Did you know that as much as 0.1% of the invoices you receive and pay are fraudulent?
Doesn’t sound like a lot, sure. However, for an organization processing 1,000 invoices monthly, that would stack up to 12 false invoices paid out a year.
That gets a whole lot worse when you add in inaccurate invoices, which are often estimated to be around 40% of the total number of bills you receive.
Ouch.
One effective way to reduce paying both fraudulent and inaccurate invoices while tightening up your financial accuracy and strengthening relationships with vendors is to implement an invoice-matching process.
There are a few ways to do invoice matching — three, to be exact — so in this article, we’ll shed some light on the different approaches.
We’ll explain what invoice matching is and why businesses should adopt it, explain the difference between the three different kinds of invoice matching, and provide best practices for a more efficient matching process.
What is invoice matching?
Invoice matching is an accounts payable process that seeks to match an invoice received from a vendor against one or more internal business documents, most commonly a purchase order.
By doing so, the AP team verifies the invoice's validity and accuracy, ensuring it comes from a real vendor from whom actual goods or services were ordered (and perhaps received, depending on your precise policy).
This simplest version of this process (known as 2-way matching) involves:
- Verifying key details on the invoice (such as the vendor name and address and that an order number is present)
- Identifying the purchase order number on the invoice
- Finding the relevant matching purchase order in your PO system
- Confirming that the items billed for in the invoice match what was requested per the PO
- Rectifying any discrepancies with the appropriate parties (such as the procurement team or the vendor itself)
But there are also other matching processes that require the presence of additional documents. It can, then, be a time-consuming affair.
Why should businesses implement invoice matching?
Any new business process, including invoice matching, needs to be justified by its purported benefits.
If not, you’re simply adding additional work to the mix, slowing down your accounts payable employees’ ability to work efficiently and effectively.
This can have real downstream consequences, such as late payments or the inability to meet early payment discount dates, so it's only fair that we address the question:
Why bother with invoice matching in the first place?
There are four key benefits that an invoice matching process provides to businesses.
1. Detect fraud early
Even a simple 2-way matching process (invoice and purchase order) can help you detect fraud early.
It's very unlikely that a fraudulent vendor has managed to get into your PO system and generate a purchase order that matches their false invoice.
2. Improve financial accuracy
Invoice matching helps improve your organization’s financial accuracy by preventing over or underpayments, ensuring that what you ordered is what is delivered and, of course, what you end up paying for.
3. Strengthen vendor relationships
A good invoice matching policy helps improve relationships with your suppliers by preventing unnecessary questions.
For instance, in finding a discrepancy between the purchase order and the invoice, the next step should be contact the person who ordered the goods in the first place.
They’ll be able to confirm whether a change to the order was made after the PO was generated (people often forget to go back in and update the PO).
Additionally, invoice matching provides an opportunity to hold vendors accountable to the terms set out in your supplier agreement, ensuring they bill you according to the rates you negotiated prior to starting business with them.
4. Enhance regulatory compliance
Finally, invoice matching improves your ability to comply with financial regulations by:
- Creating a detailed audit trail
- Ensuring that invoices are paid within expected timeframes
- Maintaining the integrity of financial data
Three types of invoice matching
When it comes to actually implementing an invoice matching process, you’ve got three options: 2-way, 3-way, and 4-way matching.
Each adds a new layer of security (an additional document to check against) and an extra step in the workflow. Therefore, the idea is to choose the process that best fits your preferred balance between security and agility.
2-way matching
Two-way matching requires that the invoice has a matching purchase order number and that the details in that purchase order match what was billed for.
In some cases, tolerances may be allowed.
For example, your accounts payable policy might allow for a ±5% tolerance, meaning the invoiced amount can be as much as 5% higher or lower than the PO and can still be approved for payment.
3-way matching
Three-way matching applies the same PO match as 2-way matching, but also requires that the invoice be matched against a goods received note.
This goods receipt outlines exactly what was received when the goods were delivered. This can help to resolve discrepancies, such as when you ordered 10 boxes of paper, but the vendor bills you for 11.
With the goods receipt note, you can prove that you actually only received 10 and not that they sent and billed for 11 (in which case, they’d probably request that you return one).
4-way matching
Four-way matching is the most robust invoice matching process.
It adds another layer to 3-way matching—a quality inspection report.
While the goods receipt details what was delivered, the quality inspection report confirms that the goods received were of the quality expected and outlined in your supplier agreement and that none arrived damaged or broken.
It also provides an opportunity for you to request an adjustment to the invoice in the case that any goods were delivered that were below quality standards.
Avoid these common invoice matching challenges
Invoice matching is not without its share of challenges.
Let’s explore.
Data issues
One of the most common challenges to the invoice matching process is issues related to data accuracy and reliability.
Manual data entry often comes with a degree of error. After all, we’re only human Discrepancies can often pop up between the invoice you receive and the details on the purchase order.
Of course, the invoice matching process is designed specifically to catch this, but these errors do slow the process down and prevent it from being what would otherwise be an exercise in confirmation.
Time-consuming processes
Invoice matching processes, especially the more intensive processes like 4-way matching, can be time-consuming.
Every vendor’s invoice looks slightly different, meaning even invoice variability plays a bit in slowing down workflows. That’s because you first need to figure out where to look for key information, like the PO number.
Complex pricing structures and payment terms add to the mix.
Then, you have to surface documents like the goods receipt note or quality inspection, which aren’t always necessarily where they should be.
This is why it's critical that you choose an invoice matching process that fits your desired balance between efficiency and security.
Partial deliveries
Partial deliveries exist when a purchase order is fulfilled in multiple deliveries.
For example, a large order might be delivered by the vendor from different depots, with half of the order delivered one day and the other half a few days later.
This can cause issues with 3-way and 4-way matching, as you’ll have more than one goods receipt to check off against.
Best practices for efficient and accurate invoice matching
Before we sign off and let you get to work on implementing an invoice matching process, let’s quickly cover some important best practices that will help your team work faster and with more accuracy.
Maintain clear communication with vendors
Let your suppliers know whenever you catch an issue, but also make sure that this information gets back to the vendor manager on the procurement team so they can cover such issues in their quarterly business reviews.
Standardize data entry
Use templates as well as standard terminology and coding or abbreviations when entering data. Ensure the same data is entered for each and every invoice (invoice number, due date, PO number, etc.)
Regularly review and update internal controls and procedures
Maintain clear SOPs (standard operating procedures) that are accessible to all AP team members. Implement a regular (e.g., quarterly) review of all policy documents to ensure they reflect actual current processes.
Conduct process audits regularly
AP auditing should be carried out regularly to ensure processes are being followed. Consider implementing a quarterly audit to double-check that invoices are being matched as per your guidelines.
Leverage accounts payable automation software
Take the manual work out of invoice matching by using AP automation software to match invoices automatically and to notify you immediately when discrepancies are found.
How to automate invoice matching
Invoice matching is an important accounts payable process. It helps you detect and prevent fraud, improve supplier relationships, and enhance spend management.
It can, however, be a cumbersome and time-consuming process, especially if you choose a more intense version such as 3-way matching.
For many AP teams, choosing the right invoice matching process is about choosing the ideal balance between efficiency and security.
But there’s a third option:
By using an AP automation solution like BILL, you can automate 2-way and 3-way invoice matching, automatically checking off the bills you received against your purchase orders and goods receipts.
With automated invoice matching, you can take advantage of the financial security benefits this process delivers while eliminating the tiring and repetitive manual work it entails.
