5 reasons e-Invoicing is a must-have today
Is your company ready for the next wave of e-Invoicing mandates?
Electronic invoicing is hardly new. Companies have been digitizing their invoice processes for decades to take advantage of the many clear benefits it provides both in improving efficiencies for resource-strapped finance teams as well as enabling broader digital transformation efforts.
But the wave of e-Invoicing mandates that are currently spreading across the globe has moved this from a “nice-to-have” to a “must-have” for an increasing number of businesses. At the same time, it is altering the way businesses approach electronic invoicing.
The e-Invoicing challenge
Of course, we know electronic invoicing means different things in different regions. In North America, one of the few major economies without a Value Added Tax (VAT) model for indirect taxes, electronic invoicing isn’t really a separate process at all. Making invoices electronic is the same as making purchase orders, advanced shipping notices or any other business transaction electronic.
However, for the majority of the world, where VAT reigns supreme, electronic invoicing has always been more complex and challenging since the invoice is a legal document for tax audits and is therefore one of the most highly regulated documents in the supply chain.
For companies in these countries, tighter regulations can mean changes in long-standing processes as well as an investment in specific technology to support the legal requirements in each country they operate in.
As a result, companies have been slow to embrace electronic invoicing, in many cases switching to technologies like PDF, since it at least resembles the familiar paper-based processes they’ve been used to.
But while a PDF might be accepted as an e-Invoice for tax purposes, it offers few of the benefits that are available to businesses who fully embrace e-Invoicing and automate the end-to-end process. Tax auditors are rightly nervous about electronic invoice formats since they recognize that digital data is very easy to manipulate, providing opportunities for tax fraud. Ensuring electronic invoice processes are robust and auditable over the long term is a real challenge facing businesses who make the switch.
So given the challenges, why switch? Let’s look at the five key reasons to make the leap.
Reason 1: A robust e-Invoicing process simplifies tax audits
Regardless of whether you send or receive invoices as paper using traditional mail or fax or if you switch to electronic formats, you still have an obligation in tax law to ensure a robust and auditable process, and to archive your tax invoices for long term audit. Depending on the retention period, which varies per country, this could be anywhere from four to eleven years after the original transaction.
While it’s true that paper based processes are “tried and tested” they are inherently problematic from a tax audit perspective. Paper can easily get lost on the way from the finance team to your long term archive – whether that’s a set of filing cabinets on your premises or offsite at a secure location. And even the most secure storage is not foolproof. I worked with a client in Spain many years ago who’s warehouse location for tax invoices was destroyed by fire, and the CFO of that company faced criminal charges for tax fraud.
A robust electronic invoicing process is inherently more auditable than a paper based process, with each step being logged and traced to verify best practices have been followed, and the electronic invoice is stored in a way that not only guarantees it’s integrity and authenticity, but also will generally include redundant data backups at different secure locations, all accessible online and made easily available to your tax auditor directly from a simple, intuitive, web browser interface.
Reason 2: E-Invoicing pays for itself
Many of the technology investments that companies make are strategic, but may take some time to demonstrate a return on investment, if at all. According to Gartner’s “Top Priorities for Finance Leaders in 2022” report, “although digital spending has been accelerating, many CFOs are left wondering about the returns on these investments”.
The same report highlighted eight key areas of “digital business optimization” that CFO’s should be looking at, and of these eight, e-Invoicing plays strongly in five, reducing costs through automation, improving employee productivity (ie being able to process more invoices without increasing headcount), reducing Sales & General Administration costs by opening digital channels for buying/selling, which in turn improves customer satisfaction, and finally, optimizing cashflow. We’ll touch on some of these as we go through our other reasons, but let’s focus here on the operational benefits of switching to fully automated electronic invoicing.
Manual invoice processes are slow and error-prone. Invoices sent via traditional mail or e-mail need to be sorted and routed to the right team. Then Accounts Payable clerks have to manually re-key the invoice data into finance systems. The data often needs to be verified and augmented – for example matching the invoice to an order or PO, assigning to correct internal cost centers and ensuring the correct tax treatment has been employed. Then there may be a round of approvals, or a dispute process if any discrepancies have occurred, and chasing for approvals or exception resolution is a time-intensive process. Approved invoices need to be recorded in the general ledger, then archived for long-term audit. Then payments may need to be aggregated before being released, along with the remittance process.
Each of these steps has a cost for an AP department, according to analysts Billentis (e-Invoicing business case, 2017), totaling on average around €17.60 per invoice for Accounts Payable invoices, with savings of up to 64% typically seen in direct savings.
