If you’re doing it right, your invoices should already include a fair bit of information regarding a given sale, such as what was delivered, how much it cost, and when that amount is due. But beyond those details, you can also track that purchase in a broader context within your overall accounting and enterprise resource planning (ERP) efforts.
You can garner this insight through a process called invoice coding, where invoices are tagged with additional labels that make it easier to monitor their interaction with the various categories, subcategories, and accounts within your general ledger.
In this article, we’ll explore this categorization method in more detail, focusing on how it can contribute to the timeliness and efficiency of accounts receivable (A/R).
Why coding invoices is important for accounts receivable
Most invoice coding discussions focus on its value within the accounts payable (A/P) process, tracking the money that your business spends. When labels are applied to incoming payment requests from suppliers and vendors, you can leverage these codes to determine what specific accounts in your general ledger need to be modified during your month-end closing processes and which specific departments are responsible for given expenses.
However, when invoice coding is leveraged for your A/R, particularly when creating invoices, these efforts predominantly focus on establishing and maintaining more robust audit trails tied to your sales efforts. This improved visibility, in turn, lends itself to help with:
- Reimbursements: For some industries (e.g., healthcare) or some larger customers, the buyer might have you include their A/P codes within your outgoing invoices to help them more accurately and efficiently confirm that what was delivered matches what was ordered.
- Payment cycles: Similarly, when the client’s A/P codes are embedded within the invoice, buyers are much more likely to approve and close out the payment request quickly.
- Quality control: Encoding production details within your outgoing invoices allows you to better monitor which manufacturing batches are tied to given transactions and deliveries, making it easier to trace defects or other product irregularities.
- Cash application: Accurately applying payments can be complicated, particularly if incoming transactions cover multiple projects or if the payments for larger expenses are broken up with an installment plan. Effective invoice coding can help mitigate these challenges.
- Audit readiness: The taxes you need to collect will vary depending on location, client industry, and other factors. Invoice coding can help create the paper trail you’ll need to answer the questions of any interested parties.
The invoice coding process: How do you code invoices, and where would an A/R team be involved?
Step 1: Decide what invoice data to capture
Before getting started, your A/R team should identify which billing details and metadata need to be captured through your coding efforts. This may include aligning with industry standards, meeting customer-specific requirements, or ensuring compliance with local regulations, especially if certain data points are needed for audit trails.
After you decide what should be tracked, you’ll want to create code lists that spell out the specific conditions required for each code you intend to apply to your outgoing invoices.
Step 2: Generate your invoice and cross-reference it against code lists
When generating a given invoice, your staff will want to include whatever codes, labels, or tags are relevant for that specific transaction. Routinely, this can be done by cross-referencing the services or products delivered against the established code lists. Depending on how complicated these efforts are, however, you might also want to include a manual verification step for your staff to help ensure that all of the necessary identifiers have been included before sending the final invoice. Alternatively, you can automate this validation effort.
From this point, you would process the invoice as normal, as the relevant codes have already been tied to the specific sale.
Step 3: Create reports to improve audit trails
As previously stated, the value that invoice coding brings to your A/R efforts will predominantly be related to creating audit trails to drive efficiencies and prove compliance. As such, you’ll want to routinely create reports that capture the metadata tied to your various codes.
An example of an invoice coding use case
Perhaps the most common example of invoice coding you’ll run across daily pertains to its use in the medical industry. Coincidentally, this is also the most common use of invoice coding you’ll run across for A/R purposes.
For every healthcare visit you make, at least in the United States, the medical provider will typically create an invoice that lists out the individual procedures tied to the exam, along with corresponding medical codes. For instance, on the invoice or explanation of benefits (EOB) for an annual checkup, you might see the following list of procedures:
Procedure Description | Code | Amount Billed | Allowed Amount | Insurance Paid | Patient Responsibility |
Preventive Office Visit (Adult, 40-64 yrs) | 99396 | $180.00 | $150.00 | $150.00 | $0.00 |
Blood Pressure Screening | 93784 | $45.00 | $40.00 | $40.00 | $0.00 |
Lipid Panel (Cholesterol) | 80061 | $55.00 | $45.00 | $45.00 | $0.00 |
Fasting Blood Glucose | 82947 | $40.00 | $35.00 | $35.00 | $0.00 |
BMI Screening | G0447 | $25.00 | $20.00 | $20.00 | $0.00 |
These invoice / medical codes provide useful billing information to the relevant insurance company or government agency offering coverage to the patient. Using these details, these organizations can more easily determine what medical assistance was provided, whether or not it fits within the coverage policies, and how much of the related cost should be offset on behalf of the patient.
