According to Director of Finance magazine, SMEs in the UK spend on average 25 employee hours per week managing, processing and chasing invoices.
Most of these invoices are still received and processed manually in paper-based format. Even more frustratingly, many invoices have to be converted into paper from digital formats such as pdf, for verification and payment. The end result is that invoice processing can become a costly, inefficient and error-prone operation.
Not surprisingly, studies show that around 13 per cent of invoices never get paid. This can prove disastrous for a smaller firm where cash flow stability is often critical for the success, or even survival, of the business.
Electronic invoicing is the obvious solution to this dilemma; e-invoicing offers smaller firms reduced handling and storage costs, rapid access to and retrieval of invoices, simplified record keeping, payment processing and dispute handling, improved traceability of orders and enhanced security and protection of business data. So far, so good – but why have so few SMEs embraced it?
The reluctance can be explained in part by current legislation. Existing EU law allows individual member states to impose, at will, a number of additional, cumbersome requirements and conditions on businesses wanting to issue VAT invoices electronically; conditions far more severe than those on paper-based VAT invoices.
They include the requirement to use specific technologies such as electronic signatures and Electronic Data Interchange (EDI) as a means of ensuring the authenticity of origin and integrity of content of the invoice. Fortunately, the UK has confined itself to the minimum of restrictions. However, UK organisations trading or planning to trade internationally still need to accommodate the signature and EDI demands. These have been included as options in UK law.
The good news is that this is all set to change. Changes to the EU Directive regarding VAT invoices – which will come into effect on 1 January 2013 – will require all EU member states to have the same, significantly simplified requirements around e-invoicing. Instead of nationally imposed conditions, individual businesses will have the right to determine the method used. The only condition imposed is that the customer must agree to the use of electronic invoicing.
The new rules mean that the method used to ensure the authenticity of the invoice’s origin, the integrity of its content and its legibility is the business’ choice completely. It will be up to the business to determine the controls that create a reliable audit trail between an invoice and a supply of goods or services. By leaving the choice up to the business and removing the interference of individual member states, it is hoped that more businesses will adopt the use of electronic invoices.
At Kofax we help many firms to understand and harness the benefits of e-invoicing. A good starting point is often to take a good hard look at how efficient current invoice cycles are and where savings in manual processing can be made.
New processes are not introduced into an operational vacuum, so it is important that firms understand their underlying AP processes and ERP systems. This will help to inform the choice of financial process automation solution.
Finally, a business needs to understand what works best for its customers and suppliers, to ensure that invoice format and distribution processes reflect this. For example, do you need an e-invoicing solution that can capture data at the point of origination, validate and process information in a wide range of formats, languages or currencies?
I believe that the new legislation, presented in the UK by HMRC as a consultation note in July, heralds a sea of change in the adoption of e-invoicing by SMEs in this country. And in these fiercely competitive, economically austere times, anything that makes it easier for a firm to flourish is surely a cause for celebration.
Martyn Christian is the CMO at business process management provider Kofax.
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