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How does invoice payment work?

Updated on :  

08 min read.

Invoice payments have a substantial bearing on the working capital available for a business. The ability of the business to meet its working capital needs depends on the time it takes for the business to recover the invoice dues.

When should an invoice be paid?

This is subjective with each business. Some companies may demand payment on receipt, whereas some may demand part of the fee be paid in advance.

However, larger corporations may often allow customers a longer credit period if they make a bulk purchase to establish a long-standing relationship. Before providing credit facilities to customers, the businesses must thoroughly check the customer’s financial stability (CIBIL score, credit reports) to ensure that its payment will be made.

Customers that pay early may be offered a discount on the total amount of the invoice. Similarly, the customers that delay payment may be charged a certain percentage as a fine/penalty for late payment.

Invoice payments often have the terms of payment established, such as net 30, net 45, etc. This means that the payment can be made either 30 or 45 days from the date of the invoice.

What does it mean to process an invoice?

The accounts payable department handles invoice processing. It is the complete cycle encompassing the receipt, approval, remittance, payment and recording of the invoice. 

  • Receipt stage

Once the invoice is received, the verification will be carried out to see if an order was made for that particular service or product. Efforts will be made to track the purchase order that matches the contents of the invoice. There has to be immediate communication with the supplier if there is any discrepancy in the fee charged between the two documents.

  • Approval stage

Once all the information is verified accurately, the invoice is then moved along to the persons authorised to stamp their approval on the invoices. The authorities will approve the invoices since the invoice is verified and found to be in order.

  • Payment stage

The terms of payment that have been previously agreed upon will have to be fulfilled at this stage. Often, early payments will be rewarded in the form of discounts on the invoice value, which the companies are likely to take advantage of.

Steps to make invoice payment

  • Step 1

The invoice received from the supplier has to be cross-checked and verified against a purchase order. Further, check if invoice details are correct.

  • Step 2

Once the invoice has been verified successfully, it moves along the line for approval. The approving authority shall then stamp his approval so that the invoice can be processed for payment.

  • Step 3

The payment will have to be made as per the terms and details specified in the invoice, be it a bank transfer, NEFT, UPI payment or cash, as the case may be.

  • Step 4

Once the payment is made, an intimation is made to the supplier via email and payment details.