Two people pointing at a sheet of paper. curve

What are Vendor Invoices & How Do You Process Them?


We’ve paired this article with a comprehensive guide to accounts payable. Get your copy of the Accounts Payable Survival Guide!

Effective invoice management is critical to maintaining the positive financial health of a business. Selling goods and services is only half of the job. A business must eventually get paid for the work. 

In order to properly align your operations and streamline accounting tasks, there must be a solid understanding of what a vendor invoice is, how to process them, and the most effective tools to get the job done.

What is a Vendor Invoice?

A vendor invoice is a document requesting payment for an itemized list of products or services that a seller provided to a buyer during a specific transaction.

If your basic question is, what is an invoice? It’s a document that completes the cycle from purchase order to product receipt. A vendor invoice can represent a one-time purchase or a bill for ongoing services, but either way, it’s a line of credit extended to the buyer. The vendor invoice has a header and one or more line items designated for products/services rendered.

Vendor invoices can be transmitted in a variety of ways. The traditional form was paper, but modern methods typically involve electronic documents. After a product/service is delivered, a vendor invoice is sent out to complete the procurement process. The invoice is intended to notify the buyer of exactly what is due, and when it is expected (payment terms).

When it comes to paying vendor invoices, they can be paid in full or through installments (depending on your contract). Subscription-based brands often bill customers once a month and automatically withdraw funds via accounting software.

Sales Order vs. Vendor Invoice

A sales order should not be confused with a vendor invoice. When it comes to a sales order vs invoice, a sales order is created by the vendor to confirm they can provide the goods/services requested. A vendor invoice is created to request payment for goods/services already provided to the buyer.

What Information is on a Vendor Invoice?

There is no standard vendor invoice template, but it must contain specific data to be upheld by the IRS as an official document. It should contain the following invoice information:

Invoice Date

The vendor invoice date will indicate the date the document was created. This also jumpstarts the payment terms and helps set the due date. If your terms are 30 days, then the payment due date will be a month proceeding the invoice date.

Invoice Number

A unique identifier, usually an invoice number (sometimes containing letters) must be assigned to every vendor invoice. This reference number establishes an audit trail for your company’s accounting records. 

Vendor invoice numbers should always be assigned in sequential order. Some businesses will also tie in the vendor invoice number to the corresponding purchase order.

Contact Information

Every vendor invoice must contain contact information for all parties involved in the transaction, including vendor information and buyer data. This includes name, address, phone number, email, and website.

Descriptions of Goods and/or Services

Each product and/or service provided must be entered as a line item on the vendor invoice. Each order line should also contain a quantity amount and individual cost. At the bottom of the invoice, the line items will be subtotaled for the final amount due.

Payment Terms

A vendor invoice should always provide clear details on payment expectations to increase the likelihood of being paid on time. The payment terms will specify the amount of time a buyer has to pay the vendor invoice off. 

Choose terms that encourage early payment. This is especially important for small businesses that want to maintain a healthy cash flow. When setting invoice terms, consider some of these more common methods:

  • Upon Receipt – Payment is due immediately
  • Payment in Advance (PIA) / Cash in Advance (CIA) – Invoice must be paid in full before work
  • Net X – Buyer has X number of days to pay after the invoice date
  • ​End of Month (EOM) – Payment terms that request buyers pay at the end of the month indicated by invoice date
  • 50% Upfront – Customer must pay half before the work begins.
  • 15-Month Following Invoice (MFI) – Pay by the 15th of the month, following the date of the invoice
  • 2/10 Net 30 – When offering 2/10 net 30, it implies a 2% discount if you pay in 10 days (instead of 30)

Total Amount Due

Lastly, every vendor invoice must contain the net payment due. On these invoice lines, you may choose to add sales tax, gratuities, or other pre-agreed-upon fees.

Additional Vendor Invoice Information to Consider

  • Accepted payment methods (like credit card or ACH)
  • Purchase order information
  • Extra identifiers for financial records
  • Other data on customer orders

Vendor Invoice Management: The Basics

Also called vendor invoice processing, this is the strategy by which companies track and pay supplier invoices. 

Basic invoice management is an accounts payable function that includes the receipt, approval, and auditing of invoices. Most companies will save time and money by eliminating the manual processes of invoice management and replacing it with supplier payment automation.

Curious how to take a holistic approach to the accounts payable process?

Watch our recorded session from the IOFM AP Automation Summit:

Processing a Vendor Invoice

The job of invoice processing relies on the accounts payable team. The traditional method of processing a vendor invoice is a highly-manual system of sorting paper invoices, matching purchase orders, waiting on approvals, and endless filing. 

