Invoice Processing vs. Accounts Payable: What’s the Difference?

Key Takeaways

• Invoice processing includes the steps a business follows to pay a vendor after receiving an invoice for purchasing their services or products.
• Accounts payable is a short-term liability or debt that a business can have for receiving a product or service that they have purchased but haven’t paid for yet.
• Invoice processing and accounts payable activities have a close relationship, but they are not the same.
• Accounts payable operations include invoice processing, vendor enrollment and identifying discrepancies in invoices and payments.
• A business can automate invoice processing and accounts payable operations to improve its cash flow and relationship with vendors.
• Businesses can choose to automate invoicing first if they need to process a low volume of invoices and need approval for a single department or team.
• Accounts payable automation can be necessary for a business when they need to handle a high volume of payments and needs to approve invoices from multiple departments or teams.

Invoice processing and accounts payable are two common terms used in finance. These two terms are closely related to vendor payments. This is why some people may consider that they have the same meaning or use them interchangeably. But practically, they don’t refer to the same activities and their applications have some key differences. In this blog, we are going to discuss how invoice processing and accounts payable differ from each other so you can use them properly.

What is Invoice Processing?

Invoice processing includes the workflow of a business for receiving, verifying, approving and paying supplier invoices. Many businesses use an invoice processing outsourcing service to increase efficiency and ensure on-time payments to suppliers or vendors. Some of the major steps of invoice processing are:

• Receiving invoices from a supplier through different channels such as mail, email or electronic platforms.
• Capturing invoice data such as supplier name, purchase order and invoice number.
• Verifying invoice data against the purchase order, vendor list and contract terms.
• Resolving inaccuracies or discrepancies in invoices such as wrong amounts, quantities or mismatches in purchase orders.
• Sending invoices to the appropriate individual or department for approval.
• Processing payments after invoices are approved.
• Recording payment information and other necessary details once the payment has been sent.

What is Accounts Payable?

Businesses don’t always pay in advance or right after receiving a product from a supplier. They can send the payments long after receiving a product or service. Accounts payable is a type of liability a business has for products or services they have received but have not paid for.

A business needs to manage its accounts payable efficiently to maintain healthy cash flow and relationships with its suppliers. They need to identify inefficiencies in their payment processing system and ensure compliance with financial regulations as part of accounts payable operations. Some businesses may use an accounts payable outsourcing service to handle these activities.

Is Invoice Processing Part of Accounts Payable?

Invoice processing is a major part of accounts payable activities. A business needs to receive, verify, approve and process invoices to send payment to its suppliers on time. It is important for companies to ensure that the invoices they receive are accurate and match their purchase orders. Discrepancies and delays in invoice processing can affect their business working capital, cash flow, and relationship with suppliers. Studies show that late payments can cost $39,406 on average per company annually.

Invoice Processing vs. Accounts Payable: Key Differences

Some of the major differences between invoice processing and accounts payable are the following:

Key Difference	Invoice Processing	Accounts Payable
Definition	The steps or workflow for receiving, verifying, approving, and processing invoices for sending payments to vendors.	Operations for managing short-term debt from overdue payments to vendors or suppliers for the products and services they have sold.
Main Focus	Process invoices through proper channels and workflow for paying vendors and maintain a healthy relationship with them.	Manage the entire vendor payment cycle and ensure bills are paid accurately and on time.
Scope	Primarily focuses on individual invoices.	Covers invoices, payments, vendor records, reconciliations and payment management.
Key Activities	Invoice data entry, three-way matching, verification, approval and exception handling.	Invoice management, payment processing, vendor management, account reconciliation and reporting.
People Involved	AP staff, invoice processors, approvers and sometimes procurement teams.	AP teams, finance managers, procurement, vendors and other stakeholders.
Technology Used	Often uses invoice processing or accounts payable automation software to capture and validate invoice data.	Uses broader AP or ERP systems to manage invoices, payments, vendors and financial records.
Relationship	Invoice processing is a part of accounts payable.	Accounts payable is a financial function that includes invoice processing.

Invoice Processing vs. Accounts Payable: Example

An example of invoice processing can be when a supplier sends an invoice to your business. Your business’s invoice processing team receives the invoice, verifies it and sends it for approval. Then, the accounts payable team or department processes payments and records the necessary details in their ledger after payments.

