Often referred to as Electronic Data Interchange or EDI, an EDI invoice is a digital version of an invoice or a bill that would otherwise be on paper. Sellers will send out these invoices to buyers to request payments for products they have delivered to them. It essentially involves a “computer-to-computer exchange” where two parties involved in the procurement process send out the required business documents to each other.
Several codes are used while carrying out transactions using this software. The more common ones being EDI 850, EDI 810, EDI 855, and many more. Each code that suffixes EDI denotes the kind of business documents they are. The EDI 850, for example, is the purchase order document that a company issues to a manufacturer. However, an invoice is denoted by the code EDI 810. Every business document is known as a transaction set or a message.
What Does An EDI Invoice Look Like?
Since these transactions are completely automated, companies using them will have to formulate their documents in a certain manner. In other words, these documents require standardization. When a document is present in its standard format, the computers that read and process this information.
The EDI mentioned above has a certain number of components. These are known as the data elements, segments, and finally, the envelopes.
- Data Element
A data element is essentially a single unit of information within every transaction set. Data elements include the city, the number of goods being bought, price of goods, country, pin, and other such data. This component can be a number, code values, and more and have to be distinguished as such.
- Segment
Several data elements together constitute a segment. For example, the buyer’s address is a segment, and the purchase details are order segments. There are three types of segments which are mandatory, optional, and conditional.
- Envelopes
Envelopes come into the equation when the EDI document, which is the EDI invoice, in this case, has to be sent to the other party involved in the transaction. There are three types of these envelopes: the Message, Group, and finally, the interchange envelope.
Each transaction set gets its envelope which is the message envelope. Several message envelopes are grouped to make a group envelope. In this case, several EDI invoices will be present in a Group Invoice envelope. Finally, this group envelope will be placed in an Interchange envelope, sent from the seller to the buyer.
In this way, a vendor will categorize and transmit a series of transactions to their buyers or clients.
Generating An EDI 810 Document
To generate any EDI document, especially an EDI Invoice, one will have to follow these steps:
- Data Collection:
This step involves collecting all the information about the transaction made between a buyer and the seller. It can involve collecting data using:
- Procurement software that holds all the information about purchase orders and requisitions.
- Altering existing documents into files that will have to undergo standardization.
- Converting or formatting digital reports into data files
- Data stored in databases and spreadsheets
In a more traditional setting, data collection may also have to take place manually, where employees will input the information regarding a transaction.
- Translation:
The data collection carried out in the above step does not follow a certain structure and requires translation. In procurement terms, the data is present in an “internal” format.
Therefore, the next step requires a seller to format all the data retrieved from the above sources to align with the standards mentioned. One can do it through translation software. The standard format that an EDI invoice must be present in has been defined in several ways. These include ANSI, EDIFACT, ebXML, and finally TRADACOMS.
Each of these standards has different versions as well. Therefore, depending on the agreements between a buyer and a seller, the EDI invoice has to be translated only in that format. As mentioned before, a business has the option to utilize software to carry out this process.
However, there is another option as well when it comes to the translation of documents. It involves the use of an EDI service provider. This will include sending information regarding the transaction to a third party who will handle the formatting and subsequent standardization.
- Transmission:
The final step involves sending out the EDI invoice to the buyer to receive the dues owed. It can happen in a total of three ways. However, the third method of carrying out this transmission involves a combination of the first two methods.
The first pathway includes connecting directly using an internet-draft security standard known as AS2, which allows business transactions to take place safely over the internet. It is a universal method that businesses use in their B2B transactions, including major retailers.
The other pathway includes the EDI mentioned above service provider, who will also double as a network provider in this case. To make the transmission, a seller will have to contact these providers using a secure communications protocol to make the transaction required.
Therefore, an EDI invoice is created and transmitted to the concerned party to complete the transaction. Buyers who receive the EDI document will perform the reverse process after receiving it. That is, the EDI document will undergo translation from the standard format into an internal format.
Traditional Invoices Vs. EDI Invoices
Almost all procurement teams unanimously agree that paperless invoicing options like EDI invoices tend to make procurement that much easier. However, to drive this point home, one can consider the following aspects of both the traditional invoicing options and EDI invoice generation.
| Paper Invoice | EDI Invoice |
| Generating this type of invoice will involve creating a purchase order and mailing it to a vendor. | A vendor need not print and mail a physical invoice to their clients as the invoice is digital in this case. |
| This process can take around a week to ten days between receiving the invoice and making the payment. | Automating invoice generation using EDI invoices will significantly decrease the duration of a procurement cycle. It is because this process takes only a few hours to carry out. |
| There is a higher chance of human errors taking place since the process involves manual data entry. | It involves little to no human intervention since it is automated. Therefore, the chances of human errors taking place are greatly decreased. |
| A longer procurement cycle will mean that a company will have to spend more on operating costs. | The operating costs are minimal since there is no need to invest in resources like paper or the postage fee. |
| Traditional invoices can be hard to keep track of in case it is not properly filed or stored. | Given the fact that this invoice is digital, it can be stored on large databases and also found easily at a later stage. |
Therefore, generating an EDI invoice is significantly more beneficial to all parties involved in the procurement process. Not only is it capable of shortening the procurement cycle, but it also improves communication between a buyer and a seller.
