Electronic invoicing, abbreviated as e-invoicing, is a digital system that generates electronic statements such as bills during an exchange of goods and services. It is used for business-to-business and business-to-government transactions. E-invoicing solutions include electronic bills which can be stored, monitored, and generated by any party involved in a transaction. This helps the parties involved to record any agreement of the business and ensure that the terms are fulfilled.
E-invoicing solutions include a host of bills and documents such as payment agreements, purchase orders, terms and conditions of payment, and more. They are faster, more efficient, and paperless. These are automated invoices that include scanning and Optical Character Recognition. As such, they may often be used in the PDF format, shared via emails. However, the PDF is not considered to be the correct format for e-invoicing.
The purpose of e-invoicing is to fully digitize the process of manual e-invoicing, which removes the need for any form of data entry. These evolved from the Electronic Data Interchange of the 1960s into more accurate and authentic invoices. The resulting process is faster and more convenient for all parties involved in the exchange.
Today, an e-invoice can be exchanged through emails, web pages, or apps. It uses several technologies to make transactions seamless. The reason governments want to boost e-invoicing solutions is the increase in efficiency and a paperless, durable system. Moreover, governments can remove any unnecessary procedure and digitize the entire process.
E-invoicing solutions are sustainable alternatives to what was earlier a manual system. While the manual invoicing system still exists, e-invoicing has become increasingly popular in contemporary times. It also helps businesses save on tax compliance costs and is most often required as a mandatory step for filing taxes. E-invoicing works for both online and offline businesses and has been mandated by several governments worldwide.
The History of E-Invoicing
The history of the e-invoice follows the history of the Electronic Data Interchange. The first e-invoice was a shipping manifest. It was exchanged between the Holland-America Line as early as 1965. A decade later, File Transfer Protocol (FTP) was developed, which made sharing files easier through the internet. It enabled businesses to exchange documents easily.
E-invoicing solutions today are more accessible for businesses. The main challenge of the Electronic Data Interchange was the cost incurred during daily operations. Moreover, the accessibility of the internet itself was a struggle for several businesses.
Within the past two decades, e-invoicing service providers have expanded from fewer than 15 before 2000 to have a CAGR of more than 28% in the forecast period of 2021 to 2025. The widespread use of the internet, e-commerce, tax requirements and government mandates are contributing factors for this rise. Moreover, as opposed to paper or manual invoices, e-invoicing solutions can help save anywhere between 8 to 39% of tax compliance costs.
The Growing Popularity of the E-invoice Market
E-invoicing solutions act as records of transaction history while storing the name of the suppliers and customers. This makes it easier for governments to file invoices. The improved accuracy of e-invoices has boosted the growth of the e-invoicing industry, and it is projected to quadruple in size by 2035.
Most countries have adopted e-invoicing solutions for major players in the market. Small businesses also benefit from the e-invoicing mandate as it eliminates several procedures, making the process hassle-free and seamless. Small businesses can present their transactions with companies without any room for disputes, making e-invoicing a feasible option.
- Accessibility of internet
The Electronic Data Interchange of the 1960s was hindered by poor bandwidth and expensive and inaccessible internet facilities. The cost incurred was high, which made it difficult for small businesses to opt for e-invoicing solutions. The digital economy of 2021 has made it easier for the masses to use the internet. With over 3 billion smartphone users globally, it became incumbent for internet service providers to develop cheaper internet plans.
The accessibility of the internet proved to be a boon for the economy. It has turned the world into a digital village and made internet transactions easy. This increased the need for paperless transactions and e-invoicing. The need for a faster alternative to manual invoicing was established.
This need is solved by the automation of the invoicing process. With easily available internet connections, businesses can significantly cut costs with e-invoicing solutions. Moreover, the growing e-invoicing industry is profitable for both big and small businesses.
- Technological advancements
Advanced developments in the technological field have boosted the growth of e-invoicing solutions. The adoption of Information Technology solutions has acted as a driver of the e-invoicing market, making incorporating e-invoicing easier. The shift to e-invoicing solutions is fairly simple for businesses, as it reduces the workload of many employees.
In addition to IT, the development of web-based invoicing applications and software-based applications have improved the e-invoicing procedure. These applications can be integrated with Artificial Intelligence, the Cloud, the Internet of Things, and predictive tools that help with analytics. These have become key drivers of the e-invoicing industry.
