Invoice Processing in Microsoft Dynamics 365: Automation Tips

Invoice processing is one of the key financial processes directly impacting cash flow, vendor relationships, and overall operational efficiency. Organisations using Microsoft Dynamics 365 have a significant advantage, as ERP's built-in invoice capture and automation capabilities can reduce processing time by up to 80%, minimise human error and improve vendor satisfaction with timely payments. Despite the robust automation features, many businesses still fail to leverage Dynamics 365's full potential and resort to the manual handling of invoices which creates bottlenecks, adds costs and inefficiencies. Industry studies have in fact revealed that shows that manually processed invoices cost organisations between £12-£32 per invoice and can take up to 25 days to process, compared to just £1.50-£3 and 3-5 days with automation.

To achieve effective invoice automation start by configuring of your Microsoft Dynamics 365 environment. The foundation begins with accurate master data, particularly vendor information, to ensure the system can properly match and process incoming invoices. Here's a process to set up the automation, step by step:

Define clear invoice processing policies within the system, including approval thresholds, required fields, and validation rules.

Set up vendor profiles with detailed information including payment terms, tax requirements, and preferred payment methods.

Establish invoice matching policies that align with your organisation's requirements:

Two-way matching: Automatically compares invoices against purchase orders, validating unit prices and quantities

Three-way matching: Extends validation to include receipt of goods, ensuring payments are only processed for items actually received

Four-way matching: Adds inspection verification, critical for industries with strict quality control requirements

These matching policies determine which invoices can flow through automated approval and which require manual intervention.

One of the most significant bottlenecks in invoice processing is the manual entry of invoice data. Microsoft Dynamics 365 addresses this challenge through Optical Character Recognition (OCR) technology integrated with artificial intelligence to automate data extraction from invoices regardless of format.

OCR capabilities in Dynamics 365 can be enhanced through the AI Builder component or third-party integrations. This solutions scan incoming invoices and intelligently extract key data fields including invoice numbers, dates, line items, and amounts. The AI component learns from corrections made by accounting staff, continuously improving its recognition accuracy.

Organisations that properly implement and train OCR systems achieve data capture accuracy rates exceeding 95%, dramatically reducing manual data entry requirements and associated errors.

The strength of Microsoft Dynamics 365's invoice automation lies in its workflow capabilities, which route invoices to appropriate approvers based on predefined rules. Well-designed approval workflows accelerate processing while maintaining proper controls and governance.

When configuring invoice approval workflows, consider implementing these features:

Hierarchical approvals: Route invoices through multiple approval levels based on amount thresholds.

Delegation rules: Enable temporary reassignment of approval authority during absences.

Parallel approvals: Allow simultaneous approval paths when multiple departments need to validate an invoice.

Escalation paths: Automatically escalate invoices that remain unapproved after defined timeframes.

The approval workflow should include exception handling for common scenarios like price discrepancies, missing purchase orders, or new vendors. Organisations that optimise their financial automation through a thorough workflow design typically reduce invoice approval times by 60-80%.

Dynamics 365 offers robust built-in workflow capabilities on its own, but Microsoft Power Automate delivers additional flexibility for creating custom automated processes for invoice management.

Power Automate enables finance teams to build custom workflows that connect Dynamics 365 with other systems and services. For example, you can create automated flows that notify vendors when their invoices are approved or scheduled for payment. These communications improve vendor relationships by providing transparency into payment status.

Custom flows can also address specialised needs like automatic currency conversion for foreign invoices using real-time exchange rates or integration with banking platforms for payment status updates.

Power Automate's low-code interface makes it accessible to finance professionals without extensive technical skills, allowing accounting teams to create and modify workflows as their processes evolve.

Mobile apps have success made their way into business operations including finance . Microsoft Dynamics 365's mobile capabilities allow accounting teams to manage invoices when they are away from their desks, by reviewing and approving from smartphones or tablets.

The Dynamics 365 mobile app offers a streamlined interface for reviewing invoice details, accessing supporting documents, and submitting approval decisions. Mobile notifications alert approvers when invoices require their attention, preventing delays when staff are travelling or working remotely.

