Whether you’re running a small-scale business or managing a large corporation, occasional conflicts and disagreements are part and parcel of the business world. An area where these disputes frequently arise is in the realm of invoices. The task of invoice dispute management often falls on the shoulders of accounts receivable (AR) and accounts payable (AP) departments, and the way they handle these disputes can have far-reaching implications on cash flow, customer relationships, and brand reputation.
Thankfully, with the advent of digital tools and process automation, businesses can mitigate these disputes and potentially avoid them altogether. This article explores the basics of invoice dispute management, the common challenges businesses face, and how utilizing software solutions can streamline and simplify the process.
Understanding the Fundamentals of Invoice Dispute Management
Invoice dispute management is a critical aspect of accounts payable and credit management. It involves the meticulous handling of invoices that fail to align with the original purchase order due to discrepancies such as price differences, billing errors, or mismatched quantities.
Generally, an invoice dispute arises when the buyer challenges the accuracy of the invoice, rendering it uncertain and open to resolution and litigation. In the event of such disputes, AP and AR teams need to have accurate and complete information to properly handle the disputed invoices and protect their organizations’ cash flow and reputation.
Key steps in this process include:
- Identifying all discrepancies in the disputed invoice, such as differing pricing, quality, or quantity, failure to meet delivery terms and conditions, invalid or missing purchase order numbers, billing errors, and any short pays already made.
- Informing the buyer, the creator of the original purchase order, and the receiving department about any discrepancies.
- Preparing any relevant discounts, credit memos, or write-offs depending on the outcome of the dispute resolution.
It’s worth noting that a swift and professional dispute resolution process benefits both parties by ensuring payment or credit is applied correctly, and relationships are not irreparably damaged.
The Challenges of Manual Invoice Dispute Management Processes
Despite the critical importance of managing invoice disputes effectively, many businesses still rely on manual accounts payable workflows. This approach is not only slow and tedious but also highly prone to human error and lacks transparency.
Common problems associated with manual workflows include maverick spend, invoice fraud, inaccuracies in invoice collection and processing, and the inability to swiftly identify and resolve true exceptions caused by supplier-side issues.
Moreover, the lack of real-time connectivity with suppliers and the inability to provide complete transparency and control over spend data can further complicate the process and increase the risk of disputes.
The Power of Automation in Invoice Dispute Management
Investing in a comprehensive procure-to-pay automation solution such as Planergy can significantly eliminate the risk and inefficiency inherent in manual workflows. With automation, businesses can gain immediate benefits such as automatic three-way match, faster and more accurate invoice collection and processing, and prevention of buyer-side errors that could lead to unfounded disputes.
Moreover, automation offers:
- Streamlined approval workflows
- Real-time connectivity with suppliers through vendor portals
- Support for electronic invoicing (eInvoicing), enabling supplier invoices to enter the system for verification without the need for manual data entry
- Complete control over all spend data, helping to prevent invoice fraud, eliminate maverick spend, and insulate the company against duplicate, late, or incomplete payments
Best Practices for Invoice Dispute Management
Besides automation, several best practices can help minimize negative outcomes in the dispute management process. These include:
- Swiftly dealing with exceptions to prevent ill will and avoid affecting cash flow.
- Maintaining regular communication with all stakeholders to keep them informed about any updates.
- Developing clear and comprehensive internal controls for processing exceptions.
- Ensuring all revised invoices are directly linked to the original in the accounting system to prevent future issues during reporting or audits.
In cases where a dispute arises due to an internal error, businesses should:
- Document the source of the exception carefully.
- Review any additional penalties, interest, or fees associated with late payment.
The Impact of Invoice Disputes on Businesses
The repercussions of late payments and invoice disputes can be severe for businesses. A study conducted in the UK in 2011 revealed that 75% of small businesses were affected by long payment terms or late payments, with 50% of these companies spending 4-6 hours each week managing late accounts. Alarmingly, 4,000 businesses failed in 2008 as a direct result of late payments.
Not only do invoice disputes delay payment and negatively impact cash flow, but the longer an invoice goes unpaid, the less likely it is to be paid in full. This makes managing working capital a crucial aspect of business operations and expense management.
The Common Hurdles in Invoice Dispute Management
There are several common issues that businesses encounter when dealing with invoice disputes. These include:
1. Missing Purchase Orders
Invalid or missing purchase order information can be a major reason for customers not paying their bills. Ensuring that the system is configured to require a purchase order when entering an invoice for a particular customer can help prevent this issue.
2. Invoice Not Received
Sometimes, customers may claim they never received the invoice. This issue can be resolved by setting up document transmittal to automatically email invoices to customers from the accounting system.
3. Sending Invoices Too Late
If customers receive the invoice too close to the due date, they may not have enough time to process an on-time payment. Sending invoices more frequently can help ensure customers have adequate time to process payment.
4. Sending Invoice to the Wrong Person
Ensuring that the invoice is sent to the correct person at the correct location is crucial in avoiding late payments.
5. Sloppy Invoice Design
If an invoice is difficult to understand, customers are likely to delay payment. Therefore, it’s essential to design clear and easy-to-understand invoices.
Non-Billing Issues: These include broken or defective products, disagreements around services, and other non-invoice related problems.
The Benefits of Effective Invoice Dispute Management
Effective invoice dispute management can have numerous benefits for businesses. For instance, a $10 million company can save $80,000 annually by reducing bad debt write-offs. These savings can be used for charitable donations, employee bonuses, lowering prices, capital investments, or even personal expenses.
Moreover, eliminating invoice disputes and managing them effectively can increase profits and provide businesses with the means to grow.
How Software Solutions Can Aid in Invoice Dispute Management
A specialized credit and collections software like Lockstep Collect can automate much of the mundane customer communications, freeing up time to make phone calls. The software also provides all the information the collector needs in one system and can notify you when the next step in the collection process should occur.
Such software can also help identify underlying problems with customers before they become major issues. For instance, if a customer says they paid within credit terms but the payment was late, it could indicate an issue with the invoice’s clarity or the customer’s organization.
Final Thoughts
Invoice disputes can significantly affect a business’s cash flow and profitability. However, by fixing internal problems such as sending invoices on time, ensuring the accuracy of invoices, and making it easy for customers to understand the invoice and payment terms, businesses can avoid many of these disputes.
Investing in an automated credit and collection system can provide even more savings while providing a centralized system to manage disputes. By leveraging such software solutions and following best practices, businesses can effectively manage invoice disputes and ensure smoother operations and healthier cash flows.