Electronic invoicing 101: A quick guide for businesses

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  1. Introduction
  2. How does electronic invoicing work?
  3. How is electronic invoicing different from manual invoicing?
  4. Challenges with manual invoicing
  5. Benefits of electronic invoicing
  6. Challenges with electronic invoicing
  7. How to create and implement electronic invoicing
    1. Requirement analysis
    2. System selection
    3. Technical setup
    4. Customisation
    5. Compliance checks
    6. Security
    7. Implementation
    8. Training
    9. Support
    10. Launch
    11. Monitoring
  8. Security and compliance considerations with electronic invoicing
    1. Recommended security measures
    2. Compliance requirements
  9. How to choose the right electronic invoicing solution
    1. Assess your needs
    2. Evaluate necessary features
    3. Consult with peers and test solutions

Electronic invoices, also known as e-invoices, are digital versions of traditional paper invoices.

Unlike paper invoices, e-invoices are created, sent, received, and processed electronically. They are often in a structured format like XML, which makes them easier to automatically process with accounting software.

This type of invoicing is used worldwide. The global e-invoicing market hit $13.5 billion in 2023 and is projected to reach $61 billion by 2032. Below, we’ll explain how electronic invoicing works, how it’s different from manual invoicing, the challenges and benefits to consider, and how to choose the right electronic invoicing solution for your business.

What’s in this article?

  • How does electronic invoicing work?
  • How is electronic invoicing different from manual invoicing?
  • Challenges with manual invoicing
  • Benefits of electronic invoicing
  • Challenges with electronic invoicing
  • How to create and implement electronic invoicing
  • Security and compliance considerations with electronic invoicing
  • How to choose the right electronic invoicing solution

How does electronic invoicing work?

Electronic invoicing is a digital process that replaces traditional paper-based invoicing with a faster, more automated process. Here’s a breakdown of how e-invoicing typically works.

  • Invoice creation: The seller electronically creates an invoice using accounting software or an e-invoicing platform. The invoice includes all necessary details like buyer and seller information, invoice number, date, item descriptions, quantities, prices, taxes, and total amount due. The invoice is in a structured format, usually XML, for compatibility with different systems.

  • Invoice submission: The seller electronically sends the e-invoice to the buyer. This can be done through these channels:

    • Direct transmission: The invoice is sent directly from the seller’s system to the buyer’s system using a secure connection.
    • Email: The invoice is attached to an email and sent to the buyer.
    • E-invoicing network or platform: The invoice is uploaded to a network or platform where the buyer can access and download it.
    • Peppol network: E-invoices are securely exchanged between businesses and governments through this global network.
  • Invoice receiving: The buyer receives the e-invoice through their preferred channel. If the invoice is in a structured format, it can automatically be imported into the buyer’s accounting system, eliminating the need for manual data entry. If the invoice is sent as an email attachment or PDF, it might require manual processing.

  • Invoice processing and approval: The buyer’s accounting system validates the invoice data, checks for errors, and matches it with purchase orders and other relevant documents. The invoice might go through an approval workflow, depending on the buyer’s internal processes. Once approved, the invoice is scheduled for payment.

  • Payment: The buyer initiates payment according to the agreed-upon payment terms. Payments can be made electronically through methods like bank transfers, credit cards, or online payment platforms.

  • Archiving: Both the buyer and seller store the e-invoice electronically for record-keeping and compliance purposes.

How is electronic invoicing different from manual invoicing?

Electronic invoicing and manual invoicing are two distinct methods for billing and payment processing, with differences in format, delivery, processing, and overall efficiency. Here’s a breakdown of the differences.

Method
Manual invoicing
Electronic invoicing
Format Physical paper document Digital document (XML, PDF, etc.)
Creation Handwritten or typed using a word processor or invoicing software Created electronically using accounting software or an e-invoicing platform
Delivery Sent via post Sent electronically
Processing Manual data entry into accounting systems Automatic data import
Storage Physical storage in filing cabinets Electronic storage in databases
Cost Higher due to printing, postage, paper, manual labour Lower due to automation and reduced paper usage
Speed Slower processing and payment times due to manual handling and postal delivery Faster processing and payment due to automation
Accuracy Higher risk of errors because of manual data entry Increased accuracy due to automated data processing
Environmental Impact Higher environmental impact for paper, fuel for delivery vehicles, etc. Lower environmental impact, no paper or physical delivery needed

Challenges with manual invoicing

Manual invoicing can be error-prone, time-consuming, and labour-intensive, leading to delayed payments, frustrated suppliers, and potential financial losses. Here are the key issues with manual invoicing that electronic invoicing seeks to address.

  • Time and money: Creating, sending, and processing paper invoices is a slow and tedious process. It involves printing, stuffing envelopes, dealing with postage, and then waiting for the post to arrive. On the receiving end, someone has to manually open envelopes, sort through invoices, and enter data into accounting systems, often leading to bottlenecks and delays.

  • Errors: Manual data entry often leads to errors. A simple typo in an invoice number, quantity, or price can have major consequences like overpayment, underpayment, or even disputes with suppliers. These errors can be costly to rectify and can damage business relationships.

