Czech University of Life Sciences, Prague

It for eBUSINESS:
ELECTRONIC INVOICING

March 2012

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Table of Content

1. Introduction..........................................................................3
2. What is eInvoicing...............................................................3
2. 1. Types of eInvoice.......................................................4
2. 2. eInvoice Formats.........................................................5
3. Why eInvoice.......................................................................5
4. The Benefits of eInvoice....................................................12
5. Legal issues of eInvoicing………………………………..15
6. Case Study………………………………………………...15
7. Quiz……………………………………………………….16
8. Conclusion.................................................................……16

Introduction

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The idea of eInvoicing is not new. The first electronic invoices were sent over 30 years ago using
electronic data interchange (EDI). Since then, the use of eInvoicing has continued to evolve at a slow but
steady pace. In the last few years, a new wave of interest has emerged among corporate accounting
organisations and large financial institutions.

The main weakness in adoption historically was cost. In the early days, EDI was relatively expensive and
resource-intensive to implement. It was the province of large organisations that could afford to invest in
the technology and mandate its use amongst trading partners. In addition, the electronic invoices would
often be in a format that was unique to the large organisation.

Factors such as the widespread adoption of EDI, the growth of the Internet, and the range of options now
available to exchange data mean that eInvoicing has become affordable for all – from the smallest to
medium and large size organisations. The Internet has enabled the creation of web forms and web
invoicing so that electronic invoice data can even be entered online. All of this has led to a wider adoption
of eInvoicing – and other B2B ecommerce transactions – across different sized businesses, different
industry sectors and different geographical locations.

What is e-Invoicing?

eInvoicing or electronic invoicing is the exchange of the invoice document between a supplier and a buyer
in an electronic format. Traditionally, invoicing, like any heavily paper-based process, has taken up a lot
of time and is prone to human error. The result has increased cost and reduced revenue for companies.

Although significant cost and time savings can be achieved by removing paper and manual processing
from your invoicing, the real benefits of eInvoicing come with the level of integration between you and
your trading partners and between your invoicing software and other business systems.

FIG 1: eInvoicing

i. Types of eInvoicing: There are 2 types of eInvoicing

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 a. eInvoicing without compliance
The process for electronic invoicing without compliance is as follows:
 The buyer and supplier agree the format that the eInvoice will take and the data to be included
 The data will be correctly structured using technology such as EDI, XML or simple web forms for
web invoicing
 The supplier creates and sends an electronic invoice either directly from their Accounts Receivable
(AR) system or via a web-based form.
 The buyer receives the electronic invoice in a format ready to be processed by the Accounts
Payable (AP) system.

In this instance, the eInvoice conforms only to the data formats that are established by the trading partners.
It does not accommodate the regulatory obligations of the countries in which the electronic invoice is
issued or received.

b. eInvoicing with compliance

The process for electronic invoicing with compliance is very similar to the process above, except for:
 The format of the eInvoice data is determined by the legislation and regulations of the territories in
which both parties are trading
 The eInvoices adhere to government-specified guidelines for eInvoice content validation, security,
non-repudiation and archiving
 The invoices are easily available for audit and VAT purposes.

It makes sense for an organisation to adopt this approach as it will facilitate their VAT obligations.
However, there are no standard regulations governing eInvoicing. Instead, there are widely varying,
country-specific approaches – ranging from complete prohibition to almost no restrictions – that any
company trading internationally will have to understand and accommodate.

FIG 2: eInvoicing with compliance

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 ii. eInvoice formats: The EU allows for two invoice formats – the full invoice and the simplified
invoice. Below is a table of the information that each should include.

Full eInvoice Simplified eInvoice

Your VAT number Invoice date
Invoice number Your name and address
Invoice date/date of creation Quantity and type of product
Your name and address Discounts
Name and address of your customer Currency
Quantity and type of product/service
Total amount to be paid
delivered
The amount of payable or deductible
Date the product/service was delivered
VAT
When payments are made (if in advance)
VAT number of your customer
IBAN/SEPA number (for international
deliveries)
BIC/SWIFT code (for international
deliveries)
Price (excluding VAT)
Discounts

The simplified invoice has been designed to make it easier for organisations – such as SMEs – to reduce
the administrative burden of issuing invoices. However, if you are considering the simplified format it is
important that you ensure that you have met the minimum information requirements of your own
government’s regulatory framework as well.

