What is Invoice to Cash & How Can it be Improved?

Why is I2C important? 

Your business needs money to function, and how you run your invoice-to-cash processes will immediately and directly impact your overall cash flow. If any of these interconnected operations struggle, there is likely a significant delay in being paid for the work that you’ve already completed. And if these mechanisms outright fail, you may never be paid. 

In fact, according to a survey conducted by Atradius, a trade credit insurance broker, respondents in the United States indicated that 50% of all the invoices they issued in Q2/2024 were past due before being paid. And 8% were eventually written off as bad debt, leaving only 42% paid on time. Fortunately, effective I2C can help mitigate these unnecessary delays.

What is the invoice-to-cash process? 

While we’ve been discussing the I2C process as a whole, this term covers a number of individual — but tightly connected — steps that occur throughout the payment process. These steps can vary considerably depending on the industry, location, and business model of the given organization. Generally, though, they typically look something like:

Step 1: Comply with mandated standards

Before you even begin selling items on credit — let alone start collecting payment for them — you want to ensure that all of your A/R practices fully comply with local and federal laws and any industry or payment processing guidelines. 

Most countries have enacted security standards for handling payment and client information. Similarly, they’ll frequently have mandated or “recommended” accounting guidelines in place that you’ll need to work within. Some common standards you’ll likely need to meet include:

• Generally Accepted Accounting Principles (GAAP)
• International Financial Reporting Standards (IFRS)
• Sarbanes-Oxley Act (SOX)
• Payment Card Industry Data Security Standard (PCI DSS)
• Health Insurance Portability and Accountability Act (HIPAA)
• General Data Protection Regulation (GDPR)

Step 2: Create the invoice

Once your credit-based sale has been finalized and you’ve delivered the relevant goods or services to the customer, you’ll want to create an invoice informing the buyer of their outstanding financial obligation. The sooner you can deliver this document to a given buyer, the sooner — and more likely — they will provide payment.

Commonly, you’ll want your invoice to include:

• Company information for you and the buyer
• Delivery details
• Amount owed
• Relevant dates (e.g., invoice date, due date)
• Payment terms
• Unique invoice number

Step 3: Follow up on the invoice

For any invoice you send out, you’ll want to engage in ongoing dunning efforts that remind the buyer of their financial obligation and the approaching — or past — due date. After all, it’s much more difficult to forget to pay if the debt remains in your mind. In addition, you should structure these touches to be professional, clear, and compassionate, ideally striking a tone and cadence that avoids potentially alienating or annoying your customers. 

If everything goes well, you should receive payment in short order (meaning you can bypass the next step).

Step 4: Deal with any challenges

Unfortunately, problems occur, and not every invoice will be resolved smoothly. Disputes will likely be one of the leading causes you’ll see for payments that are severely delayed. Commonly, if a buyer disputes your payment terms, contract, or received goods or services, they’ll withhold payment until that issue is resolved.

Depending on which payment methods you support, interruptions — like a failed credit card transaction — might also occur, requiring adaptive dunning management strategies to resolve. Or the customer may be in poor financial health or entirely out of funds, meaning you’ll never be paid and need to write off the transaction as bad debt.

Whatever the problem, you’ll need to resolve it before your I2C efforts can be finalized.

Step 5: Receive and reconcile payments

Assuming that things have progressed smoothly or you’ve been able to resolve any existing issues, you should receive payment at this stage. And how you’ll receive the provided funds will vary depending on which transaction methods you accept (e.g., credit card, wire transfer). 

As part of the corresponding reconciliation effort, you’ll want to scrutinize the details of this payment, verifying that the proper total has been sent for a given invoice. Of course, if any potential discounts or late fees should be applied, you should also accommodate those. However, sometimes, you may receive only a partial or duplicate payment, which will require further action to resolve.

Once you’ve reconciled the transaction, be sure to update the corresponding customer account and any relevant financial records or accounting documents.

Invoice to cash challenges

As mentioned above, problems will occur, and most — if not all— challenges to your I2C efforts will likely be traced back to poor data or a problematic buyer. For instance, if your submitted invoices routinely contain errors, expect payment delays and disputes to be shared. 

At the same time, the promptness and consistency of your received payments will rely heavily on your buyers’ actions. So whenever possible, it’s wise to vet potential customers before your goods or services are in their hands.

Invoice to cash best practices 

Building an efficient I2C cycle and promoting smooth operations will require you to invest in additional labor, technology, or both. Some everyday actions you can take include:

• Standardize: Put in place common, centralized workflows to avoid confusion, unnecessary process delays, or duplicated effort.
• Automate: When you lean on technology to cover the more repetitive or mundane tasks, you can often accelerate operations, free up staff for more strategic efforts, and reduce errors.
• Simplify: Your payment terms should be regularly shared, easy to understand, and avoid the potential for any confusion.
• Communicate: Make yourself accessible to buyers to resolve disputes or concerns, and employ consistent dunning practices that establish clear expectations.
• Diversify: The more payment options you support, the easier the overall process will be for your customers.
• Validate: Evaluate the credit score and history of any new buyers, or if that level of scrutiny is not feasible, take other measures (e.g., limiting transaction size, requiring payment up front) to help mitigate risk.

How the I2C process can be improved with automation

Whichever best practices you employ, we highly recommend that you pursue an automation strategy for your invoice-to-cash solution. We believe such an approach will offer you the most cost-effective means to shore up these critical functions and your overall cash flow. 

By choosing the right solution, we recommend our Accounts Receivable Automation software, which will help you improve the accuracy and timeliness of all your invoicing efforts. For instance, our software includes extensive integration capabilities that let you instantly and seamlessly migrate sales, product, and financial data back and forth between your billing systems and your broader enterprise resource planning (ERP) architecture. This capability removes the need for manual transcription, one of the leading causes of inaccurate, error-prone data within the I2C process. 

Similarly, our Smart Chasing function can standardize and automate your dunning efforts. So, your customers will receive consistent, multi-channel reminders throughout the payment process. Once that payment is received, our Cash Application AI feature can align those incoming funds to the appropriate customer accounts and even navigate irregularities — such as a duplicate payment — with little human intervention.

Alongside our automated process workflows, we’ve recently updated our platform to leverage the global payment capabilities of Flywire software. Now, you can more easily manage accounting practices and conduct business in over 140 currencies across 240 countries and territories worldwide.

Invoiced: Automated Invoice to Cash Solution 

At this point, an efficient, well-managed I2C process can make all the difference in creating a stable, reliable cash flow for your business. And if you’d like to work with us here at Invoiced, we’d love to help you put in less effort and net more benefit from all your A/R operations. 

Schedule a demo today and explore everything our Accounts Receivable Automation software can do.