A typical invoice management cycle is a workflow that includes the following sequential steps:

  1. The invoice is received by AP
  2. The invoice is recorded and matched to other documents
  3. The invoice approval process begins
  4. The invoice is submitted for payment and processed
  5. The invoice data is recorded (in the general ledger) and then archived

An established invoice management workflow will create a more efficient accounts payable team that can track what’s owed, ensure payments go out on time, and accurately record transactions.

Research estimates that 50% of firms have yet to automate their accounts payable processes, while 24% scan and email, and 23% rely on manual systems. The costs associated with manual processes are also pretty steep. While it costs about $10 to manually process an invoice, it only costs an average of $2.07 to do it electronically. That’s a difference of 79%!

The manual way of processing vendor invoices is a bloated process that can waste a company’s time and money. If you’re still processing invoices manually, your entire AP system may need a digital transformation.

Processing a Vendor Invoice with Automation

An accounts payable department can streamline the time-consuming task of invoice processing using automation, artificial intelligence, and machine learning. A digital vendor invoice is a component of automated invoice processing, a technology redefining the way people approach the entire invoice process. 

By taking advantage of automation, a company can accelerate the entire procurement process, driving revenue, increasing growth, and satisfying more customers.

Invoice workflow automation moves vendor invoices through the pipeline faster. It generally includes automating tasks like:

How Does Automated Vendor Invoicing Work?

While the traditional method of invoice document management begins when a vendor invoice is received, automation is a lot different. By the time the invoice ends up in AP’s lap, it has already been matched and approved for processing. It’s that quick!

Once the digital invoice arrives, it is scanned and fed into the system (a process known as data capture). The invoice automation software will then convert the data into a text-searchable document. The data is extracted and mapped into the ERP system. This includes information like supplier name, amount due, quantity, and so on. Invoices are then automatically routed to the appropriate parties for review and approval.

From here the vendor invoice is posted for payment. The payment is issued and AP can then reconcile the records. While the traditional method requires up to 15 steps to make this happen (taking days or weeks), AP automation enables the entire process to happen in minutes.

The Benefits of Automated Vendor Invoice Processing

AP automation takes all of the manual tasks an AP department must accomplish and uses a computer to complete them. When you take away the need to perform menial tasks, businesses see benefits like:

  • A business can take advantage of early payment discounts by tightening controls
  • Avoid misplacing invoices and eradicate manual data re-entry
  • Eliminate late fees that are charged when bills aren’t paid on time
  • Consistently process invoices faster and more efficiently
  • Nurture and support positive supplier relationships
  • Keep the supply chain continuously flowing, with materials supplied, and everyone paid

Vendor invoice automation software allows an AP team to focus on more important projects that are core to a company’s success (rather than repetitive data-entry jobs).

Vendor Invoice FAQs

Is a vendor invoice the same as a bill?

Although a vendor invoice and a bill convey the same type of information, especially when it comes to the amount owed, they still differ. A vendor invoice is generated by a business providing a product or service. The customer receiving the invoice will record it as a bill.

What are the three types of invoices?

There are three types of invoices you should know about. They are:

Pro Forma Invoice – This “pre” invoice is not an ask for payment but rather an estimate of how much the products/services will cost once the job is done.
Interim Invoice – This breaks down the cost of a big project into smaller payments. Instead of one big invoice, several small ones are sent along the way.
Final Invoice – This is the official request for payment once a job is completed or a service is rendered. It should also include all the data necessary for a customer to know exactly what they are paying for.

What should be on a vendor invoice?

If you put anything on a vendor invoice, it must include these five items:

1. Invoice number (including the purchase order number)
2. Contact information
3. Date
4. Description of products or services
5. Payment terms

Conclusion

Vendor invoices are an essential part of the procurement process and ensure a business has the cash flow to keep operating. The best way to mitigate the tedious jobs of accounts payable is to take advantage of automated invoice processing software. It’s a hands-off approach to AP management that includes smart features like:

  • Standardized invoice coding
  • Automated approval workflows
  • Centralized dashboards
  • Vendor self-service portals
  • And much more

Some automated invoice processing platforms will integrate directly with an ERP system, which will help further the accuracy and timeliness of payments. By simplifying the accounts payable process, particularly vendor invoices, an organization can improve cash management, expedite financial close, and focus on driving business growth.

Check out The Holy Grail of Accounts Payable to fully realize the possibilities of AP automation.

About the Author

  • Linkedin

RELATED ARTICLES