What is e-invoicing: Understanding the benefits and differences between other invoice types

What is e-invoicing (electronic invoicing)?

E-invoicing, also known as electronic invoicing, is a method of issuing invoices where transaction records between buyers and sellers are generated, transmitted, processed, and stored in a standardized electronic format.

But what is an invoice? Think of it as the way you confirm to customers that you’ve performed a service or shipped a product, and now they owe you money. Having a robust invoice system is key to avoiding a cash flow crunch and ensuring timely and accurate financial reporting. However, paper invoices, which have been the norm for decades, can be tedious and tough to manage.

As a result, many businesses have digitized their invoice solutions process through e-invoicing. E-invoices contain structured data with the relevant transaction details and are created using specialized software. They can be transmitted quickly through electronic channels and seamlessly processed and validated without manual entry.

Learn more about how to create and task invoices.

What’s the difference between a PDF invoice and an e-invoice?

A PDF invoice is essentially a PDF version of a paper invoice that’s sent via email. While it reduces the use of paper, a PDF invoice still requires manual processing for entry into accounting systems, which can be error-prone and time-consuming.

On the other hand, an e-invoice involves more than just the electronic delivery of invoice data; it is a structured document that can be automatically integrated and processed by the recipient's invoicing system without any manual intervention.

How to create electronic invoices

So, how does e-invoicing work? Here’s a quick step-by-step breakdown of the key steps involved:

1. Generate an invoice. Set up your invoice template within your chosen e-invoicing tool, customizing it with your business logo, payment terms, and any relevant transaction details. Input specific data such as customer information, descriptions of goods or services, pricing, taxes, and discounts. Once you’ve checked for errors and confirmed that all required fields are filled, use the software to generate the invoice in a structured data format.
2. Validate. Before transmission, the invoice undergoes validation checks to ensure it meets all accuracy, completeness, and compliance requirements.
3. Transmit the invoice. The validated invoice is then sent electronically to the recipient via direct integration between the billing and the recipient's accounting systems, through an e-invoicing network, or via a secured email.
4. Receive and process. Upon receipt, the recipient's invoicing system automatically captures and processes the invoice data. This automated processing includes the extraction of critical details necessary for payment and accounting.
5. Match with relevant documents. The system matches the e-invoice against related transaction documents such as purchase orders, contracts, and delivery receipts to verify that the invoiced charges are accurate and authorized.
6. Approval and payment. After matching, the invoice is routed for approval. Once approved, the payment process is initiated automatically according to the terms agreed upon by the involved parties.
7. Archive. Finally, e-invoices are digitally archived in compliance with legal retention requirements. Digital archiving not only saves physical space but also facilitates easy retrieval and audit of financial records.

What is not considered an e-invoice?

Unlike traditional invoices, e-invoices are made up of data that can be automatically processed without manual action. In other words, e-invoices can be transmitted into a company’s financial system without the need for accounting staff to sort each one.

Therefore, the popular invoice formats listed below aren’t necessarily considered electronic invoices:

1. Word (.doc) and Excel (.xls). Paper invoices, even if they are converted to digital format, are not e-invoices because they are not issued electronically.
2. PDF. When you create a PDF invoice, it is typically sent by email and is not considered an e-invoice. PDF invoices cannot be processed automatically because they are not sent in a structured format.

What is the difference between e-invoices and other types of invoices – specifically paper invoicing?

What’s the difference between a traditional paper invoice and an e-invoice? Read on as we compare the delivery methods, processing speeds, and data accuracy of the two common invoicing types.

What is paper invoicing?

Paper invoicing is a conventional method of billing that involves creating invoices in a physical format. You start the process by creating and printing the invoice, and then mail it to the recipient. Once received, the invoice requires manual entry into accounting systems before it can be processed.

For enterprises, the limitations and challenges of paper invoicing are significant. The need to physically handle documents slows the transaction process and increases the risk of invoices being lost or delayed during delivery.

Manual data entry also introduces a high potential for human error, from typos to misinterpretations of handwritten notes, which can result in discrepancies that complicate financial reconciliations and may lead to disputes with customers.

Imagine an online apparel retailer processing thousands of daily transactions. In this scenario, the reliance on large-scale paper invoicing – whether to keep track of fabric purchases, pay distributors, or charge customers – can lead to delays in processing and errors in data entry, severely impacting cash flow and financial planning.