Moreover, product vendors keep incorporating flexibility into their e-invoicing solutions, further encouraging businesses to choose this option. Blockchain technology has also boosted the growth of the e-invoicing market due to added security of documents. The emergence of digitalization of documents has also increased the demand for e-invoicing solutions.
- Expansion of E-commerce
With accessible internet emerged the trend of e-commerce that needed a viable solution for their invoices. The e-commerce industry is rapidly growing and needs quick responses. E-invoicing solutions help such platforms in cutting costs, downsizing, and increasing efficiency. An e-invoice reduces the workload on employees and is an enabler for small businesses and startups that need to focus on their growth.
Automated invoices make it easier for e-commerce sites to keep track of all their suppliers, vendors, and customers. This helps such businesses transparency and cost savings. E-invoicing also helps record the trajectory of e-commerce. The data recorded in electronic invoices can be used for analytics. Automation of invoices also increases the profit margins of e-commerce businesses.
Optimization of electronic invoices in e-commerce is, therefore, crucial for reducing manual data entry.
- Government mandates
Tax authorities can now sigh in relief owing to various government policies which make e-invoicing mandatory. The private sector was the biggest consumer for e-invoicing software until governments intervened and made e-invoice a requirement for many businesses. Government policies are, therefore, the biggest driver of the e-invoice market.
Most governments are concerned about the VAT gap, which refers to the difference between VAT revenues and the actual VAT collected. Often there are discrepancies in the VAT gap caused by tax fraud and other scams. The government tries to charge indirect taxes more and reduce the VAT gap caused by income tax fraud.
Indirect tax compliance, therefore, requires businesses to generate automated e-invoices. Automated invoices are also less likely to be riddled with errors and increase the efficiency and productivity of administrative work. For instance, the European Union’s mass adoption of electronic invoicing has improved the relationship of governments with the public sector.
Functions of E-Invoicing Solutions
E-invoicing solutions, as the name suggests, are key to receiving and sending invoices electronically. They can be integrated with multiple features such as analytics and accounts payable, which make it a more comprehensive solution for businesses.
E-invoices minimize invalid and illegal transactions and establish the validity of businesses through an accurate transaction history. Moreover, e-invoicing operators provide customization, which creates professional and automated invoices without a fuss. It can be integrated into existing systems, though this can vary from operator to operator. For instance, Spend Management Systems include multiple resources to simplify budget management for businesses.
How to Generate E-invoice With and Without Compliance
An electronic invoice is generated by an operator. It consists of an e-invoicing address and is generated in the invoicing system of the seller. While an e-invoice might be deployed in several ways, it needs to be structured or hybrid so the buyer’s system can process the data. PDFs, spreadsheets, and Word Files, while being very convenient, are not considered to be structured invoices.
Structured invoice data use formats like Extensible Markup Language (XML) and Electronic Data Interchange (EDI). Hybrid invoice data includes ZUGFeRD. Both of these are acceptable for generating e-invoicing solutions that comply with international standards.
Compliance with the legal framework of local jurisdiction is important for most international businesses. This requires companies to look up international regulation as several countries have strict rules for e-invoicing. For instance, the USA is more liberal with e-invoicing without stringent legal guidelines, whereas countries in Latin America have clear government policies in place.
Generating electronic invoices for countries without mandatory policies is easier for several businesses as the standards of e-invoicing might fluctuate based on different locations.
E-invoicing solutions are provided by operators online via mobile applications and web software. These operators have a procure-to-pay mode for automated invoices. In addition to these operators, e-invoicing is often integrated into Spend Management Systems like Procurement Partners.
Here’s a checklist that can be used for businesses to ensure they have a legitimate e-invoice:
- Company tax ID
- Registration numbers
- Tax rate
- Freight information
- Country of origin
- A detailed description of the product or service sold for transparency and auditing
- Invoice number to reference back information to the ERP system
- Unit price and extended price for product or service
- Buyer and seller information
- Purchase order number and payment terms
- Tax amount
These requirements may vary as per the jurisdiction in the country of origin.
Note: Often, e-invoicing operators market free invoicing tools. Most of these end up being PDFs and are not considered to be real invoices. For an e-invoice, a business has to rely on a paid service provided by a trusted e-invoicing operator.
