this step off your hands. Formal errors in the incoming invoice are highlighted in the PDF of the invoice. Factual errors noticed during invoice verification workflows can also be flagged and added to the invoice copy as corrected.
What digital invoice processing does for you
There are good reasons why the last ten years have seen full software suites established on the market that are dedicated solely to the task of invoice processing. What’s special about digital incoming invoice processing: As a rule, these solutions handle the complete invoice process from invoice receipt and validation to the required workflows and eventually archiving. But let’s get specific now: How can electronic incoming invoice processing help you?
Formal audit
In an analog world, you would first perform a check of the incoming invoice. This is a formal check to clarify whether it is even a proper invoice. In particular, the correct VAT rate must be checked here, as otherwise the input tax deduction is at risk. For starters, all mandatory details of the incoming invoice are put to the test. All mandatory elements must be present and correct in content.
Basically, you would then have to retrieve the purchase order from a file folder or the corresponding folder of your email client. This is followed by a manual comparison of the mandatory data mentioned above to check the purchase order against the incoming invoice. It’s a smart move to avoid that if you can. With only a few invoices per day, this is still feasible. But suppose you receive 100 incoming invoices a day. Performing even just the formal invoice verification manually would sooner or later prove extremely frustrating. It is better to leave the checking of incoming invoices to computers. This verification step functions automatically via three-way match. In practice, people often rely on comparing the incoming invoice with the purchase order in a two-way match using the purchase order number on the invoice.
The digital incoming invoice process
The invoice processing usually starts with invoice verification shortly after the incoming invoice arrives at the company. There are various regulations that must be complied with during the incoming invoice process, such as data protection regulations. How does this invoicing process work digitally and what needs to be considered during the process?
Invoice receipt: The first step is a formal invoice check. In other words, are all mandatory elements of the incoming invoice present?
Verification: If the incoming invoice meets these requirements, the next step involves a verification process. In other words: Using artificial intelligence (AI) or optical character recognition (OCR), the incoming invoice software identifies all necessary invoice details in the invoice document.
Extraction: In this process, the invoicing software not only takes the detailed information from an incoming invoice, it also compares this invoice information with other third-party systems, such as financial accounting / ERP systems. Electronic invoices already arrive as structured data records in a dedicated email inbox for incoming invoices. The previous two process steps are skipped and the electronic invoice is immediately forwarded for processing. This is expected to reduce throughput times by between 50 and 60 percent.
Processing & invoice approvals: Workflows get the job done, and content-based invoice verification does away with email ping-pong and trudging around the office fetching documents. Conventional software for incoming invoice processing distributes the pending tasks to specifically defined processors. This way, everyone knows what needs to be done with regard to incoming invoices. No matter where you happen to be – whether at home or on the train. The main objective of the workflow for invoice approval is to progress through the invoice process up to posting – including substitution rules and escalation mechanisms.
Booking: Once the invoicing process has reached the accounting department, the incoming invoice serves as a record of a business transaction within the accounting system – properly accounted for and documented for inspection by financial auditors.
Archiving: The last step of invoice processing – and a critical one at that. You are legally required to archive incoming invoices in an audit-proof manner. Ideally, the incoming invoice software has suitable connections to a digital archive. This prevents discontinuities in media formats.
Good to know
Advantages of digital incoming invoices
The buzzword “paperless office” has been with us for some time now. Digital invoice processing is a big step towards less paper, more transparent invoice processes, and shorter throughput times. Efficiency and transparency gains await you in the digital invoice receipt process. Now an overview of the typical advantages of digital incoming invoices.
Minimised processing times for incoming invoices
Compared to paper invoices, electronic invoices with a purchase order reference only take 2:20 minutes to process, as only the approval and payment process steps require manual intervention. In contrast, paper-based incoming invoices take an average of 29 minutes from receipt to approval and payment.
The much faster turnaround times are a direct result of the digital invoice processing.
No media discontinuities
With digital incoming invoices, you can be sure: what comes digital stays digital throughout the entire process, right up to the archiving of the invoice itself. No one need go to the printer anymore. They might still have to go to the scanner to digitise paper-based incoming invoices from old-fashioned suppliers, but only in exceptional cases. However, collaboration via a supplier portal ensures the absence of media discontinuities.