  • Lack of visibility: With manual invoicing, it’s difficult to track the status of invoices in real time. Are they in transit? Have they been received? Are they pending approval? This lack of transparency makes it challenging to effectively manage cash flow and can lead to missed payment deadlines.

  • Cost: Paper, ink, postage, and the labour required for manual processing all drive costs up. The time spent on invoicing is also time that could be better used for other value-added activities.

  • Environmental impact: The reliance on paper for invoicing contributes to deforestation and generates substantial waste, a growing concern for environmentally conscious businesses.

Benefits of electronic invoicing

Here are some of the benefits associated with electronic invoicing.

  • Faster processing and payment: E-invoices are transmitted electronically, eliminating the delays associated with physical mail. This speeds up invoice processing, leading to faster payment cycles and improved cash flow.

  • Lower costs: E-invoicing eliminates the need for paper, printing, postage, and manual data entry. This translates to major cost savings, particularly for businesses that process a large volume of invoices. Automation also reduces the need for manual labour, freeing staff up for other work.

  • Fewer errors: Manual data entry is prone to errors, which can lead to discrepancies and disputes. With automated data validation and import, e-invoicing creates more accurate and consistent invoice data and reduces the likelihood of costly mistakes.

  • Better visibility: E-invoicing platforms have real-time tracking and monitoring features. Businesses can easily see the status of each invoice, from creation to payment, providing greater visibility and control over the entire process. This transparency helps identify bottlenecks, resolve issues promptly, and optimize cash flow management.

  • Less waste: By eliminating the need for paper, e-invoicing reduces your environmental impact and contributes to sustainability efforts.

  • Better supplier relationships: Faster payments and transparent processes create better relationships with suppliers. E-invoicing can help build trust and goodwill, leading to smoother transactions and potential benefits like preferential pricing or early access to new products.

  • Scalability: E-invoicing solutions can easily scale with the growth of a business. As the volume of invoices increases, these systems can handle the workload without the need for additional manual labour.

  • Compliance and security: E-invoicing platforms comply with tax regulations and international standards and incorporate strong security measures to protect sensitive financial data.

Challenges with electronic invoicing

As with any business solution, electronic invoicing can bring its own challenges. Here are some to be aware of.

  • Initial investment: Implementing an e-invoicing system can require an initial investment in software, hardware, and training. Small businesses might find this cost prohibitive.

  • Integration with existing systems: Integrating e-invoicing with existing accounting and enterprise resource planning (ERP) systems can be complex and time-consuming, requiring technical expertise or external consultants.

  • Technical issues: Technical glitches, software updates, and connectivity problems can disrupt e-invoicing, leading to delays or errors.

  • Resistance to change: Employees accustomed to manual processes might resist the transition to e-invoicing. Change management efforts and training might be required for a smooth adoption process.

  • Supplier onboarding: Convincing suppliers to adopt e-invoicing can be a challenge, especially for smaller suppliers who might not have the resources or technical capabilities.

  • Cybersecurity threats: E-invoices contain sensitive financial information, making them a target for cyberattacks. These must be protected with strong security measures.

  • Data privacy regulations: Compliance with data privacy regulations like GDPR can be time-intensive and requires careful handling of personal information.

  • Different formats: E-invoices can be created in multiple formats, leading to potential compatibility issues between different systems.

  • Varying regulations: E-invoicing regulations can vary across countries and regions, making it challenging for businesses that operate in multiple locations to stay in compliance.

  • Lack of physical signatures: E-invoices typically lack physical signatures, which can raise concerns about authenticity and validity in case of disputes.

  • Technical issues: Technical glitches or errors in the e-invoicing system can lead to disputes over invoice accuracy or delivery.

How to create and implement electronic invoicing

Follow these steps to implement electronic invoicing at your business.

Requirement analysis

Clearly define what you want to achieve with e-invoicing, whether that’s faster payment cycles, improved accuracy, or better compliance with regulatory requirements. Review your existing invoicing processes to identify bottlenecks or inefficiencies, and use this to identify specific features you need in an e-invoicing system, such as integration capabilities with existing ERP systems or specific compliance tools.

System selection

Develop a list of essential features based on your needs analysis. Prioritise features like real-time processing, compatibility with international standards (e.g., Peppol, UBL), and ease of integration with your accounting software.

Then research and compare different e-invoicing providers. Look for reviews and case studies and request demos. Confirm the vendor has experience in your industry and can provide strong customer support.

Technical setup

Work with IT specialists to map out how the e-invoicing software will integrate with your existing systems. This might involve API integrations, data mappings, and custom development for easy data flow between systems.

Customisation

Adjust the software settings to fit your processes. This can involve setting up invoice templates, tax calculations, currency handling, and language options, depending on your needs.

Compliance checks

Consult with a legal expert to make sure your e-invoicing practices are in line with local and international tax laws and e-invoicing standards. This ensures that all invoices are legally valid and that your system is future-proofed against regulatory changes.

Security

Implement security measures like encryption, secure access controls, and regular security audits to protect sensitive data.

