Invoice-to-Cash

What is Invoice-to-Cash?

Invoice-to-cash is the accounts receivable process that takes place between the time a business bills a customer for goods or services and the time they receive payment. It encompasses the entire transaction lifecycle, from creating an invoice to receiving payment and closing out the transaction in the company’s financial records.

There are a few essential components of invoice-to-cash:

• Creating and issuing an invoice
• Dunning
• Payment collection
• Security standards
• Revenue recognition
• Payment reconciliation
• Dispute and litigation management

The accounts receivables team handles most of the invoice-to-cash cycle. Larger companies will have separate teams to manage security, compliance, disputes, and litigation. Regardless, the ultimate goal of invoice-to-cash is to ensure that businesses receive timely payment for their goods or services.

Synonyms

• Billing process
• I2C
• ITC
• Invoice-to-collection

Importance of an Optimized Invoice-to-Cash Process

Streamlines Payments and Collections

Invoice-to-cash is the path from invoice to payment. So, it directly impacts your business’s cash flow. Businesses that don’t have a system for turning customer payments into cash in a timely fashion end up with serious bookkeeping and cash flow issues.

For example:

• When businesses send invoices late, payment is also delayed.
• Customers reject incorrect invoices, and the billing team has to revisit them.
• If a customer doesn’t catch the problem, they’ll notice later and issue a chargeback or file a more serious dispute.
• When payments bounce due to insufficient funds, it has a direct impact on cash flow.
• Customer invoices sent to the wrong address or with the wrong customer/payment info lead to involuntary churn.

With billing or subscription management software (which businesses use to manage these business operations), invoices are automatically generated, often based on recurring billing data or usage volumes (like a phone bill). That helps businesses avoid most of the errors and delays caused by manual invoice creation.

Improves Cash Flow

When it takes too long to receive payments from customers, businesses struggle to keep up with expenses and investments. Problems with revenue recognition can also lead to cash flow issues.

Invoicing software reduces errors and delays, which means businesses receive payments faster. Plus, with an automated billing system, there’s less to reconcile, so you’re more likely to spot discrepancies quickly.

Better Financial Forecasting

When your invoice-to-cash flow works smoothly, your financial statements will have fewer accounting errors. When your revenue data accurately reflects the money in the bank, revenue forecasting is a lot more trustworthy.

Decision-makers rely on forecasts to communicate with investors, stakeholders, and team members. And, the responsibility ultimately falls upon them to decide which direction to take the business using that data. So, accurate payment tracking is the difference between well-informed decision-making across the entire organization and completely misguided judgments.

Accurate invoicing data also gives insight into customer payment behavior and trends. Businesses can use this information to optimize their pricing strategy and forecast performance if they were to enter a specific market.

Invoice-to-Cash Process Workflow

The invoice-to-cash process typically follows these steps:

1. Create and Issue an Invoice

Businesses raise invoices to customers in a few different ways:

• Manual entry in the system
• Auto-generated invoices from a Purchase Order (PO) or shipment details
• Recurring automatic payments for subscription services
• Third-party invoice creation (e.g., by a vendor)

Once the invoice is generated, it’s sent to the customer for payment. If you’re a recurring revenue business, your billing software will take care of this automatically and send it to your customer’s email address each time the billing cycle renews. If you’re billing a client for professional services or physical items, you’ll create line items for each separate component, add them the quantity/price for each, and send it to the customer yourself.

2. Dunning

Some of your customers won’t pay right away. If they forget, don’t notice the invoice, or are trying to extend their payment terms (deliberately or not), your business will have to remind them of the overdue amount. This process is called dunning and involves sending out reminders — typically email notifications or follow-up calls (depending on your relationship with the customer).

3. Payment Collection

Once the customer receives the invoice, they’ll either pay it or question its contents. Dunning itself is part of the collections process, but it’s not its only component.

Most businesses collect payments by:

• Credit card
• Automated clearing house (ACH) bank transfers
• Paper checks
• Electronic Funds Transfer (EFT)

Your business might offer special payment terms (e.g., 2/10 net 30) to incentivize earlier payment. Some businesses also allow payment plans for customers with cash flow problems or those whom they deem creditworthy.

4. Security Standards and Compliance

Invoicing involves sensitive information like customer names, addresses, credit card numbers, and bank account details. The invoice-to-cash cycle needs to follow security standards to protect this data.

The company’s finance team also has to comply with internal accounting standards (ICS) and government regulations.

For example:

• GAAP (Generally Accepted Accounting Principles) in the US
• ASC 606 (domestic) and IFRS 15 (international)
• SOX (Sarbanes-Oxley Act)
• HIPAA (Health Insurance Portability and Accountability Act)

Billing information is among the most sensitive data your company processes. Failing to comply with these regulations could lead to severe financial, legal, and reputational consequences. And, in the event of a serious data breach, customer relationships are on the line.

5. Revenue Recognition

Businesses working with customers under contract must be careful to recognize revenue in the correct accounting period. Revenue recognition under ASC 606/IFRS 15 requires businesses to recognize revenue in the period it’s earned, not when cash is received. This can be tricky to track, especially if your business deals with complex contracts, subscriptions, or multiple performance obligations spanning months.

6. Payment Reconciliation

Not all payments are accurate. Sometimes, customers overpay or miss an invoice and pay less than they’re supposed to. Other times, businesses accidentally charge a customer twice for the same invoice (or not at all). There are dozens of potential issues you might find with your billing/accounting figures. That’s what payment reconciliation is for.