Why eInvoice?

There’s compelling evidence that eInvoicing saves money for your company. Research suggests that a
paper-based invoice costs around 30 euro compared to less than 5 euro to process an electronic invoice. In
addition, cost savings are matched by revenue generating and cash flow potential. A growing number of
governments are compelling suppliers to use eInvoicing when invoicing their public sectors. This will be a
major driver of e-invoicing adoption in the near term.

Companies worldwide are seeking to address competitive pressures with cost efficiencies and improved
visibility into their financial performance. Back-office functions are areas in which significant cost
efficiencies can be achieved through automation of routine, administrative tasks. Many organisations have
streamlined and digitised functions like procurement but fewer have optimised accounts payable. Some
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 are centralising accounting functions into payment factories, others are transferring invoice processing
offshore or outsourcing to a third party to save money.

Centralisation and outsourcing can yield cost reductions, but the maximum efficiencies can only be
achieved through business process re-engineering and automation. Removing paper from invoicing
processes is a critical step to achieve true efficiencies. Research studies performed by Aberdeen and
IOMA Research reveal that more than two thirds of the companies surveyed receive more than 80 percent
of their invoices on paper via postal mail.

A key catalyst for the resurgence in e-invoicing has been regulations which allow corporations to replace
paper invoices legally with electronic equivalents as the basis for taxation and commercial activities.
These new regulations emerged in Europe starting in 2001, but similar frameworks have been introduced
in Asia and Latin America since. The ability to eliminate paper invoices from the financial supply chain
can create significant cost-saving opportunities for buyers and suppliers.

Here are five of the key reasons why, if you have not already done so, you should be introducing
eInvoicing into your organisation:

 Overcome Paper Invoice Challenges

Each paper invoice requires time-intensive, error-prone, manual processing for both buyers and suppliers.
According to the European Associations of Corporate Treasurers, you can save over 80 per cent of your
costs by introducing eInvoicing. To understand how this saving can be achieved, it is worth examining
just how intensive the paper-based invoicing process is – for both the buyer and supplier.

Once you understand the processes involved, it should be easy to see why the cycle time to process can
take 23 days or more – a figure that can rise to over 90 days when errors and exceptions are involved. An
invoice-to-settlement cycle can shrink to under 5 days when you implement eInvoicing.

Paper invoice issues for Buyers

While every Accounts Payable (AP) department operates differently, in general there are five phases —
each of which is very resource and paper intensive, as shown in the following table.

Phase Activities Description

Invoice  Creation of invoice by Suppliers typically generate and print invoices from
capture supplier their Accounts Receivable (AR) system and then mail
 Delivery of invoice to buyer them to the buyers for payment. Once received in the
buyer’s mailroom, invoices are sorted and routed to the
 Sorting and routing of the AP department where administrators manually key
invoice to AP department them into the AP system.
 Entry of invoice into AP
system
Quality  Verify and augment supplier An AP administrator reviews each invoice to ensure
assurance data accuracy and completeness. For example, invoices
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 data are reviewed for errors such as incorrect account
number or missing purchase order number. Then, the
 Validate math on invoice
AP administrator validates the invoices to confirm that
 Match invoice to order, the amount being billed matches the amount ordered
receipt and contract and the amount of goods received, and that the price
 Assign to cost centres billed corresponds to the contracted price. Finally, the
administrator assigns the appropriate cost center to
 Ensure correct tax treatment ensure the appropriate tax treatment.

Routing and  Determine approval authority Invoices often need to be approved by one or more
circulation company personnel prior to payment. The AP
 Circulate invoice for approval
administrator routes invoices to the appropriate
 Resolve disputes with approver(s). The administrator monitors the process,
supplier following up with required approval personnel when
there are delays. In the event of an invoice dispute, the
 Monitor status of approval AP administrator contacts the supplier to resolve.

