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Invoice Approvals — The Ultimate Guide
Invoice approvals allow you to only pay for what you purchased, which helps you to avoid overpayment. However, what is it?
In this article, we will discuss what invoice approvals are. We will check its importance and how it works. Additionally, we will run you through the process of creating one and why you should automate your invoice approvals.
Once you are done reading this article, you will know the significance of invoice approvals in your procurement. Thus, you will have better visibility of your spending. So without further ado, let us now start.
What is Invoice Approval?
Invoice approval is a process where the company reviews and approves supplier invoices before they make any payments. Usually, suppliers send an invoice through email or post. Once they send the invoice, the approval process begins.
The invoice passes through a series of internal processes that the company set. This usually involves reviewing associated documents such as requisition forms and purchase orders.
Small and medium-sized businesses (SMBs) typically rely on their finance personnel or administrative team members to manage invoice processing. In contrast, large enterprises usually have a designated department called the accounts payable outstanding department, which is responsible for handling the entire invoice approval process.
Although you can do the approval process manually, many companies are now automating this process. This is due to the fact that paper-based invoices are tedious and lead to cost inefficiencies.
The approval process also takes so long in manual AP departments and ends up consuming a lot of resources and work hours.
Why is it Important?
Invoice approvals are important to ensure that the invoice is accurate and that you are only paying for the goods and services that you received.
Knowing that the invoice amount is the same as the agreed terms help control costs and prevent you from overspending.
Additionally, the approval process ensures that payments comply with the organization’s policies. Without the approval process, invoices cannot be processed for payment. Thus, it can lead to delayed payments and may damage your relationship with your suppliers.
Furthermore, the approval process provides a documented record of the invoice approval, which is needed for accounting and auditing purposes.
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How does it Work?
The invoice approval process differs from company to company. However, the process generally involves these processes:
1. Receiving the invoice
The invoice approval process begins when the company receives the invoice, which can be through a digital AP automation system or a physical paper invoice sent by the supplier.
The accounts payable (AP) department then carefully examines the invoice to confirm that all necessary details have been provided.
2. 3-way matching
Once the invoice is reviewed, it undergoes a matching process, which is typically done through a three-way matching system.
This involves comparing the invoice with other documents such as the Goods Received Note (GRN) and the purchase order (PO) to determine its accuracy.
This matching process confirms that the organization ordered goods or services from a supplier and received them accordingly.
3. Invoice for approval
After the invoice has undergone the matching process, it is then submitted for approval to personnel who have the authority to approve the payments. This individual could be a procurement manager or anyone else responsible for authorizing such payments.
4. Journal entries
After the invoice approval and payment processing are completed, the accounting entries are recorded in the corresponding journals.
This process involves reducing both the accounts payable and cash accounts simultaneously to reflect the payment made to the vendor.
Steps in Creating an Invoice Approval Process
It is common for businesses to have a well-defined process to handle incoming invoices. While these processes may differ from one organization to another, they are generally classified into two categories:
- Invoices that have a purchase requisition or purchase order.
- Invoices without an associated request or purchase order.
Here are some steps that you can follow to ensure faster and more accurate approval of invoices:
1. Making invoice
In this step, all relevant information should be included in the invoice and entered into the organization’s invoice approval system.
2. PO matching
The next step is to classify the invoice. This involves identifying and linking other purchasing documents like order receipts, purchase requests, purchase orders, etc.
3. Define exceptions
Invoices that fail validation due to discrepancies or missing information are sent to the appropriate personnel to correct errors and resubmit for approval.
4. Route approvals
Validated and matched invoices are routed to specific approvers based on the information in the purchasing documents such as PO number, requester name, or department.
5. Process payment
Approved invoices are automatically forwarded to the finance team for payment processing. Once payment is completed, the invoice is closed.
Why You Should Automate Your Invoice Approval Process
Many organizations still rely on a manual, paper-based invoice approval process which can be time-consuming, costly, and prone to errors.
This outdated process often involves numerous exceptions and provides little to no visibility into the approval status of invoices, causing delays and frustration for both vendors and the internal accounting team.
By utilizing a solution/software to manage invoice approvals, an organization can eliminate the need for paperwork, minimize manual errors that may arise during data collection and retrieval, speed up the approval cycle, and enhance straight-through processing capabilities.
Furthermore, by implementing automated systems, businesses can streamline their operations, reduce processing times and costs, and improve their overall efficiency and accuracy.
+ What is invoice approval?
It is a process where the company reviews and approves supplier invoices before they make any payments.
+ Why is it important?
It is important as it ensures that an organization pays only for goods and services that it has received and that the payment complies with internal policies and regulations. It also helps to prevent procurement fraud and errors in financial reporting.
+ What are the benefits of automating the invoice approval process?
Automating the invoice approval process can bring several benefits, including reducing paperwork, minimizing the risk of manual errors, accelerating the approval cycle, and increasing straight-through processing capabilities.
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