What is Invoice Accuracy?

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Invoice accuracy is a key performance indicator (KPI) used by organizations looking to track and improve their invoice submission system.

Why does sending an invoice require its own KPI? Generally, this is a fairly simple process. You enter a few numbers and the date of the invoice, send an email and wait for payment.

The truth is that incorrect or poor quality invoices can have a negative impact on business, and the risk to healthy cash flow is much greater than you might think.

For starters, accurate billing usually precedes prompt payments. Research shows that billing errors cause 61% of late payments. If bills aren’t paid on time, your business could experience cash flow difficulties, making it difficult to pay your employees, suppliers, and even your utility bills. This should be a particular concern for startups and small and medium-sized enterprises (SMEs), as these businesses depend on timely payments to stay operational.

Second, rush billing habits can impact the perception of organizations. Well-presented and accurate invoices speak volumes about a company’s level of professionalism and reliability, as well as improving the customer experience. This can ultimately improve brand reputation and customer retention rates.

If an organization repeatedly sends inaccurate invoices, not only will customers think less about it, but they will also be frustrated with the subsequent back and forth needed to resolve the errors.

Ultimately, sending incorrect invoices wastes the company’s time and resources, as well as the customer. Measuring the accuracy of invoices can allow finance and accounting teams to spend their time on strategic value-added tasks, instead of sorting through unpaid invoices and trying to figure out what went wrong, update minor details and repair customer relationships.

How do you measure invoice accuracy?

To calculate percentage accuracy of invoices, simply divide the number of invoices correct by the total number of invoices, then multiply by 100. An accurate invoice is generally defined as an invoice that is 100% accurate; requiring no additional attention or resubmission.

For example, if your company issues 80 invoices in a month, of which 65 are deemed to be accurate, the invoice accuracy calculation would be as follows.

Accuracy of invoices = number of correct invoices / total number of invoices x 100 = x %

Invoice Accuracy = 65/80 x 100 = 81% Invoice Accuracy

This calculation requires you to keep a record of the number of inaccurate invoices sent by your company. You will need to define what constitutes an inaccurate invoice and set up a reliable tracking system.

How can you improve the accuracy and quality of invoices?

Once you know the prevalence of inaccurate invoices within your organization, you can decide on a course of action. In-depth data analysis can help you identify patterns or root causes of inaccuracies in your invoices, allowing you to implement changes where they are most needed.

Generally speaking, however, the following steps can be taken to improve the accuracy and quality of invoices.

1. Use invoice templates or software

The right invoicing software can help you create professional and accurate invoices with ease and efficiency. You’ll be able to create and send multiple invoices at once, follow up seamlessly with customers, and quickly perform financial audits.

The most basic tools will simply provide a range of customizable invoice templates in your preferred format, be it Word, Excel or Google Docs. More sophisticated software can integrate with third-party apps, record purchase orders, track invoices in real time, set up recurring payments, and issue invoices in multiple currencies.

You can check out this article on the best invoicing software for 2022 to get started.

2. Implement rigorous record keeping

Invoice accuracy suffers when a company does not rigorously track products and services.

If a business chooses not to invest in a tool that offers real-time invoice tracking capabilities, it will need to implement its own record-keeping system. This should be used to track the precise number of hours worked by the organization, maintain detailed cost breakdowns, and record all customer sales.

In addition to helping improve invoice accuracy, strong record keeping will save a lot of time and effort. It is important to pay attention to accounting during each billing cycle.

3. Itemize invoices

Creating an itemized cost list may seem daunting, but it will save a business time and energy in the long run.

An invoice that reads something like this is not best practice for accuracy:

Total: $6,415

The lack of specificity means that it is too easy to lose sight of which products or services have been taken into account. Even if the company were to miraculously record all the details correctly, its customers would likely find this format difficult to understand. This results in wasted time providing clarifications or settling cost disputes.

4. Be transparent

Clear and honest communication is an essential part of invoice accuracy. Customers need to know exactly what they need to pay and when they need to pay it long before an invoice appears in their inbox.

This is especially important when dealing with new customers, as unexpected or hidden costs can lead to cost conflicts that quickly sour a new relationship.

5. Communications

Invoice accuracy is a matter of customer service, a fact that must be communicated clearly to employees responsible for processing a company’s invoices.

While it’s common for organizations to invest in customer service training for their sales teams, it’s essential that finance and accounting departments also know how to guide customers through the billing process. They need to communicate information consistently, respond to customer questions quickly, and resolve disputes calmly.

To provide excellent customer service, a company’s sales reps need to communicate effectively with members of its finance and accounting teams. Make sure they convey the correct and relevant information, including contract dates, pricing, payment terms, and unique customer requirements.

Additional Procurement KPIs

Below are some additional procurement KPIs related to invoice accuracy.

1. Dropout rate

Abandonment rate measures the number of potential customers who abandon their purchase or inquiry before completing it. This can help a business identify customer service or pricing issues. Learn more about dropout rates.

2. Current Sale Days

Days Outstanding Sales (DSO) measures the average time it takes for a company’s customers to pay their invoices. This KPI is calculated by dividing the company’s total accounts receivable balance by its average daily revenue. Learn more about pending sale days.

3. Average number of days late

The average number of days past due tracks the number of days past due by customers in a business. This can help the business gauge how well its customers are meeting payment terms. Read more average number of days late.

4. Stock rotation

Inventory turnover measures how often, over a period of time, an organization sells all of its inventory. This will allow the organization to effectively manage inventory levels and provide more efficient customer service. Learn more about inventory rotation.

5. Collection Efficiency Index

The collection efficiency index measures a company’s efficiency in collecting payments from its customers. Learn more about the collection efficiency index.

6. Processing time for a single invoice

Single invoice processing time measures the time it takes, on average, for a business to process a single invoice. Measuring the speed at which a company processes supplier invoices is just as important as measuring the performance of its customers. Learn more time to process a single invoice.

7. Bad debt to sales ratio

The bad debt to sales ratio measures the percentage of credit sales that are not collected. Anything below 15% is considered a good ratio. Learn more about the bad debt to sales ratio.

Additional Resources

Now that you’re more familiar with invoice accuracy and quality improvement, explore our additional resources below:

Image Credit: Pickadook / Shutterstock.com

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