Common challenges with manual invoice coding and the benefits of automating invoice coding
Not surprisingly, the difficulties associated with manual invoice coding are the same as those associated with any other manually driven processes. Fortunately, the corresponding automation benefits also apply.
Invoice Coding Strategy: Manual vs. Automated | ||
| Manual Processes | Automated Processes |
Accuracy | Subject to common, human-based errors (e.g., transcription mistakes, incorrect categorization) | Improves accuracy with built-in validation rules and by removing the human element |
Timeliness | Frequent delays caused by limited office hours, PTO, and excessive workloads | Invoices processed at the speed of technology, addressing multiple documents simultaneously |
Scalability | Requires additional staff or labor hours to accommodate growth | Only requires additional processing power to match increased workloads |
Reporting | It can take hours or even days to complete, depending on how many records and systems need to be reviewed | Finished in minutes, no matter how many data streams are involved |
How to automate your invoice coding
Given automation’s advantages, we at Invoiced (a Flywire company) believe that you’d be well served by leveraging technology rather than employee labor to run your coding efforts.
However, you typically won’t find a tool exclusively dedicated to invoice coding. Instead, these functions will likely be covered by a broader A/R platform.
As such, the actual logistics of your coding automation will depend heavily on the solution you choose, so you’ll want to make sure that you find the right offering. When considering what’s on the market, you might consider these tips.
- Tip 1: Since your invoice coding will be part of a broader accounts receivable solution, evaluate your current A/R processes and target those that are ripe for automation. Typically, you’ll want to focus on your most labor-intensive or error-prone areas. Invoiced offers a suite of accounts receivable automation capabilities.
- Tip 2: Identify what you want your invoice coding automation to accomplish before buying. Are you trying to identify medical procedures, apply tax codes, or flag inconsistencies? The answers to these questions should factor into your purchase.
- Tip 3: Look for solutions that offer live demos or pilots. It’s always helpful to try before you buy. You can book an Invoiced demo here.
- Tip 4: Consider the tool’s ease of use. If it’s overly complicated to operate or requires extensive training for new users, choose a more user-friendly option. Invoiced regularly wins G2 awards for being the “Easiest to Use” A/R tool for mid-market enterprises.
- Tip 5: Review its development roadmap. Has this product released any new features or capabilities in the past couple of years? Are there any updates on the horizon? Or has the offering grown stagnant? Invoiced regularly updates its product to serve our customers better.
- Tip 6: Determine the software provider’s level of customer support. Are they responsive to issues or questions? Are they easy to reach? Invoiced is also regularly recognized by G2 as the A/R automation software for mid-market businesses that is “Easiest to Do Business With.”
Key features to look for in invoice coding automation tools
Alongside these tips, you should also ensure that your new A/R solution has a sound technological footing. Some capabilities you should actively look for are below. Invoiced meets all these needs and more. To explore how we can get you paid faster and with less effort, book a demo today.
- Customizable invoices: Your coding requirements today could change tomorrow. Look for an offering that lets you add and update fields within your invoices as needed.
- Audit trails: Choose a platform that bundles comprehensive reporting capabilities. When evaluating performance metrics and invoicing metadata in a historical context, you can more easily demonstrate compliance and identify process bottlenecks.
- Data accessibility: You’ll want a platform that delivers broad ERP integration, allowing you to seamlessly migrate data across your invoicing, accounting, and production systems.
- Artificial intelligence (AI): Properly categorizing invoices and leveraging those categories can get complicated. An AI-powered solution, in turn, can help simplify all manner of tasks, such as cash application or medical coding.
- Bespoke automation: Don’t just settle for some pre-built automation workflows. Find a tool that lets you build your event-triggered process trees.
How Invoiced supports invoice coding automation
Whatever solution you choose, you’d be wise to perform your due diligence and verify that it delivers the full capabilities and support you’ll need to make your process and invoice coding automation a success. And as part of your search, we recommend considering our Accounts Receivable Automation platform.
Our solution delivers highly customizable invoices, capable of supporting comprehensive tagging, alongside an Automation Builder feature that lets you quickly and easily label your payment requests and alter how you respond to them depending on event-based triggers. At the same time, we deliver broad integration support and open API access that allows you to seamlessly move, manipulate, and access data from across your new billing and existing ERP systems.
At the same time, our Advanced Reporting add-on allows you to create ad-hoc reports based on hundreds of object and field types, making it easy to capture all of the relevant data and metadata tied to your invoice coding efforts. And our CashMatch AI algorithm can automatically sort through collected payments, leveraging the coding information on the invoice to ensure that any incoming cash is properly credited to the relevant customer and general ledger accounts.
We’ve even made it easier to account for and accommodate tax requirements from across the globe by leveraging Flywire software to support payments in 140 different currencies.
If all those capabilities and more pique your interest, schedule a demo today.