Reporting  Record expense in General The AP administrator records the expenses in the
and filing Ledger General Ledger. The invoice is then filed or transported
 Store and archive for tax audit to archives for storage. In the event of a subsequent
purposes supplier dispute or audit, the invoices must be
retrieved.
 Respond to supplier status
inquiries
Payment  Aggregate payments due to Upon invoice approval, the payment is processed by
Supplier the AP system and payment is made via paper check or
 Release payment Automated Clearing House.

 Send instructions to bank

 Distribute remittance advice

to Supplier
Paper invoice issues for Suppliers
As with buyers, supplier paper invoices requires time-intensive, error-prone, manual processing and this is
very resource and paper intensive, as shown in the following table.

Phase Activities Description

Invoice creation  Generate the invoice Suppliers typically generate the invoice from their
and distribution sales order system. They then print the invoices and
mail them to the Buyers for payment. Suppliers have
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  Print the invoice no control over whether or not the customer has
received the invoice.
 Fold the invoice and place it
into an envelope

 Stamp the invoice and place

into the mail
Status follow-up  Contact buyer to confirm Suppliers have no visibility into the processing status
and issue receipt of the invoices they mailed. Customers may reject
resolution  Deal with rejections or re- invoices long after the supplier has submitted it if
send requests and repeat the required data is missing. This often prompts calls and
process emails to confirm invoice receipt, request payment
status, and resolve any disputes
 Resolve disputes with buyer

 Inquire about approval status

and payment date
Payment and  Receive check and reconcile Data reconciliation is a difficult, manual process. The
reconciliation with invoice lack of visibility into invoice processing makes cash
 Contact buyer to resolve management a reactive process. Late payments and
under/overpayment/late variable days sales outstanding (DSO) impact
payment issues working capital and borrowing.

 Contact buyer with questions

on reconciling invoice(s) to
payment
Reporting and  Store and archive for tax The invoice is then filed or transported to archives for
filing audit purposes storage. In the event of a subsequent dispute or audit,
the archive must be manually searched for retrieval of
the pertinent invoice.

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Problems with the paper cycle

 Needs people to consolidate the invoices and supporting documents

 Needs people to put it in envelopes

 Needs to be sent somewhere, possibly delivered to a collection point first

 Needs to be couriered or posted

 Needs someone at the other end to receive it, take it out of envelopes and distribute it

 Needs someone to check it’s all there

 Needs someone to check it reconciles with settlements

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  Improve process automation
Process automation represents the ‘sweet spot’ for eInvoicing. Electronic invoices can be processed by
your organisation’s other IT systems – such as purchasing or treasury systems – which removes time, cost
and data errors when transferring invoices over different media.

For both buyers and suppliers, electronic invoicing process automation delivers important benefits:

1. Early payment discount opportunities for buyers

Companies will often negotiate various discounts in return for early payment. eInvoicing removes
the delays that jeopardise these discounts, possibly adding up to millions of euro going directly to
the company’s bottom line.
2. Reduced days sales outstanding (DSO) for suppliers
Today, cashflow is king. The greater the DSO, the less money available within the organisation.
By eliminating time and errors from the process, eInvoicing speeds payment and reduces DSO.
3. Low error rate
In retail, up to 40 per cent of paper-based invoices contain data errors related to price or trade
promotions. Errors require research with the buyer and negotiation with the supplier to resolve.
eInvoicing eliminates errors by ensuring that the data is correct at the point of origin and
unchanged as it populates other business systems.
4. Low call and dispute volume
By ensuring the data quality of your invoice, eInvoicing means that suppliers no longer need to
spend a significant amount of time chasing payment status or payment errors. The buyer’s AP
department doesn’t need to devote so much time to fielding supplier calls.
5. Increased staff productivity
Time-consuming paper processes prevent accounting personnel from more strategic activities, such
as identifying opportunities to reduce spend or performing invoice audits that enable procurement
organisations to identify billing errors, maverick purchases, and off-contract buying.
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 6. Meeting VAT audit requirements
Meeting the requirements for European VAT audits require time-consuming and costly collection
of key documents from hundreds or thousands of folders containing paper invoices. eInvoicing
allows you to store all related electronic documents together making retrieval for auditing a much
simpler process.

