Learn the fundamentals of invoice matching
- 12 Aug 2020
Invoice matching is one of the key activities in a company’s accounts payable department. It is a task that can be complex, time-consuming and resource heavy. But, when done right and leveraging modern automation tools, invoice matching can save your AP team time by enabling touchless invoice processing via robust AP automation solutions.
What is Invoice Matching?
Invoice matching is the process of comparing information on the invoice with supporting documents such as a purchase order, goods receipt, and contract. The invoice matching process aims to ensure accurate vendor payments and correct accounting of costs; it also enables compliance to purchasing contracts and easy detection of potentially fraudulent invoices.
Invoice matching is used when a vendor invoice is preceded by a purchase order (PO) from the buying organization. This means that the buyer has created a purchase requisition stating the goods or services needed, quantity, vendor and contracted price. Once the purchase requisition is approved, a purchase order is generated and sent to the vendor. Upon delivery of the goods or services, the buyer often needs to register a goods receipt in the ERP or procurement system.
Since approval of the cost is gained at the purchase requisition phase, the invoice does not need another round for approval as long as the invoice details match the purchase order and goods receipt.
What is a Deviation – When Data Doesn’t Match Up
A deviation (or invoice exception) occurs when the details on the invoice do not match the supporting documents. The two most common deviation types are:
- Quantity deviation: the number of items invoiced does not match the number on the purchase order and/or the goods receipt
- Price deviation: the item price on the invoice does not match the item price stated on the purchase order
When a deviation is identified as part of the invoice matching process, an investigation is needed to understand if this is an acceptable deviation and the invoice can be pursued to payment or if the vendor needs to be contacted to correct the errors on the invoice.
Managing deviations is often one of the most time-consuming tasks in the AP department. In fact, Ardent Partners’ State of ePayables 2019 Report shows that 62% of organizations see exceptions as a top challenge for accounts payable. Unfortunately, the issue with deviations is a sizable one. The same report found that the average invoice exception rate among surveyed companies was 22.6% in 2019.
Two, Three and Four-Way Matching
You might have heard of these different levels of invoice matching. These refer to the number of supporting documents against which an invoice is matched.
- 2-way matching verifies that invoice information matches the corresponding purchase order
- 3-way matching verifies that invoice information matches both the purchase order and the goods receipt
- 4-way matching adds another criterion to verify that the invoice details also match the acceptance or inspection document in the case this step is part of the purchasing process
Most companies use 3-way invoice matching. To enable automated 3-way matching, you need to ensure that master data, including vendor ledgers, purchase order details and goods receipts, can synchronize seamlessly between the ERP system and the AP automation solution.
Matching Invoices to Contracts
Purchase orders are often not used for indirect expenses; as a result, these invoices usually fall outside of the invoice matching process, requiring manual handling. If this type of indirect expense is regulated by a vendor contract with a payment plan - such as when using contractors, leasing office space or employing cleaning services - invoice matching can be done automatically in AP automation solutions. In this case, the invoice details are matched to the contract and payment plan instead of to a purchase order.
It All Comes Down to Data Quality
Automated invoice matching provides a real advantage for AP teams, saving a lot of time and resources - when it works. It’s not as easy as simply implementing AP automation solutions; you need to ensure there is a reliable connection between your AP automation solution and the ERP(s) to ensure master data synchronization for total success.
We live in an ever-changing business world, and must ensure our data records include the most recent and up-to-date information. As new vendors are onboarded, price lists are updated and inventory lists changed, your AP, finance and procurement teams need to continually update your data ledgers to enable the high levels of automated invoice matching required to stay efficient.
Improving Automated Invoice Matching Levels
Reaching high levels of automated invoice matching does not happen overnight or by only implementing a new system. Your accounts payable department needs to apply a continuous improvement approach to automating its process. There are two main actions that AP teams can take on to improve automation.
First, continuously improving the data quality internally and with vendors. Here, you should leverage the data that sits within the AP automation solution to identify bottlenecks in the invoice matching process. Are invoices from a specific vendor more likely to get stuck in the process? If these are missing a PO number or information is entered in the wrong field, a simple phone call to the vendor informing them of the problem can be a quick fix. If a certain type of invoice always results in price deviations, it might be because the price list has not been updated with procurement.
Secondly, the AP team can configure the AP automation solution to allow a certain level of deviation to increase the number of invoices that are matched automatically and hence reduce manual reviews. Pre-configured tolerance levels are often used to accept common additional costs such as freight, administrative fees or currency exchange. You can also decide to allow a small price deviation for a certain vendor or type of invoice. Allowing a deviation of just 50 cents can make a big difference in the volume of invoice exceptions needing manual treatment.
The Goal: Touchless Invoice Processing
Automated invoice matching can enable fully touchless invoice processing. When all data on the invoice matches supporting documents (and applied tolerance levels), the invoice can go directly from receipt and data capture to final posting in the ERP for payment without anyone reviewing or touching it.
This might seem like an unlikely dream for many, but it is possible. In fact, benchmarks show that companies using modern AP automation solutions reach a 67% touchless rate on average, with best-in-class companies achieving well above 90%. Imagine the time you could save if only one out of 10 invoices needed manual attention. Surely invoice matching is an operation that’s well worth automating.
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