What is invoice coding?
Invoice coding is the process of embedding additional information into an invoice using a unique system of codes.
At a high level, it's really that simple. But there are important differences in invoice coding between the invoices that companies send to customers and the invoices that companies receive from vendors.
What is invoice coding in accounts receivable (AR)?
When a company sends a new invoice to a customer, that's part of the accounts receivable process — the company expects to receive payment.
Medical billers, for example, use a complex system of procedure codes to bill for medical services. Healthcare providers count on medical billing specialists to translate medical records into procedure codes and enter those codes on medical bills. That's one type of AR invoice coding.
Another example comes from the 1980s and 1990s when companies started using bar codes on invoices to speed up payment processing. Business customers could scan the codes to pay those invoices electronically, so neither company had to wait for a paper check to clear.
What is invoice coding in accounts payable (AP)?
When a company receives an invoice, that's part of the accounts payable process (AP) — the vendor or supplier invoice represents a bill that the company needs to pay.
Companies use GL codes, or general ledger codes, to connect incoming invoices to specific general ledger accounts. These codes are usually made up of letters and numbers, known as alphanumeric codes.
The invoice coding process might also include line items like invoice date, due date, terms, GL posting date, and even a description of the goods or services, but these are also usually included as "human-readable" information on the invoice as well.
What is invoice coding used for?
Healthcare facilities still use invoice coding in the billing process, and many large companies use invoice coding to track all kinds of things, from the factory where an item was made to the specific retail store where it was sent.
But the most common use of invoice coding, especially for accounting teams, is to track the department, account, or location that's responsible for incoming bills. This account coding helps them allocate vendor payments to the right internal budgets.
How to code invoices
Apart from medical coding, which follows a highly complex set of standard codes, most companies have unique coding systems that depend on their specific business requirements.
The most complicated systems may include:
- Part numbers
- Fulfillment plants
- Shipping methods
- Vendor or customer numbers
- Purchase order numbers
- And even more
Needless to say, these systems can become incredibly complex, stringing long sequences together that look something like this:
01775hm-0021-32155pn7-07559
While most invoice coding systems aren't nearly that complicated, even simple systems can slow the accounts payable process as a company expands, adding new departments and locations to the list.
Scaling problems: The trouble with GL coding
The real problem with GL codes is that they're called "codes" for a reason. Using the correct codes for the right departments or business processes requires manual data entry and a look-up table.
While top performers in an accounts payable department might memorize the list, it often takes a long time for new members of the payable team to learn the system and become productive. And the more complicated the system is, the longer it takes.
Manual processes just don't scale well. Increasing the number of invoices your team has to process each month or the number of GL accounts they have to manage can lead to bottlenecks. When you add high turnover and a relatively long "time to productivity" to the mix, accounts payable invoice processes can really suffer.
In addition, coding specialists are still human, introducing the possibility of human error when adding those codes during invoice processing.
Invoice processing automation
Today, many companies are automating their accounts payable process, moving far beyond electronic invoices into full automation workflows that use artificial intelligence to streamline things like:
- Vendor invoice entry and data capture
- Adding codes during invoice processing
- The invoice validation process
- Sending invoices for approval
- Invoice communications
- Invoice payment and payment methods
- Updating financial records
By moving away from paper invoices and manual coding actions with automated invoice processing, companies can save time, save money, and minimize discrepancies by reducing the risk of human error.
Automating invoice coding with accounts payable from BILL
BILL’s AP automation makes it faster and easier to pay and get paid.
- Use AI to read invoices and enter invoice data for you
- Apply invoice codes and invoice approval workflows automatically
- Approve invoices anywhere, even on a mobile device
- Pay with a variety of options, all from one convenient dashboard
- Sync with major ERP and accounting software, including QuickBooks, Xero, Oracle NetSuite, Sage Intacct, and Microsoft Dynamics
Streamline your AP, reduce your cost per invoice in both time and money, speed up your approval process, and keep your accounting system up to date with built-in integrations. Learn more about AP automation with BILL today.