By integrating your eInvoicing system with existing business systems, you can send, receive and route
invoice data to the relevant people automatically. This may require higher levels of encryption and
security to ensure the integrity and authenticity of your electronic invoice depending on your
organisation’s internal policies.

 Improve cash management

When discussing how to survive a recession, one analyst recently commented: “We can’t save our way
back to zero”. Instead, the focus is shifting from cost savings to cashflow management. This means
increasing the liquidity of an organisation and seizing the revenue generating opportunities that arise.
eInvoicing has a key role to play here.

Electronic invoicing is an important means to achieve three cash management objectives: enhanced
cashflow, enhanced spend management and increased visibility in the invoicing process.

I. Enhanced cashflow
Capturing early payment discounts was cited as important by 87 per cent of respondents to Paystream’s
2011 eInvoicing adoption benchmarking survey — little surprise in an economic environment where
interest rates are low to non-existent. A one or two per cent discount equates to 36 per cent APR. Add to
this, a recent Deutsche Bank survey shows that the main reason that organisations miss out on discounts is
internal delays in settling the invoice and you can see why eInvoicing can become a cash management
weapon. Surveys suggest that there can be as many as seven copies of a paper-based invoice going to
seven different places in the process. The electronic routing and approval process overcomes all of this
inefficiency.

The shortening of what is known as the order-to-pay cycle is not just good news for the buyer. It is also
good for the supplier, where it is commonly called the order-to-cash cycle. While the buyer seizes the
discount, the supplier gets paid much more quickly. It can reduce its days sales outstanding (DSO). The
consequent improvement in cashflow will help with the business effectiveness of the organisation.

II. Enhanced spend management

Spend management programmes can identify sources of inefficiency, waste and abuse by aggregating data
from purchasing, contracts and AP systems into a data warehouse which can be analysed for cost-saving
opportunities.

Examples might include reducing maverick, off-contract buying, cancelling unused services and
consolidating spend with fewer suppliers. In categories such as travel, legal, utilities and
telecommunications expenses, spend management can provide insights which reduce costs by 2–10 per
cent.

Regardless of spend category, a key enabler for spend management programmes is the ability to receive
electronic invoices from suppliers. Only by having all information instantly available in a digital format
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can an organisation perform the advanced analytics that make these programmes possible. Increasingly,
commentators are discussing the benefit of optimising a third supply chain. Organisations have sought to
optimise their physical and more recently, their financial supply chains. The next few years will see
leading companies begin to optimise their information supply chain.

 Increased invoice visibility

Paper or e-mail based invoices take longer to become visible in AP systems. They also have a much
greater potential to get lost in the approval process. Without visibility to invoices in the approval process,
cash managers lack the comprehensive data necessary for forecasting and forward planning.

A large invoice which is not discovered by the treasury organisation until shortly before payment, could
result in a significant cash deficit relative to forecast. As a result, a business may need to borrow funds at
the last minute at an expensive premium. Suppliers may begin to cancel orders due to non-payment or late
payment of invoices. In addition, fraudulent invoices can more easily enter the system and be much more
difficult to identify.

By processing invoices electronically, all upcoming payments become visible to the treasury organisation
in the accounting system almost as soon as the invoice is received, improving forecast accuracy. Invoices
can be routed, approved and settled quickly meaning that buyers can take advantage of more effective
discount management.

Finally, the requirements for digital integrity and authenticity allow for much closer tracking of electronic
invoices – a major benefit when tackling fraud – rogue invoices can be automatically flagged if they don’t
meet any of the agreed criteria for eInvoicing with your trading partners.

 EU Directive and other compliance issues

By 2013, all EU members must afford the same legal status to electronic invoices as they do for paper-
based invoices. The EU’s intention is to create an environment where it is as straightforward as possible
for all size of organisation to use eInvoicing when trading with partners, both nationally and
internationally.

