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What Is Invoice Matching? 2-Way, 3-Way and 4-Way Matching Explained

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As a business, getting paid is only half the battle. After an invoice is settled, it must be matched with your accounting record. This can be a bit tricky. Especially if your process involves a lot of extra paperwork, like shipping receipts and inspection reports.

Fear not! Automated invoice processing is here to save the day.  

Matching (also known as PO matching) is used by finance departments to ensure proper oversight of a company’s transactions. Without it, the IRS will consider your papertrail inefficient and may levy fines. It’s that important.

So what exactly is invoice matching, and why is it so critical to running a successful business? 

What is Invoice Matching?

Invoice matching is an automated process used by AP professionals to ensure that there are no discrepancies between a purchase order (PO) and an invoice. 

The automated invoice process includes matching information like:

  • Supplier name
  • Vendor code
  • Quantity
  • Purchase amount
  • Purchase order number
  • Address and phone number
  • Line items and product descriptions
  • Custom fields

There are three tiers of invoice matching: 2-way matching, 3-way matching, and 4-way matching. Beyond the purchase order, other supporting documents can be used during this process such as a supplier contract, goods receipt, and delivery confirmation. 

Different Types of Invoice Matching

There are three common types of matching in accounts payable automation, creating a two-way, three-way, or four-way match.  

Two-Way Invoice Match

This occurs when an invoice from a third-party is matched with a purchase order, tolerances are met, and the invoice is entered into a database.

Three-Way Invoice Match

This happens when an invoice is matched with a purchase order, the receipt of goods, and a supplier invoice. All three components must match within agreed-upon tolerance levels. It is then entered into the AP system.

Four-Way Invoice Match

Much like three-way matching, this process needs a purchase order, receipt of goods, and supplier invoice. To make it a four-way, it also requires inspection information. 

This typically has to do with quantity tolerance. Once all 4 components match, the invoice is entered into the AP database.

Tolerances and Holds

These processes rely on certain tolerances that must be met and invoice holds when they aren’t. A tolerance typically involves confirming the invoice amount matches the purchase order details.

An invoice hold occurs if an invoice and its corresponding PO don’t match and/or items cannot be confirmed as received.

When details on the invoice do not match the supporting document (purchase order, receipt of goods, supplier invoice) in terms of amount, this is considered a quantity deviation. When the price on the invoice does not match what is on the purchase order, this is considered a price deviation.

It all depends upon the software you choose and company regulations in place. Some approval processes are more lenient. No matter the amount of documents required, all invoices must meet matching tolerances. If not, a hold is placed and payment will not be made until it is resolved or manually released.

How Can Invoice Matching Benefit my Business?

Automated invoice process brings many advantages to a manual system, including:

Cut Manual Invoice Processing Time 

Removing human intervention in an accounts payable system means eliminating the hassle of paper invoices and time-consuming manual tasks. There’s also tiresome and lengthy inquiries when an invoice doesn’t match a corresponding purchase order or contract.

Pricing and Cost Analysis

AP automation means more accuracy when it comes to matching invoices. That’s because it’s easier to see cost allocation for each line item. Since you can clearly see which ones add the most value, this leads to better decisions in supplier selection. It facilitates cost analysis and positive pricing trends become more apparent. 

Supplier Relationships

Automating the accounts payable process helps to vet and add suppliers quickly. It supports building new vendor relationships and keeping track of existing ones. This is the advantage of the procurement and AP department working hand-in-hand with technology. 

Cash Flow

Automated coding and shortened lead times mean more accurate cash flow forecasting. This has a positive effect on monthly and annual closing procedures and keeps people organized.

Early Payment Discounts

Another key benefit of automating the invoice process is the ability to shorten the payment terms and take advantage of early payment discounts. This leads to a price reduction and improves revenue. 

Remote Work

AP automation software and invoice matching help to support a borderless economy with a consistent approach to touchless processes. With access to critical financial data in real-time, teams can work remotely on the same projects with little interruption. This helps a business reach beyond local resources, save money, and expedite production.

Accuracy and Security

Organizations with a high rate of automation will reduce the rate of errors in manual processes. Automated scanning also helps to identify any fraudulent invoices or other types of security disruptions. Removing these issues creates time for higher-value activities rather than duplicating errors and correcting mistakes.

Other types of benefits to automated invoice matching include:

  • Automate routing of a supplier invoice to the correct approvers.
  • Enforce company rules, compliance, regulations, and security.
  • Leverage an ERP investment by integrating accounting systems.

How Does Invoice Matching Work?

Automated invoice processing is a disruptive technology that has forever changed how an accounts payable department operates. Supplier invoices are never touched by a human and the process relies on intelligent machine learning to streamline workflows. 

Documents are: 

  1. Received
  2. Scanned
  3. Converted to digital
  4. Routed
  5. Matched
  6. Approved or disapproved
  7. Processed

All without the single need for a human hand or piece of paper. Most types of automation software integrate with common organizational ERP systems like Oracle, Microsoft, and SAP.

Optical Character Recognition (OCR)

Over the years, the accounts payable process has evolved from being a cost center to a profit center. This is largely due to the speed of a technology known as optical character recognition.

OCR works to convert electronic invoices from PDF and image files to editable and searchable text. It automatically decodes and pulls out data that helps to immediately reduce manual workload and increase process efficiency. 

Robotic Process Automation (RPA)

Robotic process automation works in conjunction with OCR as a virtual assistant of sorts. It enables enterprises to customize software that imitates the actions of an accounting team. 

These robots collect the necessary information, interpret it into useful tools, communicate with other parts of the system, and initiate the appropriate responses. 

In accounting, RPA is uniquely transformative. While an employee would typically take anywhere from 3-10 minutes to receive, scan, and process an invoice, RPA can do it in seconds. Some additional benefits to robotic process automation:

  • Improve the speed of supplier acquisition, uploads, dispute resolutions, and more.
  • Confirm the order is cross-referenced with a product catalog to ensure quantity, weight, and codes are correct.
  • Quickly retrieve any document based on platform events and content.
  • Create a ship note and send it to the buyer’s system. This helps with operations in the warehouse and frees up employees.
  • Upload and manage various product catalogs with little instruction.
  • Approvers can monitor all invoices the company has received. The robots will collect every invoice and match them against document logs.

Final Thoughts

Finance began as a tedious business process but technology has pushed for innovation in this space. Integrating invoice matching and touchless processing into an ERP system further leverages your investment. For once, accounting departments can become free thinkers, less burdened with manual tasks, and open to jobs that create more profit and value for an organization.

Automation is not to be feared. Used in conjunction with humans, it’s a vehicle that enables employees to reach greater potential and leads to a higher rate of job satisfaction. It saves the boring work for robots while a business focuses on growth.

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