An accounts payable example may not be limited to processing invoices. It can be about how a business manages its debt or liability to another business or individual, which can be a supplier, vendor or contractor.

Here are some examples:

• A vendor or supplier sells raw materials such as vegetables, fruits, meat and spices to restaurants or hospitality businesses.
• An HVAC company provides services to the facility of a company and sends them a bill for it.

How Invoice Processing Fits Into the AP Workflow

Invoice processing starts in the AP workflow after a business creates a purchase order and sends it to vendors. Here is how the overall process works:

Purchase Order

A business needs products or services, and they send a purchase order to a vendor. The vendor receives it and sends an invoice to the business with order details such as the quantity of products being supplied, price and total amount owed.

Receiving and Verifying Invoices

Businesses receive the invoice and match it against their purchase order. See if there are any discrepancies and resolve issues if something needs to be fixed.

Crediting Purchase Amount

After verifying the invoice, the business enters the invoice information into the company’s accounting system and records it as a liability. Many AP departments of businesses use accrual accounts, which means recording expenses when they are incurred rather than when they are paid.

Invoice Approval

The AP team approves the invoice and decides when they will send the payment according to the payment terms of the vendor. They can schedule a payment early because the vendor may give a discount for early payment. However, sending a payment too early can also have a negative impact on their cash flow. So they need to schedule the payment carefully.

Payment and Record Update

The business processes the payment as scheduled and sends the payment details to the vendor. They record the payment information in their account or ERP system and update the accounts payable records.

Invoice Processing vs. Accounts Payable: Which One Should You Automate First?

Automation can help a business handle repetitive tasks with less manual effort. It can help businesses improve efficiency and reduce errors in performing particular tasks. This is why many businesses try to find out how to automate invoice processing and accounts payable tasks and which one they should automate first.

Invoice automation means using technology to capture, extract, verify and approve invoices. A business can reduce costs and errors in invoice processing by automating. Businesses that don’t have a big budget for automation or who don’t want to go through the complexity of full accounts payable automation can choose it. It is the front end of major accounts payable activities, so they will be able to focus on other accounts payable activities such as vendor enrollment, payment execution and fraud control.

Businesses that have enough budget and capabilities can choose to automate their whole accounts payable activities. It can be very helpful for them if they need to handle a high volume of vendor payments.

Here are some tips that can help you decide which one you should automate first:

• Businesses with a low volume of invoices and payments can choose invoice automation first and then slowly switch to accounts payable automation when payment volume increases.
• Invoice automation is good for capturing, verifying and recording payments. But if you have frequent vendor enrollment, payment and invoice mismatches, disputes, and late payment issues, then you may choose accounts payable automation.
• If you need to approve invoices from a single team or department, then you can consider invoice automation since you have less payment management complexity. You can decide to automate your accounts payable functions if you need to route and approve invoices across multiple departments.

Conclusion

Invoice processing and accounts payable have a close relationship. Accounts payable is a short-term debt or liability a business usually has for products or services received but not yet paid for. Invoice processing is a part of accounts payable activities. Invoice processing and accounts payable operations help a business maintain a good relationship with its vendors or suppliers, and these activities can have a major impact on its cash flow. Automating invoice processing and accounts payable operations can help a business maintain a positive relationship with its vendors and make payments to them on time.

Frequently Asked Questions

Is Invoice Processing the same as Accounts Payable?

No. Invoice processing is a part of the accounts payable process. Accounts payable includes vendor enrollment, invoice processing, fraud control, and routing payments for approval. It is a process businesses use for managing short-term debt they make from buying and receiving products without payment. Invoice processing is a workflow businesses use from receiving invoices to paying a vendor.

Is Invoice Processing part of AP?

Yes, invoice processing is a part of AP. Businesses start invoice processing when their vendor, supplier or contractor sends them an invoice for the products or services they have received.

What are the main steps in Invoice Processing?

Some of the major steps of invoice processing are receiving, capturing, verifying, sending invoices for approval, processing payments and recording details of payments.

Can Invoice Processing be automated?

Yes, a business can automate the steps of receiving, capturing, routing for approval and processing payments with technology.

What is AP automation?

AP automation is the process of automating accounts payable activities, which may include invoice receiving, capturing, vendor enrollment, payment execution, etc.