What Are EDI Payments?

Business moves at the speed of technology. It's important to keep up with the pace of these changes in our rapidly evolving world. One key element of this is to use accounting methods that keep a competitive edge.

Gone are the days of physical forms and paper-based practices that lead to increased processing time, unnecessary errors, and overspending. EDI payments are here to fast-track accounting practices and simplify processes so you can focus on other important tasks. 

Keep reading to learn how EDI payments can speed up your startup's workflow, helping you stay on the cutting edge of your industry with an automated accounting system.

EDI Payments 101

EDI is a technology system that helps transfer data quickly between entities. It keeps transactions secure on both ends and simplifies transactions from traditional paper processes. Here's what you need to know about EDI technology, EDI processing, and the different types of EDI transactions.

Definition Of EDI Payments

"EDI" stands for "electronic data interchange." EDI is a system designed to facilitate the smooth exchange of financial documents between businesses. EDI business transactions are sent via secure electronic transfer.

Your EDI software translates the data into readable terms. Likewise, the EDI software standardizes the transferred data so your trading partner receives your EDI invoice in a format that also works for them. In other words, the EDI system enables businesses to speak the same financial language quickly.

EDI is not used to transfer funds among accounts. This interchange transfers business documents between partners, so your company will still need to use wire transfers to send or receive payment.

The Evolution And Importance Of EDI In Financial Transactions

Like much of our modern technology, EDI grew out of the need to develop greater logistics for military and freight control systems. As far back as 1948, development was underway for something like EDI to execute the Berlin Airdrop. These systems evolved to organize freight shipping logistics for American ports and highways as far back as the 1970s. Near the turn of the millennium, a new invention changed everything.

The arrival and rapid growth of the internet have driven an explosion of EDI in the last 30 years. The National Institute of Standards and Technology formalized and defined EDI standards in 1996. Since then, EDI utilization has grown steadily. In the 2010s, cloud-based computing made integrating and automating systems easier than before. Likewise, the COVID-19 pandemic forced many businesses to rethink their operations, leading some to bring their accounting systems into the digital age before they had planned.

More companies use EDI today than ever before. A 2023 report found that between 59% and 85% of businesses in the supply chain sector, in particular, use EDI. Likewise, nearly70% of the $6 trillion U.S. manufacturers sold last year were through EDI transactions. Additionally, the industry is expected to grow steadily in the coming years. Some estimates project EDI's market size will expand at a rate of 11.09% from 2024-2032.

How EDI Payments Work

The EDI system enables your company to send or receive EDI payments nationwide automatically. If you have used a debit card from your financial institution, you have used an electronic data exchange.

While they both involve electronic data exchange, EDI payments differ from debit cards in procedure, protocol, and purpose.

The Process Of Making An EDI Payment

EDI payments simplify your business's invoice and payment process. To better understand how EDI works, it's helpful to compare it with its predecessor in an example.

Imagine two SaaS businesses that specialize in cloud-based supply chain management.

Mike's Matrix Management uses old-school traditional accounting, which relies on physical business documents. So, Mike's customers must submit a purchase order through fax or email. Next, Mike's accounting department must receive the purchase order and manually put it into the system. After this, Mike's team can finally generate an invoice, which they must fax or email to the customer. Then, Mike has to wait for the customer to pay the invoice using a paper check or another manual payment form.

Compare this to the Sara's Supply Supervisors' EDI-friendly approach.

Sara's system is automated, ditching the physical forms and manual input necessary in Mike's outdated workflow. Customers can submit purchase orders directly to Sara's system without the need to submit a form via fax or email. The automated system receives the purchase order via Sara's online forms and generates an invoice, which automatically goes to the purchaser. The buyer can generate remittance advice documents (proof of payment) and use wire transfers to send electronic payments, reducing the time it takes to get paid.

Key Components Of EDI Payment Systems

There are a few key components to an EDI payment system, and it's essential to know how they work together. These include:

• EDI Software: A translator software converts the standard form financial data into a more readable format for your accounting department.
• Data Standards: Data standards set the specific format for transmitting financial data using EDI. There are a variety of industry-specific standards, but ANSI x12, EDIFACT, XML, and GS1 are among the most common.
• Security Protocols: Protocols ensure that your data is securely encrypted, transmitted, and decrypted by your trading partner's system.
• Mapping: Mapping provides a detailed diagram for your internal systems, ensuring EDI-received data goes to the right place in your accounting workflow.

Benefits Of EDI Payments

Employing EDI in your startup company's accounting procedure makes your business more efficient, benefitting your company in several ways.

A report from Boston Consulting Group found that cost management is a top priority for C-suite executives in 2024. Many organizations — both established and startups alike — share this sentiment and are making cost management a top priority.

EDI reduces your processing time and cuts manual data entry errors, lowering costs and boosting profits.

Faster Processing

A traditional accounting system has some natural, inefficient pain points that slow the workflow. EDI reduces your processing time. For instance, EDI invoicing automates parts of the procedure and cuts the need for manual human input, speeding up production.

In concrete terms, this means you're not watching the "To be processed" stack of invoices grow as your team awaits the arrival of a forgotten manual purchase order from a client. Instead, technology does it all for you. Likewise, your accounting flow is no longer at the mercy of the postal service or that finicky fax machine.

Faster processing times also mean you get paid sooner rather than later. Prompt customer payment lets you better allocate resources when and where you need them. On the other hand, if you're not using an EDI invoice, you could get caught in limbo, needing money you have yet to receive. It can be challenging to manage a budget with outstanding invoices. EDI, however, takes away that stress and helps speed up payments.

Finding the right approach to EDI and automation should be a key piece of your invoice management strategy.

Reduced Errors

Using EDI financial transactions in your business operations drastically reduces human errors, which cost both time and money. Most errors are a byproduct of manual data entry, so automating your accounting process helps reduce these costly mistakes.

The EDI software and standards you select also help reduce format errors and security issues. The standards ensure you and your clients see the same thing when you exchange financial data. Your security protocols keep the numbers secure in transit and reassemble them in accordance with the standards once they arrive.

This standardization and security would have been difficult to achieve with previous methods. Today, EDI software formats finances for you and your business partners and secures your data from cyber snoops, reducing errors and giving you peace of mind.

Lower Costs

There's a reason your cable company tries to get you to "Go Paperless" every time you sign in: It saves money. EDI payments reduce the need to manually prepare business documents, which can save your startup cash.

First, you'll save on costs associated with printing, paper, copiers, and the seemingly never-ending maintenance copiers require. Second, if your accounting team isn't bogged down in manual data entry, they are free to perform higher-level tasks and projects, making your company more efficient and profitable down the line.

With EDI technology that facilitates quick transfer of funds, your company saves money and reduces the costly delays you've come to expect from traditional accounting practices.

Leverage EDI Payments For Your Business Operations

If businesses move at the speed of technology, the companies that stay up-to-date with systems can stay a step ahead of the competition. To set that pace, incorporate EDI into your everyday business operations.

EDI facilitates faster processing, reduces errors, and lowers costs for business, eliminating all sorts of waste from human error, costly delays, or inefficient practices. From this perspective, the best and most efficient accounting system integrates EDI transactions into your startup company's automated accounting platform. Get started today with an automated accounting platform that works for you.

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