Digitalising the processing of invoices eliminates media discontinuities and improves compatibility with all invoice formats. The invoice software not only reads scanned paper invoices, it can also extract information directly from emails, converting the relevant details into structured data for the accounting system using intelligent algorithms.
Location-independent collaboration
The digital invoicing process brings your team together – regardless of time and place. Employees in invoice processing and accounting can easily access incoming invoices, even if they are working from home, for example. This applies to the entire invoice verification process.
Everyone involved always has the same level of information: For example, the site manager can check and approve invoices for material deliveries while still at the construction site using his cell phone or tablet – without a laptop, without wasting time, and without an office.
Workflows for invoice approvals
The factual check of the incoming invoice is controlled by workflows. Contemporary incoming invoice software distributes pending invoice checks to defined processors. This means that every employee knows at a glance what needs to be checked for each incoming invoice. For example, dual control of invoice documents above a certain invoice amount is standard. Automated substitution rules are in place, as are escalation rules in case the invoice processing runs into trouble.
Role-based views provide everyone involved with customised information, from the invoice processor to the managing director. This promotes transparency by providing all employees with a quick overview of the status and content of invoices and the progress of the workflow.
Cost savings and streamlined processes
Your accounting staff always have an overview of the deadlines on the incoming invoices for the prospective cash discounts and any reminder deadlines. All fully automated, of course. This allows you to take full advantage of discounts granted through digital invoice processing. Missing reminder deadlines is also a thing of the past.
A cloud-based invoice solution offers not only cost benefits but also scalability. Compared to conventional models, there are no maintenance costs and you only pay for what you actually use. The subscription-based license model enables flexibility and optimal cost control in the invoice cloud.
Integration with ERP / financial accounting systems
The processing of incoming invoices offers even more options through integration with systems such as SAP ERP, Microsoft Dynamics 365 Business Central, Datev, and many more. Examples include integration into ordering processes and automatic supplementing with supplier master data from ERP systems. An invoice cloud makes it easier to integrate digital invoice processing into your IT environment, supports data transfer between systems and offers monitoring functions for processes and error detection. The software automates the checking of the extracted invoice data for correctness and plausibility, accesses data from your ERP system and carries out many work steps in the background. This way, you avoid unnecessary effort and archive your incoming invoices in an audit-proof manner.
Integration into upstream and downstream processes
When incoming invoices arrive at the company, it means someone ordered something. Ideally, a modern incoming invoice management system should have interfaces to the upstream ordering system. This means not only interfaces for the automated processing of order confirmations and delivery bills but also integration of a contract management system. The advantage lies quite simply in a higher level of automation.
Planning reliability
The digital incoming invoice enables efficient cash flow planning. Incoming invoice processing software provides you with an up-to-date overview at all times and offers meaningful reporting functions. This means you can check which invoices are currently in which step of the process at any time. An evaluation of open items, actual discount days and invoice lead times is also useful.
Diverse incoming invoice formats
The software solution should be able to process common invoice formats: Emails plus attached PDFs are a common standard. There are also electronic invoices. These are characterised by structured data in XML format, and they eliminate the need for data extraction during readout. These incoming invoice formats simplify many things.
Editing in the cloud
Cloud-based programs, especially Software-as-a-Service (SaaS) such as an invoice cloud, are becoming increasingly popular due to their scalability, cost control and independence from additional IT. They allow you to work from any place at any time, making them ideal for modern working environments such as home offices or on the move. The use of a cloud-based invoice solution for invoice processing offers specific advantages and makes companies more efficient overall.
Advantages of an invoice cloud
An invoice cloud enables the holistic processing of incoming invoices in a single application. Various processes such as data verification, document movement and approval procedures are handled in accordance with compliance, accounting and other regulations. In addition, the software offers detailed management options such as substitution rules, escalation management, dual or triple control and fully automated straight-through processing. Companies can customise the invoice workflow specifically for the cloud and partially or fully automate it using add-ons.
A software solution for invoice processing solves a common problem in the accounts payable department of many companies: heterogeneous invoice formats. Even when companies digitalise their accounting, they still encounter difficulties when supplier invoices are received by email as PDFs or on paper. Manually typing or copying the data into the system is time-consuming and error-prone. An invoice cloud solves this problem and makes the process more efficient.
