From Spreadsheets to the Cloud (1): Why Manual Invoice Data Capture is Bad for Your Company

If your company is dealing with lost invoices, complaining vendors, duplicate payments, or over payments while its Accounts Payable (AP) department is growing, you may want to re-evaluate your manual invoice data capture system.

Simple steps make up a complicated process

The paperless office is an ideal that is stuck in the concept phase – it’s not a reality, at least not for most public and private enterprises. Organizations are still using manual invoice data capture methods to process over 90% of their invoices manually, according to a 2017 Billentis report.

To further complicate matters, they are also processing and filing nearly all their incoming invoices in paper form – in fact, a recent Corcentric survey revealed that nearly 44% of finance staff still get invoices by fax. For tax and legal purposes, these invoices are often filed together with additional documents such as purchase orders.

One or more accountants handle these files, verifying the accuracy and relevance of the information they contain, including:

• whether the vendor is already in the organization’s list of approved vendors
• whether payment has been authorized
• whether vendor details are still the same

To ensure the company has the payment information it requires, AP team members extract and enter invoice data from digital and paper invoices to an assortment of internal systems. They also need to check and compare the data to the contents of various databases.

That process seems simple when you break it down into steps:  

• Take a document (i.e. an invoice) from a file
• Find one or more fields in the document
• Retype the data from the field(s)
• Compare the data you just retyped to information in the purchase order contained in the file
• Close the file and open a new one
• Repeat

This procedure works just fine for a simple invoice in an ideal world. In reality, however, this process can take a week or longer according to the previously mentioned Corcentric article, potentially getting bottlenecked and more complex with each step. The cause of such difficulties could be something as trivial as an incorrectly typed number or misplaced decimal, or as critical as a disorganized invoice processing system made up of various departments and individuals entering and checking data on an ad hoc basis.

The harsh reality: lost invoices, duplicate payments, and late payments 

To provide a clearer sense of the issues that human data entry can create, we’ll examine two recurrent scenarios that stem from manual invoice processing. We’ll use benchmarks and KPIs to analyze these situations later on; we’ll start with a glimpse of the reality of working for an AP department.

Lost invoices can lead to duplicate payments

Invoices arrive at an organization through several channels, including the business postal addresses and email accounts of managers who have ordered services. Because payment workflows tend to be haphazard and inefficient, invoices can end up buried and lost in a pile of mail or an unused spam folder. After several weeks of waiting for a company to pay such an invoice, the vendor might issue a duplicate invoice then place an angry call to the procurement department. To prevent this from escalating, the AP department could decide to bypass the correct approval process and make an exception – resulting in a duplicate payment to the vendor. 

Late payments and excessive invoice processing times

Have you ever wondered why large companies require their vendors to deliver invoices with a payment due date that is two or three months after the invoice issuing date? The reason is simple: they require this time to process invoices and issue payments. 

The entire procedure, from receiving an invoice through payment authorization, can take several weeks primarily for two reasons:

First, the accounting department may be having difficulty processing a large quantity of invoices. All the data that AP receives from other systems can overload the team, causing a knock-on-effect throughout the invoicing workflow. This effect manifests itself in longer processing times, higher error rates when retyping or pairing invoices, and issues with cash flow, vendor relations, and communication with other departments.

The second cause of excessive invoice processing times is more common than the first: a disorganized, almost ad hoc system that is often short-handed due to paid time off and absenteeism. Working in such a chaotic environment, AP teams that process invoices manually are prone to bottlenecking. To further complicate matters, invoice processing and approval often requires cooperation and coordination across several  internal departments and, in some cases, external payment solution providers. 

A worst-case scenario: an invoice gets stuck in procurement for two weeks, spends another two weeks in AP, and sits idly in the department that ordered the services for yet another two weeks. A total of six weeks has elapsed before anyone enters the invoice data into the system! In this case, a supplier’s typical course of action is to charge late-payment fees and revoke any early-payment discounts they may offer. This situation also damages the company’s relationship with the vendor.

These are just some of the most obvious short-term problems that manual invoice processing creates. Issues such as non-compliance with budget and approval parameters or incorrect budget allocation are not as easy to immediately identify and address; in the long term, they could lead to major complications in the accounting process. 

Generally speaking, manual data invoice extraction can and usually does lead to several major short- and long-term problems. To help you determine whether your manual invoice data extraction processes are causing your company more harm than good, check the following widely used metrics and benchmarks.