Benefits of electronic invoicing

Electronic invoicing, on the other hand, offers several advantages over traditional invoicing methods, including:

• Increased efficiency. E-invoices are transmitted instantaneously, eliminating the delays associated with postal services. This may lead to faster approval and payment cycles.

• Reduced costs. E-invoices can help enterprises save up to 90% on processing costs thanks to the elimination of paper, printing, and postage expenses, as well as lower labor costs from a reduced need for manual data entry and processing.¹

• Improved accuracy. E-invoicing may reduce the risk of human error since it involves automated data entry systems.

• Enhanced security. Electronic invoices can be encrypted, helping to secure data during transmission. Digital records also allow for better control over who accesses sensitive information.

• Environmental benefits. By cutting down on paper use, businesses contribute to environmental conservation, aligning with global sustainability goals.

The implementation of e-invoicing in the US has made steady progress since before the turn of the millennium. In 1996, the federal government included electronic invoicing as one of its compliance standards for federal agencies in the Federal Financial Management Improvement Act (FFMIA) of 1996.²

In 2015, the Office of Management and Budget (OMB) issued a mandate making e-invoicing compulsory for all government agencies and departments.³ In 2011, the Remittance Coalition (later renamed the Business Payment Coalition (BPC)) was founded to advocate the benefits of electronic invoicing and establish a standardized system of e-invoicing between businesses.

One of the most high-profile e-invoicing success stories is ubiquitous big-box retailer Walmart.⁴ With a global network of suppliers and hundreds of thousands of invoices settled monthly, the retail giant has become a key beneficiary of e-invoicing.

Electronic invoicing has empowered Walmart to standardize its invoicing process, reducing the risk of human error, and preventing costs associated with missed or late payments. Walmart now processes over 500,000 e-invoices per month, improving its supplier relations and making huge cost savings.

E-invoicing and compliance

Whenever you handle credit or debit payments, you must maintain compliance with the PCI DSS (Payment Card Industry Data Security Standard), a set of comprehensive data security regulations to protect consumers and safeguard against fraud and unauthorized transactions.

How PayPal Invoicing is designed to simplify e-invoicing compliance

Not complying with e-invoicing regulations can lead to fines and audits. Luckily, tools like PayPal Invoicing are designed to help ease the compliance challenges associated with e-invoicing.

PayPal’s invoicing solution comes with features that address various regulatory requirements, including:

1. Digital signatures and authentication. PayPal ensures that all electronic invoices are authenticated and signed digitally. In other words, it not only secures the invoices against tampering but also verifies the identity of the parties involved, a major compliance requirement in many jurisdictions.
2. Retention requirements. PayPal provides options for automatic storage and backup of all invoices, adhering to global standards for data retention. This helps businesses maintain records for the required period without manual intervention.
3. Conversion of XML invoices into business partner’s desired format. To accommodate different system capabilities of business partners, PayPal can convert invoices from XML or any other standard format to formats that are preferred by the recipient, ensuring compatibility and compliance.
4. Processing and optimization of incoming and outgoing invoices. PayPal's invoicing system optimizes the processing of both incoming and outgoing invoices while helping them to meet compliance standards.
5. Document transmission. Secure transmission methods are used by PayPal to send and receive invoices. This complies with legal requirements regarding the safe exchange of electronic documents and helps prevent unauthorized access.

How to transition to e-invoicing

Ready to transition from tedious paper invoicing to e-invoicing? While choosing a solution can seem simple enough, you don’t want to waste time implementing new processes or tools that don’t align with your specific needs and constraints. Follow these steps:

1. Assess your business needs. What are your current invoicing processes, and what do you aim to achieve with e-invoicing? Your goals might include faster payment cycles, reduced costs, or improved transaction transparency. Additionally, consider the volume of invoices processed and the integration with existing financial systems.
2. Choose the right solution. Research platforms that offer features like automatic data capture, integration with your existing ERP (Enterprise Resource Planning) systems, compliance with regulatory standards, and scalability to handle your business growth. Once you’ve narrowed down the list, don’t just commit to one immediately – beyond researching and comparing providers, take the time to request demos and conduct a cost-benefit analysis.
3. Train and educate your team. Found the best match? Next, focus on training and educating your staff about the new system. Effective training ensures that employees are comfortable using the new tools and understand the processes involved. Consider providing continuous support and learning resources to address ongoing questions and to facilitate smooth adoption.