Most B2B payments are electronic. And we can all agree that’s a big improvement on sending checks. But the same can’t be said for invoicing.
Most businesses are still manually creating and sending invoices as PDFs or word documents. And that means we’ve managed to perfectly replicate the paper invoicing process on digital systems. With all its risk, inefficiencies, and frustrations recreated as well.
This obviously isn’t sustainable – especially as transaction and invoice volumes rise, cross-border transactions become more common, tax and compliance regimes become more complex. Something has to change, and many governments across the globe are doing their part to ensure it happens sooner rather than later.
This change takes the form of electronic invoicing, or “e-invoicing” for short. Let’s explore what it is, how it works, and why it’s relevant to you.
What is electronic invoicing?
Electronic invoicing is exactly what it sounds like: sending your invoices as a digital message on a secure platform in a standardized format.
In theory it enables you and your payees and vendors to much more easily establish what they owe, what they’re owed, track the status of outstanding invoices, and make payments more easily.
What does an electronic invoice look like?
Note that this isn’t the same thing as simply “sending an invoice via email.” An e-invoicing system provides a secure communication channel and platform to create, send, and receive structured, machine-readable invoicing files.
Most commonly, these will be XML or EDI files with fixed data fields that can be automatically interpreted by both you and your vendors or customers’ systems, and by tax and regulatory authorities.
In many countries, e-invoicing mandates already exist that specify both the legally required formats for electronic invoices, and the approved systems you’ll have to use to create, receive, and send them.
Why do businesses need electronic invoicing?
Regulators in all regions are currently considering mandates – particularly in the EU, Asia, and South America. This means wherever you operate, your organization will need to prepare for e-invoicing regardless.
But this isn’t a bad thing, as it gives your organization the chance to significantly streamline your operations by getting rid of manual invoicing workflows and cutting out a significant part of your AP function’s manual workload.
Manual invoice processing and capture workflows take time (usually a week or more if nothing goes wrong), they’re highly error prone, and subject to all manners of delays in matching, approvals, and reconciliation processes.
Structured machine-readable e-invoicing formats eliminate most of this back and forth with clear, transparent transaction records that are easily read and interpreted by automated systems.
How does electronic invoicing work?
The process behind e-invoicing is quite simple:
- First, an AR operator creates the invoice as a structured file. They can either do this manually or using a file creation tool that speeds up the process—including by “PO flipping” from existing procurement records.
- Next, they validate the invoice file with the system through an automatic requirements check. Structured formats mean the system can instantly flag missing or likely erroneous fields, and also check for compliance with relevant tax and reporting regulations.
- The invoice is received by the purchasing company’s system. The machine readable format means their accounting or ERP platform can instantly validate the invoice and assign it to the appropriate cost center and approval chain. This also makes catching duplicates and detecting fraud a much easier process.
- The buyer’s system then performs automatic 3-way matching against purchase orders and receipt of goods notes. This allows for any discrepancies to be weighted and submitted seamlessly for adjustment in the approval workflow.
- The system then automatically sends the invoice for approval. If all checks are met, this can be entirely touchless. For queries and exceptions or the handling of deductions, the system automatically routs to the stakeholders who need to be involved.
- The invoice is then sent for payment (the progress of which is tracked by the system in real time).
Both the vendor and the buyer keep a copy of the invoice in their records for reporting and compliance purposes.
Electronic invoicing vs. traditional invoicing
Even though most invoices are now sent as PDFs in emails, they still fall foul of all the downsides of the traditional paper invoice.
There are many ways a traditional invoice can be paid incorrectly or not at all. The document can be lost. It might not contain all the information a bank needs to complete the payment. An AP clerk might write the wrong number on a bank order or check. The bank itself might execute the payment incorrectly.
This also makes reporting a slow and cumbersome endeavor. Figuring out what you made this year – or what you owe your tax collectors – can take weeks or even months of manual number crunching and sifting through files. And reconciling it all with your various bank statements and remittance advices makes the process even longer and more prone to inaccuracies.
To contrast, electronic invoicing is time efficient, occurs within a single self-contained tech ecosystem, and manages most of the burden of data entry, processing, and communication without human oversight. This means lower costs, fewer errors, smoother payment processes, and enhanced visibility and control for all parties.
E-invoicing standard formats: what are the different types?
E-invoicing formats are usually standardized within a particular country according to rules set by the government. The most common formats are:
XML (Extensible Markup Language)
XML is favoured in many applications because it’s simple, flexible, and very easy for all kinds of different digital systems to “read”. Many countries demand the use of XML filetypes for their e-invoicing regulations, but different countries frequently use different specifications and data fields. Common types include UBL (Universal Business Language, used internationally in invoicing) and cXML (“commerce” XML).