Let’s talk numbers and facts!

If you want to understand the effectiveness of your invoice data capture process, look at your system’s qualitative and quantitative aspects. Start with these numbers and KPIs first to identify potential complications that manual invoice processing is creating for your AP department. 

Cost per invoice. Total Cost of Ownership (TCO) is one of the main indexes that companies use to evaluate the cost-effectiveness of a process. The TCO of manual invoice data extraction can vary from $6 to $50 per invoice. We calculated the TCO for a very simple invoice data extraction process for a hypothetical company and got a result of $2.03 per invoice. 

Invoice turnaround time. The average time to process an invoice through the entire cycle, from invoice receipt to payment authorization, is 12.4 days though it can reach up to 25 days. This KPI is very important because it affects the penalties for late payments and discounts or bonuses for early payments. 

Cost of late payments and penalties. Whenever the time to process an invoice exceeds the payment due date, many vendors charge a penalty for the late payment. This not only generates additional costs for the AP department, it also creates friction between vendors and their customers.

Rate of timely payment. This index represents the opposite of late payment penalties. Optimally, all invoices should be paid on time or early – doing so can really pay off!

Rate of captured early payment discounts. To improve their cash flow, vendors sometimes offer discounts for early payment. These reductions typically vary between 1-2%, making smooth, timely invoice processing profitable while lowering costs for the AP department.

Cost of errors. Everyone makes mistakes; data entry specialists can be especially prone to making them when the quality of incoming invoices is low. Incorrect data entry in company systems can result in, for example, payments going to the wrong accounts . An incredible 12.5% of invoices require some type of reworking when handled manually. The hidden costs of human errors include the additional time, resources, and budget required to find and correct mistakes.

Rate of duplicate payments: Globally, over a third of all companies report that duplicate payments and overpayments account for more than 1% of their total payments. This figure reaches 2% for 14% of all businesses. This index is important, as it indicates several issues that a company needs to address in its processes, such as cash flow problems and the additional time and communication required to capture, process, and solve duplicate payments and overpayments.

Quantity of supplier enquiries, disputes, and escalations. The AP department is often the team that vendors call when they have complaints about late payments or unpaid invoices. Ideally, suppliers should be discussing their products or services with the procurement managers that place the orders – not reporting payment issues to AP. Every supplier enquiry about late or missing payment costs time, resources, and money as accountants communicate with vendors to resolve the matter.

Manual invoice extraction is bad for business in the long run

Most measurable quantitative problems are clear, but organizations often disregard or ignore qualitative issues. As you’re about to see, this neglect can have dire consequences.

Vendor relationships and turnover. Late payments without prior notice, payments to the wrong accounts, lack of communication… all of these take their toll on vendor-customer relations. Prompt payment is one of the cornerstones of a functioning business relationship; a high turnover of vendors due to poor payment practices can damage your brand and reputation. 

Invoice fraud. A staggering 82% of organizations reported they’d been the victims of payments fraud in 2018 according to the 2019 AFP Payments Fraud and Control Survey, underwritten by J.P. Morgan. 

Cash flow planning. Invoice processing is one of the most crucial aspects of cash flow management. You cannot manage your cash flow if you do not have the correct payment amounts and due dates. When you process invoices correctly, rapidly, and on time, you’ll have an easier time managing and boosting your cash flow. 

Employee satisfaction. Retyping data from an invoice is a mentally exhausting chore. Companies are finding it increasingly difficult to find data entry specialists; the burnout rate of these specialists is accelerating and replacing and retraining them is labor-intensive and costly. 

While your AP department may have data entry staff who are willing to spend most of their time mindlessly transcribing data, chances are they’re not the most engaged or focused team members. Providing them with technology that enables them to focus on other tasks will help increase their productivity and value to your company; at the same time, it will boost their satisfaction with their role in your AP department.

Conclusion

While manual transcription is still the most common way of capturing invoice data and processing invoices, it’s also the least effective. From human errors while entering data through duplicate payments to vendor turnover, manual invoice data capture bottlenecks company processes. We can see as much in quantitative KPIs and qualitative indexes such as the state of vendor relationships and employee satisfaction. 

Manual invoice processing is clearly inefficient and expensive. Now that we know the extent of its impact on your business, we’ll spend the next article in our series evaluating alternatives such as outsourcing, P2P portals, template-based OCR solutions, and AI-powered OCR solutions.