I’ll reiterate here the point I made in my opening discussion – the cost savings to be gained from e-Invoicing can only be fully realized with a fully automated B2B e-Invoicing approach. PDF based e-Invoicing removes very few of the costs on the Accounts Payable side of the house.
The accounts receivable process is generally simpler, with the total cost for the end-to-end process averaging around €11.10 per invoice for Accounts Receivable departments (per Billentis again). Still, the cost-savings from fully automating this process are similar, at around 59% per invoice.
These kinds of savings will usually pay for the investment in an e-Invoicing solution within the first year. However there are significant additional indirect savings and ancillary benefits to be had. I’ll talk more about those in the next section.
But for CFO’s looking at smarter technical investments for 2023 and beyond, e-Invoicing represents a clear opportunity for a rapid return on investment while assisting companies in seeing many key operational efficiency improvements.
Reason 3: E-Invoicing benefits your bottom line cashflow
As I mentioned earlier, there are indirect benefits that companies with fully automated e-Invioicing processes experience as well as the direct cost savings we’ve talked about.
Firstly, an automated process is able to scale more easily. They can process much higher volumes of invoices since there is little to no human intervention to slow things down.
They experience fewer errors and have to manage fewer exceptions. While error rates for manual data entry in accounts payable departments will vary according to the size of the organization, the complexity of the accounts payable process, and the skill level of the data entry personnel, studies have shown that the average error rate is around 2%. Even a small error rate such as this can result in significant financial losses over time, and this is one of the key reasons CFO’s look at automating their invoice processes.
The end result of this greater efficiency and speed is that companies with fully automated e-Invoicing processes are able to get paid earlier, and pay their suppliers quicker. These indirect benefits can be very significant, eventually outstripping the direct operational cost savings we’ve discussed.
Paying vendors early has two consequences. Firstly avoiding late payment penalties and secondly, benefiting from early payment discounts.
The average number of invoices that are paid late in an organization will vary considerably based upon the industry, the size of the company, and negotiated payment terms. However, according to a survey by Atradius, a credit insurance company, the global average of invoices paid late is around 39%.
Late payments can have a significant impact on a company’s financial health, as they can result in payment penalties, damaged relationships with suppliers, and potentially even legal action. A fully automated e-Invoicing process can help ensure that invoices are paid on time and to avoid these negative consequences.
Conversely, companies who are able to pay early are often able to negotiate early payment discounts, typically around 2% for payments within 10 days, and occasionally on a dynamic discounted basis, such as 3% in 7 days, 2% in 10 days, 1% in 15 days. Dynamic discounting is only possible with a fully automated e-Invoicing process and so this is yet another good reason for companies to make the switch.
On the accounts receivable side, Days Sales Outstanding or DSO is a key metric for many AR teams because it helps track cashflow, liquidity and working capital.
A companies DSO can affect both it’s ability to pay vendors and also affect it’s credit rating. Companies that automate their Accounts Receivable processes are typically able to reduce their DSO figure, increase their cash flow and increase their creditworthiness, leading to better payment terms, lower interest rates and improved access to credit.
In addition, low DSO generally means greater working capital, reduced dependence on credit, and an ability to invest more rapidly in new business opportunities that can drive growth.
Reason 4: Riding the wave of e-Invoicing mandates
E-Invoicing has been available as an option for businesses in most countries for decades. But a tectonic shift a decade ago in Latin America has begun to change all that. Chile, Mexico and Brazil began to experiment with alternative approaches to electronic invoices as a way to address the significant problems they were observing with tax fraud, with very large VAT gaps. The “VAT gap” is the difference between expected tax revenues and what is actually collected, and in many cases this gap can represent a significant percentage of state revenue, leaving countries short on funds and affecting public spending.
In 2011 Mexico became the first country to mandate e-Invoicing – forcing all taxpayers to switch to e-Invoicing regardless of their size or technical ability. According to the Inter-American Center of Tax Administrations (CIAT), Mexico reduced their VAT gap by almost 6% from 21.5% to 15.7% in 2013. This was highly significant and set a precedent that was rapidly adopted by many Latin American countries. Turkey became the first European country to follow this model, but it was the successful implementation of an e-Invoicing mandate in Italy in 2019 that set in motion what now looks like a veritable tsunami of e-Invoicing mandates across the region.
The VAT gap across the European Union stands at over €93 billion (source: “The VAT Gap Report 2022″, European Commission), with Italy, France and Germany representing over 55% of that total at €51 billion. Italy has already seen significant reductions in it’s VAT gap as a result of their e-Invoicing mandate.
France, Poland, Belgium, Spain, Serbia, and Slovakia are all implementing e-Invoicing mandates in 2023 and 2024, and Germany recently announced their mandate for January 2025. However this has been formalized by the European Commission in a December 2022 publication called ViDA – VAT in the Digital Age, which proposes making e-Invoicing mandatory in all of the remaining EU member states by January 1st 2028.
