How to Digitize Invoices for Streamlined Processes

Do you know the difference between digital invoices and E-invoices? Find out how your business can automatically digitize invoices to use the data for efficient, end-to-end AP automation workflow and touchless supplier invoice processing straight through global electronic payments and real-time reconciliation to the general ledger. 

What is a Digital Invoice?

A digital invoice is an invoice that can be viewed online and processed digitally through automation, generally in a PDF or Microsoft Word format rather than paper-based. Digital invoice data can be extracted for invoice processing using OCR (optical character recognition) technology, aided by machine learning for increased accuracy. 

E-invoice vs. Digital Invoice

The main difference between an E-invoice and a digital invoice is that E-invoices (electronic invoices) are created as computer-readable messages by accounting software, often in standard web form, XML, or EDI formats. Digital invoices are instead created by scanning paper invoices or capturing invoice data from PDF files or Word files with OCR technology. 

E-invoicing and digital invoices apply to both accounts payable and accounts receivable, depending on your business side of the transaction. In accounts receivable, E-invoices may include an embedded Pay Now button for customers to pay the seller easily. 

The Importance of Digitizing Invoices and Accounts Payable

Digitizing invoices for accounts payable is important because it lets your company receive and store digital supplier invoice data without:

• Manually keying paper-based invoices into your accounting system 
• Routing paper documents in matched sets to approvers
• Filing and storing paper invoices in file cabinets and archived warehouse boxes

Instead, your business can use automated OCR invoice processing to automatically capture needed supplier invoice data and process accounts payable invoices for payment electronically without using paper documents and manual processes. 

Paper-Based System Challenges Without Digitized Invoices

Does your business still use an old-school, manual paper invoice system? If yes, your company is wasting time and money by not investing in AP automation, which can streamline processes with digital transformation. With AP automation, your accounts payable department will gain efficiency and effectiveness, reducing fraud risk and payment errors, eliminating duplicate invoice payments, and avoiding human errors from using a manual system. 

Bottlenecked Accounts Payable Processes

In a paper-based, manual invoice processing system, the accounts payable staff is caught up in a bottlenecked system, requiring more time to reach the payment processing finish line and hiring more staff to keep up with the invoice volume. The accounts payable department’s workload feels too heavy within the limitations of regular weekly work hours, hurting morale and possibly causing employee turnover. 

The AP team must manually verify incoming invoice data from goods suppliers and service providers (including quantities and invoice pricing by line item and recalculate all invoice totals), match paper invoices with copies of paper purchase orders, and receive reports that are stapled together as a set, spend time looking up general ledger accounts for coding invoices, and route the paper documents in a packet to the person that they decide is the right approver.

After approval, the approver returns the documents package to the accounts payable department. During this process, paper documents may get lost, and accounts payable staff may need to request duplicate copies (taking extra time and risking duplicate invoice payments). Approvals would be delayed if the approver is on a business trip or otherwise away from the office performing remote work or at home for the evening or weekend. 

Payment Delay Costs and Reduced Visibility 

Delays between invoice receipt and payment cause accounts payable recording delays and a lack of visibility by not knowing how much is owed to suppliers on open invoices. The Accounts Payable Aging report is inaccurate because it doesn’t include all supplier invoice amounts yet. These accounts payable invoice recording delays prevent your company from performing relatively accurate cash flow forecasting.  

Invoice processing delays also result in repeated contacts from suppliers inquiring about their payment status, hurting AP staff productivity when they respond as a follow-up. 

Early payment discount deadlines may be missed on vendor invoices, costing a company substantial amounts and lowering its gross margin and profitability. Days outstanding in accounts payable (DPO) will increase. Suppliers may temporarily delay their next shipments to your business if their invoices are substantially overdue for payment.  

Paper Checks

Next, paper checks are printed. The matched document sets would be sent to one or more authorized check signers with paper checks requiring signatures. Then, paper checks would need to be stuffed in envelopes and mailed, which would take time and cause further supplier payment delays.

Paper checks are not a secure payment method. Checks can be lost in the mail, stolen, bleached, and then rewritten with a different payee and amount. The routing and bank account numbers are visible on the check, inviting more types of fraud. 

Invoice File Problems

A file copy of the paper check would be attached to the invoice with its supporting documents and correctly alphabetized by supplier name in file cabinets used for the current year’s AP invoices. 

After year-end, the files would be boxed alphabetically, ready for archiving. The auditors would select a sample of invoices for testing, and AP would find and temporarily pull them from the file boxes. Ideally, they would be returned to the right files in the correct alphabetical order, but paper-based processes take time. Boxes would be stored in warehouses.  

6 Best Ways to Start Digitizing Your Accounts Payable 

The best ways to digitize supplier invoices in accounts payable are:

1. Select and implement an add-on cloud-based AP automation software system, seamlessly integrating with your ERP or accounting software (through API or CSV files)  to digitize accounts payable. 
2. Onboard suppliers through a self-service portal. 
3. Receive digital invoices in PDF or other acceptable formats via a designated email address or upload through your supplier portal, which is provided by an AP automation platform. 
4. The AP automation system will use OCR (optical character recognition) for data extraction of supplier invoice data by headers and line items, using artificial intelligence with machine learning to increase accuracy.
5. Invoice and AP data will sync with your ERP or accounting software. 
6. AP automation completes the end-to-end invoice receipt-to-payment cycle, including supplier validation, invoice error detection, coding, matching, approvals routing, global payments, and batch payment reconciliation to the general ledger in real-time. It provides an electronic audit trail. 

Pros and Cons of AP Digitization

Although digital accounts payable has pros and cons, AP digitization has many more advantages than disadvantages. 

Pros of AP Digitization

• Enables scalable and efficient AP automation for paperless, AI-driven, intelligent invoice automation
• Eliminates paper documents and storage needs
• Reduces invoice processing costs and hiring needs as your business grows for cost savings
• Reduces fraud risks and errors
• Eliminates bottlenecks to timely approvals and payments and lost paper documents
• Enables global electronic payments and global regulatory compliance
• Eliminates time-consuming and costly paper check printing, signing, envelopes, and mailing
• Provides automatic payment status to suppliers, saving AP team time
• Enables automatic real-time payment reconciliation to the general ledger without needing to use error-prone spreadsheets 

Cons of AP Digitization

• Requires implementation and a change from the status quo
• Suppliers and employees need system training 
• Incurring monthly SaaS and some EFT transaction costs (offset by savings through use)

Start Your AP Digitization Journey with Automation

AP digitization begins by using OCR technology included in AP automation software to capture invoice data, including headings and line items. Once your company digitizes invoices with a secure, modern, cloud-based automation software solution for accounts payable, it has unlocked access to efficient, automated invoice processing with self-service supplier onboarding. 

The best AI/ML-driven AP automation includes touchless invoice processing, error and fraud detection, 3-way or 2-way matching, AI-automated coding, approval process routing, global electronic payments using the payee’s choice of payment method, and real-time general ledger reconciliation. AP automation software also improves analytics visibility and controls over spend with AI-driven chat using a digital assistant for analytics called Ask TipaltiAI℠.
Tipalti can collect W-9 or W-8 forms through a self-service supplier portal before your first payment and track supplier payments, helping you achieve 1099 and 1042-S tax compliance using validated supplier TINs. Tipalti AP automation, integrating with your ERP system or accounting system, will digitize invoices and let your company achieve all of the benefits that end-to-end AP automation provides. Learn more about using invoice digitization and AP automation.