How to Process Invoices From Start to Finish

Invoice processing is a financial operation ensuring accurate recording and payment for goods and services. An invoice serves as a formal request for payment, detailing what was provided, the quantity, and the agreed-upon cost. Efficient invoice processing maintains accurate financial records, manages cash flow, and fosters strong vendor relationships. It also helps businesses track expenses, comply with tax regulations, and avoid late fees.

Preparing for Invoice Processing

Establishing clear internal policies is a step before any invoice arrives. These guidelines define how invoices are handled, including payment terms and expense categorization, ensuring consistency and compliance. Policies might specify spending limits for certain departments or individuals, requiring higher-level approvals for larger expenditures.

Accurate vendor information management is essential. Businesses must maintain up-to-date records for each vendor, encompassing contact details, agreed-upon payment terms, and tax identification numbers. For US businesses, this often includes collecting a W-9 form from vendors, which provides their Taxpayer Identification Number (TIN) for tax reporting purposes like issuing 1099 forms at year-end.

Setting up an appropriate accounting system is another step. This can range from simple spreadsheets for very small businesses to comprehensive accounting software. The system serves as the central repository for all financial transactions, including recording invoices, tracking payments, and generating financial reports. It provides the framework for organizing financial data efficiently.

Defining an approval workflow before invoices are processed is important. This involves establishing who has the authority to approve invoices, potentially based on dollar amounts or departmental budgets, and outlining the sequence of approvals. A well-defined workflow ensures that invoices are reviewed by the appropriate personnel, preventing unauthorized payments and maintaining financial control.

Receiving and Validating Invoices

Invoices are received through various channels such as traditional mail, email attachments, or dedicated online vendor portals. Upon receipt, it is important to log basic information immediately, including the date received, the vendor’s name, and the invoice amount. This initial data capture helps in tracking the invoice’s journey through the system.

Following initial logging, a thorough verification and matching process takes place. This often involves a “three-way match” where the invoice details are compared against a purchase order (PO) and a receiving report or proof of delivery. The PO confirms what was ordered, the receiving report confirms what was received, and the invoice details the charges, ensuring all three documents align. If a purchase order was not used, the invoice should still be verified against other supporting documentation, such as a signed contract or a service agreement.

Beyond matching, the invoice must be checked for mathematical accuracy and to confirm that vendor details, such as billing address and payment terms, align with established records. This verification also includes checking for duplicate invoices to prevent double payments. If any discrepancies are identified during this validation phase, like incorrect pricing or missing information, immediate action is necessary.

Handling discrepancies involves contacting the vendor to clarify the issue and request a corrected invoice or supporting documentation. Maintaining clear communication and documenting the issue, along with the steps taken to resolve it, is important for audit purposes and preserving vendor relationships. The invoice should not proceed to the approval stage until all discrepancies are resolved.

Approving and Recording Invoices

Once an invoice has been validated and resolved, it proceeds through the pre-defined approval workflow. The invoice is routed, either physically or digitally through an accounting system, to the designated approver(s) for review and authorization. This ensures individuals with authority review and approve the expense.

Authorization for payment signifies the invoice is legitimate and aligned with company policies. This approval should be clearly documented, whether through a physical signature, an electronic approval stamp, or a digital audit trail. Documentation of approval is important for internal controls and audit inquiries.

After approval, the invoice is recorded in the accounting system. This recording involves making a journal entry that typically debits an expense account (e.g., office supplies, utilities) and credits the Accounts Payable liability account. The specific expense account is determined by the company’s chart of accounts.

Record the invoice date, the amount owed, and the due date accurately in the accounting system. This ensures that the liability to the vendor is recognized and that the payment can be scheduled appropriately. The entry increases the amount the business owes to that specific vendor within the Accounts Payable ledger. Maintaining a detailed audit trail of accounting entries and approvals is important for transparency, fraud prevention, and compliance.

Managing Invoice Payments

Scheduling payments is a step that follows invoice recording, focusing on optimizing cash flow while adhering to payment terms. Businesses often prioritize payments based on due dates to avoid late fees, or they may strategically pay early to capitalize on early payment discounts, such as a “2/10, net 30” term which offers a 2% discount if paid within 10 days instead of the full amount in 30 days.

Various payment methods are available. Common methods include paper checks, which can incur higher processing costs and pose fraud risks. Electronic Funds Transfers (EFTs), such as ACH payments or wire transfers, offer faster and more secure transactions. Other options include credit cards or online payment platforms, which may involve transaction fees.

Executing the payment involves initiating the transfer of funds through the chosen method. This could mean printing a check, processing an ACH payment, or utilizing accounting software. Ensure the payment is sent to the correct vendor for the accurate amount.

Upon successful payment, mark the invoice as paid in the accounting system, updating the Accounts Payable ledger. This step is followed by reconciling payments with bank statements, ensuring funds match recorded transactions. The paid invoice and all supporting documentation, including the purchase order and receiving report, should be filed or archived. The IRS generally advises businesses to retain most tax-related records, including invoices, for at least three years from the date the tax return was filed.