Advantages of E-invoicing Solutions
Electronic invoicing solutions are hailed as the future of invoicing. The billion-dollar industry has seen a drastic expansion lately to keep up with the ongoing digital revolution. In such a case, businesses in both public and private sectors must adapt to automated invoicing for an improved work experience.
It is extremely profitable for governments looking to minimize the VAT gap and improve work efficiency. E-invoicing solutions are feasible for small, mid-sized, and big businesses and help with cost-cutting. Here are 14 benefits of e-costing solutions for businesses:
- Savings on processing cost and better cash management
Integrating e-invoicing solutions into organizations reduces costs and improves cash management in the organization. E-invoicing solutions do not require manual labor, which helps cut costs on staffing and processing fees and improves efficiency.
- Easy, paperless transactions
Automated invoices eliminate the complex procedures with paper and save both time and money. The paperless initiative is a greener approach towards invoicing and minimizes the possibility of errors. Moreover, electronic invoicing reduces printing and shipping costs, as paper will no longer be used.
- Save on tax compliance
Tax compliance costs are reduced owing to the quick, short procedures of e-invoicing solutions. This is because there is a better chance at tax equity by reinforcing tax audits. Corporate businesses get a better reduction of tax compliance rates than individual businesses.
- Increased satisfaction for suppliers
Suppliers value transparency just as much as employees. With e-invoices, suppliers get timely payments which increase their satisfaction and make their service more personalized. Any delays due to discrepancies in the system get notified and improve the relationship between suppliers and businesses.
- Smooth, seamless work and cash flow
A smooth, seamless exchange is the unique selling point of e-invoicing solutions. It helps the company’s cash flow by enabling timely payments. An e-invoice also reduces the pressure on the staff and increases productivity by eliminating unnecessary steps.
- Better use of skilled staff
Since e-invoices reduce the workload on staff, they can be reallocated to high-value services. E-invoicing upskills employees without rigorous training and helps them handle more highly skilled work.
- Security of important documents
The use of blockchain technology and digital lockers has reduced the chances of the invoice getting lost in mails. Electronic invoicing also helps in the digitalizing administrative process and anticipates a tech-savvy future.
- Error-free administrative work
Automated invoices minimize the probability of human errors in administrative work. This increases the overall productivity and efficiency of businesses.
- Easier to track invoices
Electronic invoicing enables easier tracking of invoices. Businesses need not worry about losing important documents. Every transaction is recorded electronically, thereby being more convenient for businesses.
- Improved efficiency and faster booking of invoices
E-invoicing solutions are hassle-free and faster than manual invoicing, which saves time. Moreover, automated invoices do not require data entry and often provide the data for better audit and predictive analytics.
- Better compliance with international mandates
E-commerce has made the global market accessible, which requires stringent compliance with mandates. E-invoicing operators make it easier for businesses to comply with these mandates, as in the case of Latin America, Korea, or the Nordic countries.
- Increased transparency
Transparency concerning suppliers helps businesses chart their trajectory. E-invoicing solutions maintain an end-to-end record that helps businesses identify glitches and discrepancies. Businesses can also examine supplier performance and uphold agreements and payment terms. Transparency in agreements is also appreciated by suppliers, which improves relationships between suppliers and businesses.
- Contributes to public policies
The European Union believes that the adoption of e-invoicing solutions contributes significantly to public policies. By generating e-invoices, governments encourage financial transparency in businesses which is a key public policy.
E-invoicing solutions allow the public sector to experiment with the digitalization of documents, which was earlier limited to the private sector. Moreover, the public sector can effectively reduce costs and increase their productivity. Thus, e-invoicing solutions are conducive to the growth of the public sector.
- Fewer chances of tax evasion
The risk of tax evasion and tax fraud is minimized with e-invoices as the transaction is recorded electronically. E-invoicing solutions are more durable than manual invoices, which can be lost, stolen, or damaged. E-invoices generated by operators are stored electronically, making auditing easier and more reliable. Thus, governments are actively encouraging businesses to integrate e-invoicing solutions into their system.
Business behavior is dynamic and keeps changing, especially in a digitalized world. It is important to keep up with emerging trends for businesses to prosper. The current scenario of the pandemic foretells a future where E-invoicing solutions are prevalent. It is, therefore, better to switch to workable e-invoicing solutions now. E-invoicing solutions are easily adaptable and increase productivity and efficiency. This makes them an indispensable part of modern business practices.