The EU Council Directive promotes the efficient cross-border creation, transmission, acceptance, storage
and retrieval of invoices. There are five key elements to the directive:-

1. eInvoices and paper invoices are legally the same

2. The eInvoicing process must ensure the integrity, authenticity and ‘legibility’ of eInvoices
3. The authentication and integrity must be ensured through digital signatures, EDI or any other
means
4. An invoice must be stored in the same format it was created
5. For audit purposes, all supporting documents must be stored with the invoice

The Benefits

E-invoicing enables a company to automate their invoice processing. As a result, buyers, suppliers and
other managers gain a number of operational and strategic benefits. In addition to cost savings, the ability
to automate the invoicing process and integrate with other business systems provides business efficiency
and revenue generating opportunities.
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 The key benefits for buyers, suppliers and managers include:

For buyers For suppliers For managers

Reduced costs Faster payments Improved visibility

Increased accuracy Reduced costs Optimised cashflow

Increased AP productivity Fewer rejected invoices Improved compliance

Faster processing and payment Improve supplier/customer

Increased productivity
cycles relationships

Focus on higher value activities Enhanced accounts reconciliation Enhanced IT system optimisation

Enhanced accounts reconciliation Improved customer relationships Meeting green initiatives

Improved dispute handling and

avoidance

Improved supplier relationships

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LEGAL ISSUES OF Einvoicing

Different and complex rules and regulations surrounding eInvoicing which vary from country to country.
Current EU legislative environment for eInvoicing:
1. Council Directive 2010/45/EU on the common system of value added tax as regards the rules on
invoicing (amending Directive 2006/112/EC)
2. Council Directive 2006/112/EC on the common system of value added tax
3. Council Directive 2001/115/EC on the conditions laid down for invoicing in respect of value added
tax
4. Directive 1999/93/EC on a Community framework for electronic signatures

CASE STUDY
Leading Apparel Manufacturer
 Thousands of customers, mainly small shops
 Sending paper invoices/paper packing slips in cartons

 Labour intensive to manually affix invoices to cartons

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Objective
100 percent of small and medium-size customers to receive electronic invoices and ship notices

Steps to Success
1. Implement web forms solution for invoice and advance ship notice to small shops
2. Education programme for the customers including webinars, custom web site, documentation
3. No cost for customers to participate

Results
Manufacturer and Customers both win
1. The manufacturer eliminated paper invoices, manual process of affixing invoices to cartons
2. Enabled faster payments at reduced costs and also increased sales
3. Customers receive advance notice of goods arrival, faster invoice reconciliation, improved stock
visibility
4. Increased sales and customer satisfaction

QUIZ
1. Which of the following processes guarantee the required authenticity and integrity for electronic
invoicing?
a. Email
b. Electronic Data Interchange (EDI) with proper management controls
c. Digital signatures

2. If audited by the local tax authority a company has to provide documentation to support its
accounts. If you receive electronic invoices what do you need to prove:
a. The invoice came from the named supplier
b. The invoice has not been tampered with or modified in any way
c. All of the required data fields are on the invoice
d. The correct tax amounts are shown for each line item
e. That the process I employ can prove all of the above

3. When sending/receiving electronic invoices, which of the following options should be your
primary concern:
a. Security of the information
b. Compliance with local tax authority regulations
c. Cost savings
d. All of the above

Conclusion

Implementing an eInvoicing solution can be a complex process. It will involve a number of people in
different parts of your business and potentially will extend to include your supplier/customer community.
It will also require the integration of different business systems. To commence your eInvoicing project, it
is advised to do the following:

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  Forward planning
Where to begin? How do you ensure you get the planning correct from the start?
 Internal capabilities
What are the skills and knowledge that you will require within your business to create and manage your e-
invoicing solution?
 Technology readiness
What systems will your eInvoicing solution need to integrate with? Will the systems be contained within
the accounts department or will it need to communicate with your ERP and planning systems?
 Supplier/customer acceptance
Are your trading partners either capable or willing to invoice electronically? What can you do to help with
their adoption?
 Supplier/customer integration
How easily can you onboard your trading partners to your eInvoicing system? In which format will they
require invoices?
 Data storage and archiving
All countries have regulations about how long you must retain invoice information. What are the data
storage and archiving issues you’ll need to address?
 Managing change
Most analysts accept that the biggest barrier to successful eInvoicing implementation is cultural and not
technological. Are your people ready to move to eInvoicing?

REFERENCE
http://www.einvoicingbasics.co.uk

http://theeinvoicingblog.wordpress.com

http://ec.europa.eu

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