EDI (Electronic Data Interchange)
Developed as a standard format for exchanging business documents and already common in manufacturing and retail for sharing everything from instruction sets to complex bills of materials and compliance data for transportation, imports, and exports.
PDFs
They are also frequently used in e-invoicing, usually with embedded XML data. This is because they’re easy for humans to read, even if they’re less rigidly structured than purely machine-readable formats.
Some platforms for electronic invoicing also allow PDFs to be sent and stored alongside machine-readable files for ease of human inspection and compliance with reporting requirements. Most notable among these are the German ZUGFeRD (“central user guide of the forum for electronic invoicing in Germany) protocol and the French FACTUR-X.
How to generate an electronic invoice
There are multiple ways to create an e-invoice.
If you have a lot of time, you can write a compliant XML file yourself. This would be self-defeating, however, as the highly structured nature of these documents means their creation can be automated based on just a few parameters:
- Relevant vendor and customer ID
- Bank account details
- Purchase order number
- Invoice type code
- Currency information
- Invoice line items and totals
- Relevant tax frameworks
- Issue date
- Due date
Depending on the system and regulatory frameworks, each invoice may contain a unique identity number both for itself, and for the customer and supplier. This creates a permanent and transparent record of all transactions occurring within the framework.
Things to consider when you adopt electronic invoicing
The growth of e-invoicing adoption represents a fantastic opportunity to substantially automate a large part of your order-to-cash and procure-to-pay processes. After all, all inbound and outbound transactions will increasingly require structured invoices with mandatory information fields – exactly the kind of thing automated systems are perfect for handling.
But managing the change won’t be easy. Regardless of where your business is based, you’ll have to weigh the requirements of different organizations and regulatory frameworks—especially if you trade in multiple countries and regions.
First, consider how solutions integrate with your existing systems and processes. Implementation of an electronic invoicing solution (or solutions) only works if it plays ball with your ERP and accounting systems, and with the ways that your people already work.
You’ll also need to think about how much resource investment from your IT teams e-invoicing adoption will require.
Next, review regulatory compatibility across all your markets. Different countries and industries have different e-invoicing requirements. You’ll need to make sure you can meet them, both in terms of technical setup and in terms of VAT reporting and other tax requirements.
Third, you’ll need to implement data security policies. Any new systems will need to meet your existing security needs so digital invoice data and personally identifying information are properly safeguarded.
And finally, before you do anything, you should remember that switching to e-invoicing has to be seen as a change management project. Some suppliers and customers might resist the transition, and your people will require training and preparation regardless of what solutions you eventually decide to implement.
How can Serrala help you adopt electronic invoicing?
Serrala solutions are designed to create a coherent, end-to-end ecosystem for your invoice-to-pay processes that simplifies your accounting workflows and allows for full working capital optimization.
Our offering helps your organization meet corporate global compliance requirements and expedites the receipt and processing of e-invoices in different territories, ensuring you maintain compliance with all platforms, formats, and archiving regulations.
We can also support you in integrating your e-invoice processing into your global invoice capture and processing automation workflows to maintain efficiency and unlock your teams’ capacity for more strategically relevant tasks.
Electronic invoicing (e-invoicing) FAQ
What’s the difference between traditional and electronic invoicing?
“E-invoicing” describes the practice of sending and receiving invoices in the form of machine-readable files to allow for automated processing and real-time reporting and compliance. This process removes most of the manual data entry from AP processes, and the errors and delays associated with them.
How does e-invoicing improve efficiency and contribute to cash flow?
By removing most of the common delays from the P2P process, e-invoicing makes it possible for businesses to request and make payments more quickly. This means businesses can receive cash faster, cutting the cost of sales and collections, and more easily track its outstanding and pending commitments to its vendors, improving working capital intelligence and making a more strategic approach to liquidity management possible.
What’s driving electronic invoicing adoption?
E-invoicing adoption is being driven by both a need to streamline finance operations and by regulatory mandates and changes occurring in multiple countries. E-invoicing both makes it easier for businesses to pay each other (and understand their working capital to improve decision making) and for governments to ensure compliance with reporting regulations and tax obligations.
Where is e-invoicing mandatory?
As of writing, e-invoicing is mandatory in many countries for specific types of transactions. All EU countries plan to roll out e-invoicing laws over the next 5-10 years, with Italy and Spain already mandating them for all B2G and B2B transactions. France, Germany, and Poland all mandate e-invoicing in B2G and will progressively roll out the technology as a mandatory component of B2B transactions over the next several years. Some countries in APAC have also instated e-invoicing mandates, as have many countries in South America, including Mexico and Brazil.
How will e-invoicing impact my business?
Your finance department will have to respond proactively to e-invoicing transformation and legal requirements. However, this has a huge upside in streamlining your AP and AR processes, as it paves the way for the automation of the most onerous and repetitive parts of these processes, which impose a significant amount of manual work on multiple teams.