Those companies operating in Latin America will already have been forced to switch to e-Invoicing in countries with mandates, but now, every company with business operations (registered tax legal entities) within the EU will also have no choice but to switch to electronic invoicing as these mandates take effect through the years leading up to 2028.
And it’s not just LatAm and Europe. Already in 2023, Egypt and the Kingdom of Saudi Arabia have introduced e-Invoicing mandates; The Philippines also introduced a new mandate; South Korea extended their existing mandate to more taxpayers; Japan has a planned e-Invoicing mandate due in October 2023; China is also piloting electronic invoicing right now and has been expanding to more and more provinces; Australia and New Zealand have introduced mandates for Business to Government (B2G) e-Invoicing.
So wherever you are in the world you will increasingly be forced to make the switch.
Embracing these mandates often can be something of a double-edged sword for businesses since tax authorities are often more concerned about implementing e-Invoicing in a way that is convenient for them as opposed to making it technically or practically easy for businesses, and this can impact an organizations ability to respond in a timely fashion.
Implementing a consistent invoicing process that spans multiple countries with different technical requirements introduces many technical, integration, data security and implementation challenges, let’s look at these next.
Reason 5: It’s not as difficult to switch as it looks!
The e-Invoicing Market Pulse Survey (2022) by IDG, sponsored by OpenText, surveyed 152 managers and executives responsible for invoicing processes in multinational organizations based across the USA, UK, France and Germany.
The survey found that despite the obvious benefits of automation, the vast majority of invoices are still manually processed. Only 40% had already adopted automated electronic invoicing, leaving 58% planning or considering adoption. Given the clear benefits we’ve discussed, we asked the obvious question – why are so few businesses adopting automated electronic invoicing?
The biggest challenges holding businesses back from adoption were data security (54%), integration with internal systems like ERP, SRM/CRM, e-procurement etc (45%), perceived complexity of technology (36%), gaps in knowledge / expertise (32%), and integration externally with customers/suppliers (30%).
42% of our respondents reported that their invoicing processes were siloed by geography, department or platform, and 60% of our respondents reported that having a single, global, strategic e-Invoicing partner would be highly valuable to address these challenges, and it’s easy to see why.
Ultimately what is clear when you look at the challenges holding companies back is that e-Invoicing is very much an integration problem.
A global e-Invoicing solution like OpenText Active Invoices with Compliance (AIC) simplifies the complexity of siloed systems and processes by providing a single platform that is agnostic to all of your different internal invoice applications and processes – whether inbound / accounts receivable or outbound / accounts payable – and is built on the OpenText Trading Grid, the largest B2B integration platform in the world, connecting over a million businesses and exchanging over 13 billion transactions a year, including 4 billion electronic invoices.
OpenText provides an outsourced service which, through a combination of self-service tools and a white glove “managed service” approach, manages the integration of all of the various internal applications that your business has and which need to generate or receive compliant e-Invoices. And our service can also on-board any number of your customers, suppliers and other external trading partners and stakeholders regardless of their technical capability.
OpenText ensures the security of your data with a comprehensive multi-faceted approach that includes secure protocols, two factor authentication, and robust Identity and Access Management (IAM), always ensuring compliance with the latest security standards.
The end result is a comprehensive e-Invoicing ecosystem that removes those concerns about technical complexity while also providing you access to the expertise that you may be lacking internally, both technically and in terms of understanding the compliance requirements in each country.
While many companies think they may have already embraced e-Invoicing by switching from paper to PDFs, as we’ve seen here, the real benefits can only be obtained by fully automating your invoice processes end-to-end.
The operational improvements, efficiency enhancements, cost savings and bottom line cash flow benefits which come with full automation are clear and compelling, especially for multinational businesses operating in multiple VAT regimes.
And with the tsunami of e-Invoicing mandates spreading across the globe switching is no longer optional in an increasing number of countries.
As we have seen here there are five very good reasons to switch to e-Invoicing, and it becomes increasingly difficult for CFO’s to find a good reason not to make the shift and fully automate their invoicing process.
Those organizations that lag behind will miss out on the opportunities provided by streamlining and removing operational costs while enhancing cashflow, and the risk, of course, is losing your competitive edge against those companies already reaping those benefits.
For more information about how OpenText can help your company ride the wave of impending e-Invoicing mandates and realize the many operational benefits we’ve discussed here, please visit our e-Invoicing solution page.
For regular updates on key regulatory changes around electronic invoicing, see our periodic e-Invoicing and VAT compliance newsletter.