Implementation

Start with a pilot phase that includes a select group of vendors or customers. Use this phase to collect feedback and make adjustments. Gradually expand the rollout to include all your invoices, systematically bringing each stakeholder group on board.

Training

Conduct detailed training sessions for your finance, sales, and IT teams. Provide resources like manuals, FAQs, and training videos to help them learn the new system.

Support

Set up a support framework with your vendor to promptly address any issues. This can include dedicated support for the initial months after going live.

Launch

Fully activate the system after confirming all integration points are functioning correctly and all user groups are trained.

Monitoring

Use tools within the e-invoicing system to actively monitor its performance and gather user feedback. Look for improvements in processing times, error rates, and user satisfaction.

Security and compliance considerations with electronic invoicing

Electronic invoicing requires careful attention to security and compliance to protect data and follow the law. Here’s a detailed look at recommended security measures and compliance requirements.

  • Data encryption: Encryption helps safeguard invoice data during transmission and storage. Strong encryption protocols like TLS (Transport Layer Security) and AES (Advanced Encryption Standard) protect sensitive information from unauthorized access.

  • Access controls: Access controls ensure only authorised personnel can view, modify, or process invoices. Role-based access controls (RBAC) help prevent internal fraud and data breaches by restricting user access based on their job functions.

  • Authentication and authorization: Use strong authentication mechanisms like multi-factor authentication (MFA) to access the invoicing system for another layer of security.

  • Audit trails: Audit logs should capture details about who accessed or modified an invoice and when. This helps track discrepancies and investigate incidents and also supports regulatory compliance.

  • Data integrity measures: Measures like digital signatures and checksums preserve data integrity and verify that the data has not been altered from its original form.

  • Network security: The networks that transmit invoices must be protected with firewalls, intrusion detection systems (IDS), and intrusion prevention systems (IPS) to thwart attacks and unauthorised access.

Compliance requirements

  • Regulatory compliance: Both local and international regulations can govern e-invoicing processes. For instance, the European Union’s Directive 2014/55/EU mandates the use of electronic invoicing for public procurement.

  • Tax compliance: Many jurisdictions require specific standards for e-invoices for tax reporting. Your e-invoicing system must be able to generate invoices that are compliant with local VAT or GST regulations and integrate with digital tax reporting systems, if applicable.

  • Standards and formats: E-invoicing must adhere to international standards like EDIFACT, which facilitate interoperability between different invoicing systems across borders. Compliance with these standards ensures invoices are legally recognised and can be processed by systems in different countries.

  • Archiving policies: Regulatory bodies often require businesses to retain invoices for a specific period for auditing purposes. This includes using reliable storage solutions that comply with data retention laws.

  • Privacy laws: You must comply with data privacy laws like GDPR in the EU or CCPA in California. These regulations mandate how personal data should be handled and protected.

  • Cross-border data transfers: If you operate in multiple countries, your practices must comply with laws governing cross-border data transfers. For example, data transferred from the EU to other regions must comply with GDPR transfer rules like standard contractual clauses (SCCs).

How to choose the right electronic invoicing solution

Follow these steps to choose the right electronic invoicing solution for your business.

Assess your needs

  • Transaction needs: Consider the volume of invoices your business processes and the complexity of your transactions to help determine what you need in an e-invoicing solution.

  • Existing systems: Identify which systems (e.g., ERP, accounting software, CRM) you’ll want to integrate with your e-invoicing solution.

  • User base: Consider the diversity of your user base, including international vendors and clients, which might require multilingual and multi-currency support.

Evaluate necessary features

  • Automation: Look for automation features like invoice fields that autopopulate from purchase orders and automatically match invoices with payments.

  • Security: Assess the security measures included, such as data encryption, secure access controls, and compliance with data protection laws.

  • User experience: Choose a user-friendly interface that requires minimal training with accessible customer support and clear documentation.

  • Mobile and cloud access: Consider whether a mobile application or cloud access is necessary for remotely handling invoicing tasks.

  • Compliance: Check that the solution complies with all relevant invoicing regulations, including those specific to your industry or the jurisdictions where you operate.

  • Formats: Ensure the solution supports standard e-invoicing formats, such as EDIFACT, facilitating smoother transactions and future compatibility.

  • Scalability and flexibility: Assess the solution’s scalability and flexibility to grow and change as your business evolves.

  • Customisation: Check if the software allows customisation according to your specific workflows or industry requirements.

  • Vendor stability: Research the vendor’s market presence and stability. Established vendors are likely to offer more reliable and continually updated solutions.

  • Support services: Evaluate the quality of customer support, including availability, responsiveness, and technical expertise.

  • Cost: Assess the pricing model, whether it’s a one-time fee, a monthly subscription, or based on transaction volumes. Consider setup costs, maintenance fees, and any additional charges for updates or additional features. Weigh the potential savings against the cost of the solution to determine its ROI.

Consult with peers and test solutions

  • Reviews and case studies: Read reviews and case studies from current users to gauge the solution’s effectiveness and the vendor’s customer service.

  • Free trials or demos: Before finalising your decision, take advantage of free trials or demos offered by vendors. This allows you to test the solution’s compatibility with your existing systems and its ease of use.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.

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