Frequently asked questions about incoming invoices
Mandatory information: What must be included in an incoming invoice?
The necessary components of a proper incoming invoice include the following mandatory information:
- Full name and address of the invoicing party
- Full name and address of the invoice recipient
- Invoice issue date
- Unique invoice number on the incoming invoice
- Time of performance or delivery date
- Designation and quantity of the delivered goods, type and scope of the service rendered
- Net invoice amount
- Value-added tax
- Gross amount
- If applicable, reference to the tax liability of the recipient of the service
- Tax number or VAT identification number
- Bank details of the invoicing party
One important aspect: If the incoming invoice does not contain all the required mandatory information, the requirements for the deduction of input tax are not met. Lax checking of the invoice is therefore prohibited. If you submit incomplete invoices for the input tax deduction, there may be additional payments in the event of an audit.
Discounts or rebates can also be included in incoming invoices as useful additional information. The same applies to information on the payment deadline. If the invoicing party also places the ordering company’s order reference on the incoming invoice, this serves as a practical reference for further processes on the part of the invoice recipient. However, this additional information is not part of the mandatory information on the invoice.
Important to note: The more complete the mandatory information on the incoming invoice is, the easier it is to process later using automatic incoming invoice processing.
Further questions
What is the mandatory information on small-value invoices?
In the case of small-value invoices, the number of mandatory details on an incoming invoice is reduced. The following mandatory elements are sufficient for these low-value invoices:
- Full name and address of the invoicing party
- Invoice issue date
- Designation and quantity of the goods delivered or type and scope of the service provided
- Gross amount (net remuneration including VAT)
- Applicable tax rate or a reference to a tax exemption
It is easy to see that VAT does not have to be shown separately for incoming invoices. This type of invoice also does not require any information about the time of performance or the recipient of the service.
What is a progress invoice?
A progress invoice is an interim invoice that a company issues to a customer before the final invoice is issued. The progress invoice is used to invoice a partial amount for a specific phase or piece of work before the entire job is completed.
Progress invoices are common practice, especially for outgoing invoices with high invoice amounts. They are especially common for long projects that take months or even years to complete. The customer can use them to track the progress of the project and pay the company at regular intervals. The final invoice will only be issued when the project is completed or when all progress payments have been made. The final invoice will then include all progress payments and show the total amount of the project.
The progress invoice is subject to the same requirements with regard to mandatory information and archiving. Modern systems for incoming invoice processing are designed to handle progress invoices as well as other special cases that may arise for incoming invoices in the context of the ordering process, such as reduced quantities, price deviations, etc.
How long do incoming invoices have to be retained for?
Incoming invoices must be retained and archived in an audit-proof manner for several years.
Reading tip: Retention periods for electronic invoices – how long to archive?
Are there limitation periods for invoices?
Yes, invoices can also expire. This means that the claims associated with the invoices expire after a certain period. The statutory limitation period begins at the end of the calendar year in which the invoice was issued.
How do I find the right software for digital invoice processing?
There are certainly many paths a digitisation project can take – some are rocky and filled with surprises, while others are smooth and easy. Rule of thumb: First, get an overview of your current invoicing process and then ask yourself: Which invoice processing functions do you absolutely need and which ones would just be “nice-to-have”? With easy invoice, you can check, approve and archive invoices – at any time and from any location. Of course, this topic is not limited to features and functions alone. You can find a good overview of the digitalisation of incoming invoices in the following article: Digitalising accounting – seven steps to paper-free bliss
How does AI help with invoice processing?
AI-based invoice processing gives you a real-time overview of your financial status. The system can predict cash flows on the basis of existing invoices and payment data. This allows you to plan ahead and use your financial resources more effectively.
What do I need to bear in mind with electronic invoices?
The electronic invoice is formally identical to any other incoming or outgoing invoice. It has the same mandatory elements, and the same retention period applies. The decisive difference is that xml-based formats provide structured data records. These data records can be processed directly in the ERP/financial accounting system. This eliminates the process steps of capture and extraction. The electronic invoice is forwarded for processing immediately after receipt.