In Part 4 of the procurement series, Anna Van Cleef discusses the Invoice-to-Pay process and best practices for procurement professionals.
The Invoice-to-Pay process starts with the invoice received during the Procure-to-Invoice Process, obtaining any necessary approvals, and processing the payment according to payment terms.
When an invoice is received from a Supplier and the necessary matches are confirmed, as discussed in part 3 of this series, it goes through any additional approvals required based on your company’s process. Some companies require approval from business leaders, other require final review from Accounts Payable, and some approve the invoice based on the matching process alone.
After the necessary approvals are received, the payment for the approved invoice is processed according to the agreed payment terms.
Payment Terms
To ensure timely payment of the invoice to a Supplier, payment terms are agreed to in advance. Payment terms are an important part of the cash flow cycle for the Buyer and Supplier. Payment terms are commonly “Net”, “Discount”, or “End of Month” terms. That said, there are other types of payment term that are utilized often within the supply chain.
Below, we will go into the three common types of payment terms:
- Net Terms indicates that the total payment for the invoice is due within some number of days. Typically, you’ll see Net terms as Net 7, 10, 20, 30, 60 or 90 days; however, other net terms, such as Net 120, may also apply based on the agreement.
- Discount Terms drives an incentive to pay invoices sooner to receive a discount on the total cost of the invoice. Although this concept seems like a “win” for the Buyer and a “lose” for the Supplier, it can actually be a “win-win” if agreed to by both parties. For the Supplier, it can drive faster cash flows by receiving payments sooner. For the Buyer, it allows the invoice to be discounted slightly to have a lower total cost. Typically, you’ll see Discount Terms shown in the following format: “X% Y Net Z”. In this format, X defines the percentage of the total amount of the invoice that will be discounted if paid in Y days. If the discount period passes, the full amount with no discount is due in Z days.
- End of Month Terms simply indicates that the payment of the invoice is due at the end of the month.
Another facet of payment terms is about the date in which they begin their calculation. Payment terms can start from the day that the Supplier sends the invoice, the day the Buyer “accepts” the invoice, or other agreed to dates in within the process. Being clear about the start date of payment terms can reduce confusion and frustration between the Buyer and Supplier within the relationship.
Payment
Payment of the invoice and receipt of that payment closes out the Invoice-to-Pay process. After the Payment Terms are reached, the funds are sent to the Supplier. The payment may be in the form of a check, wire, Evaluated Receipt Settlement (ERS), or other payment form. We are starting to see the emergence of Blockchain supporting this process as well.
Once the payment is received by the Supplier, the Invoice-to-Pay process is complete for that transaction or invoice. Depending on the purchase or the type of relationship a Buyer has with a Supplier, additional invoices and payments may be made until the total project or contract is completed.
Managing these transactions and the overall relationship with the Supplier is what we will cover in Part 5.
Invoice Disputes
Unfortunately, not every invoice smoothly goes through this process. Sometimes there are differences between the Buyer and the Supplier as it relates to an invoice. These disputes can range in financial value, but often cause strain between both parties in the relationship.
Invoice disputes may occur during the initial matching process. A system, or person, may detect a difference between the pieces of information submitted and “reject” the invoice back to the Supplier for correction. This could be something like a mismatched billing address or quantities and prices not matching. It can also be disputed during the additional approval process where people are validating the invoice to other documentation provided by the Supplier for final validation.
Finally, invoice disputes may arise during an audit. Disputes may arise due to issues that both parties didn’t catch during the initial submission that didn’t align to contractual terms and conditions, resulting in required debits or credits.
There is good news! There is a system that can reduce invoice disputes between the Supplier and Buyer upstream of the invoicing process. Look forward to a future article about this system in the future.