Advanced mobile features include the ability to view invoice images directly within the approval request, compare invoice details against purchase order information, and add comments or questions for the AP team.

Organisations that implement mobile approval capabilities typically see a 35-40% reduction in approval cycle times, directly impacting days payable outstanding (DPO) metrics and improving vendor relationships.

Successfully implementing invoice automation in Microsoft Dynamics 365 requires both technical configuration and process optimisation. Organisations that achieve the highest automation rates follow these best practices:

Clean master data

Maintain accurate vendor information, including tax IDs, payment terms, and remittance details. Establish a standardised format for data entry to ensure consistency across all records. Regularly verify and update vendor information to mitigate risks related to fraud and compliance.

Implement exception handling procedures

Implement exception handling procedures to ensure that any discrepancies or unexpected situations, such as price variances, are addressed promptly and effectively. This involves establishing a clear protocol for identifying, reporting, and resolving exceptions as they arise.

Provide ERP user training

Ensure AP staff understand both technical features and underlying process goals

Remember that invoice automation is an iterative process that can benefit from technical support and training. Most organisations begin with automation rates of 40-50% and gradually increase to 80-90% as they refine their processes and systems. Each improvement cycle should target specific friction points identified through performance metrics and user feedback.

Even well-designed automation systems encounter occasional challenges. Data capture errors often stem from poor invoice quality or non-standard formats. Improve OCR accuracy by working with key vendors to standardise invoice formats and ensure documents are clearly scanned. For vendors with consistently problematic invoices, consider implementing vendor portals or e-invoicing solutions to bypass OCR entirely.

Matching failures typically indicate discrepancies between purchase orders, receipts, and invoices. Address recurring matching issues by analysing root causes, whether they stem from procurement practices, receiving procedures, or vendor billing errors.

Workflow bottlenecks frequently occur when approval responsibilities aren't clearly defined or when approvers lack necessary information. Review approval hierarchies regularly to ensure they reflect current organisational structures and establish clear escalation paths for delayed approvals.

While Microsoft Dynamics 365 provides robust invoice processing capabilities, integrating with specialised financial operations platforms can further enhance efficiency, particularly for global businesses. Fyorin's unified financial and cash management platform complements Dynamics 365 by streamlining the payment execution phase of the invoice lifecycle, especially for cross-border transactions. With direct integration to Dynamics 365, Fyorin enables automated payment processing in 100+ currencies while providing real-time cash visibility across all accounts. This integration creates a seamless end-to-end process from invoice receipt through payment execution, reducing costs and accelerating the entire accounts payable cycle.

What is Microsoft Dynamics 365 Invoice Processing?

Microsoft Dynamics 365 Invoice Processing refers to the comprehensive set of tools and features within the Dynamics 365 suite that facilitates the management of vendor invoices. This process integrates various functions such as invoice capture, invoice posting and automation to streamline the workflow, reduce manual data entry, and enhance accuracy in financial operations.

How does invoice automation work in Dynamics 365?

Invoice automation in Microsoft Dynamics 365 works by utilising automated processes to handle the entire invoice process. This includes capturing invoices through an invoice capture solution (OCR), matching them with purchase orders and receipts, and posting them into the system without manual intervention. By automating these tasks, organisations can significantly reduce processing time and errors.

What are the benefits of automating invoice processing?

The benefits of automating invoice processing in Microsoft Dynamics 365 include increased efficiency, cost savings, improved accuracy, and enhanced compliance. Automation allows for touchless processing of vendor invoices, minimising the need for manual checks. This leads to faster payment cycles, better vendor relationships, and a more streamlined accounts payable function.

What is the role of workflow in Dynamics 365 Invoice Processing?

Workflow in Microsoft Dynamics 365 plays a crucial role in managing the flow of invoice processing. It defines the steps and approvals required for each vendor invoice to be processed, ensuring that all necessary checks are performed. This structured approach helps organisations maintain control over their financial transactions and ensures compliance with internal policies.