7. Dispute and Litigation Management

Dispute management involves all the steps your company takes to process and hopefully resolve conflicts with customers.

These may include:

• Erroneous charges
• Refunds
• Contractual disagreements
• Billing disputes
• Legal action

Litigation management kicks in if the dispute is not resolved and escalates to a court case. In such a situation, you’ll have to provide evidence of customer interactions (e.g., conversations, emails, phone calls) and your efforts to resolve the dispute.

Using Automation to Streamline I2C

Businesses that successfully streamline customer invoicing automate it as much as possible. Most billing and accounting tasks can be automated with billing or subscription management software.

• It automatically populates customer information for each billing cycle..
• You can program it to send automated email and push notifications to remind customers of due dates after a certain number of days.
• Automatic clearing house (ACH) bank transfers or credit card charges can automatically pull payments from customer accounts (if the customer allows).
• It supports price localization, currency conversion, and multiple payment methods.
• It supports complex pricing structures, such as those in SaaS billing and B2B manufacturing.
• Support teams use a single platform with complete information about customer interactions, transaction history, and financial agreements.

Shockingly, 35% of enterprises, 73% of mid-market companies, and 86% of SMEs still use manual invoicing data entry. That means a lot of companies are still dealing with the risks and inefficiencies of manual work mentioned above.

Bottom line: automation makes your business more efficient, secure, and productive.

Components of Invoice-to-Cash Billing Software

1. E-Invoicing

Electronic customer invoicing is the base component of any invoice-to-cash software. It automates invoice generation (or, in the case of manual invoicing, turns your invoices into PDFs). Then, you’ll use it to send the invoice straight to their email inbox.

2. Payment Gateways

Payment gateways are the interfaces that connect e-invoicing systems with payment networks (e.g., VisaNet, Mastercard Payment Gateway Services). They securely transmit payment information between parties and authorize each transaction. When your customer pays your invoice through your software, it will use these intermediaries to process the transfer.

3. Subscription/Recurring Billing Management

If your business deals with subscriptions or recurring billing, you need to track customer payments, changes in subscription terms, and cancellations. This type of platform will support each customer’s unique billing cycle, subscription tier/price, and self-service portal integration (for account configuration).

4. Invoice Reconciliation

Reconciling invoices is the process of matching customer payments with their respective invoices. This task is particularly useful if you have a ton of customers paying via different methods (e.g., credit card, ACH, check). Most subscription billing tools will also offer this feature.

5. Reporting and Analytics

Most billing software will also provide you with detailed reports and analytics about your invoicing process. You’ll be able to access key metrics, like revenue growth, churn rate, customer lifetime value (CLV), and other financial KPIs.

Benefits of Billing Software in I2C

Compliance and Security

Compliance and security measures are crucial components of invoice-to-cash. They’re also some of the most costly if things go wrong. A secure, cloud-based invoicing platform protect your business (and customers) from fraud.

• PCI compliance is a must for businesses handling credit card data.
• Invoicing standards like PEPPOL, e-invoices, and electronic data interchange (EDI) reduce errors, save time, and enhance transparency.
• Compliance with tax regulations ensures accurate billing and avoids legal issues.

You won’t be able to accomplish any of these things (or protect your customers’ sensitive information) unless you have robust security protocols in place. For that, you need software that optimizes the order-to-cash process.

Electronic Invoicing Improves Customer Experience

Invoice-to-cash is also an integral part of customer relationship management. It’s your “last chance” to leave customers with a positive impression, which is especially important for recurring business models.

• A well-designed invoice template can make your brand stand out.
• Sending timely and accurate invoices builds trust and credibility with customers.
• Systems that allow customers to pay in their preferred method (credit card, bank transfer, etc.) enhance the customer experience.
• Automatic payment reminders help avoid late payments and maintain healthy customer relationships.
• An efficient dispute management process can save customers from frustration and keep them happy.

Especially in B2B transactions, businesses need to make it easy for customers to pay invoices. 70% of B2B decision-makers say they’re willing to make purchases of $50,000+ online, and the majority of them expect that.

Increases Revenue Efficiency and Improves Cash Flow

The most apparent (and immediate) benefit of invoicing automation is increased efficiency. You’ll save time and resources because you’re reducing manual work, eliminating human error, and streamlining the entire order-to-cash process.

• Invoicing software automates billing processes, so your team can focus on more valuable tasks.
• Automatic payment collections improve cash flow and reduce DSO (days sales outstanding).
• Less manual data entry means fewer errors and potential disputes, which can result in late payments and lost revenue.
• Having all customer information in one place allows you to make better financial decisions based on real-time data.

Minimizes Late Payments and Collections Efforts

Late payments are a headache for any business owner, and they create serious cash flow problems. But, 93% of businesses cite late payments as an issue they regularly deal with.

Automatic payment reminders reduce the chance of late payments and eliminate the need for manual follow-ups. And real-time invoicing updates help you track pending payments and address them promptly. Automated collections processes (e.g., dunning) and save time and resources, especially for SMEs with a small accounting team.

Data Synchronization Through Integration

Seamless integration of billing software with CPQ (configure, price, quote), ERP (enterprise resource planning), and CRM (customer relationship management). Data synchronization between these otherwise disparate systems guarantees accurate and up-to-date information for invoicing processes, minimizing the risk of errors or discrepancies between systems, and optimizing overall efficiency.

Secure Payment Processing

Security for your customers’ sensitive information is one of the most crucial elements of invoice-to-cash. Billing software should provide secure payment processing options, including encryption and tokenization, to protect against fraud and data breaches.

People Also Ask