Two-way matching and three-way matching are two types of invoice matching (also known as PO matching) used by finance departments to ensure proper oversight of a company’s transactions. So what exactly is invoice matching, and why is it so important to a 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.
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.
In this guide you’ll find the following:
- Terms associated with invoice matching
- Steps to complete a:
- Two-way match
- Three-way match
- Four-way match
- The benefits of matching
Key Terms to Know
There are three common types of matching in accounts payable automation, creating a two-way, three-way, or four-way match. These processes rely on certain tolerances that must be met and invoice holds when they aren’t.
Here are some key terms to help you understand the process:
- 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.
- Touchless Invoice Processing— The definition of a touchless process is that no manual intervention is required. Invoices are processed automatically without the need for human contact.
- Tolerance— A condition that must be met in order to avoid an invoice hold. This typically involves confirming the invoice amount matches the purchase order details.
- Invoice Hold— A hold on the payment that occurs if an invoice and its corresponding PO don’t match and/or items cannot be confirmed as received.
- Purchase Order— A document that confirms the purchase, sent from the purchaser to a vendor.
- Receipt and Packing Slip— These are documents received by the purchaser from the receiver to confirm delivery of the product.
- Quantity Deviation— 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.
- Price Deviation— When the price on the invoice does not match what is on the purchase order, this is considered a price deviation.
It is important to know these terms in order to grasp the concept of invoice matching and what is involved. Some systems have less requirements and tolerances (two-way), while others have more (4-way).
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.
Steps to Perform a Two-Way Match:
A two-way match is the simplest way to ensure that standard operating procedures are met. This process involves pairing an invoice with a purchase order using your core accounting system.
A two-way match process requires the following steps:
Step 1:
A vendor sends the invoice to the purchaser indicating that a payment is to be made on goods or services.
Step 2:
Create an invoice in the department’s database and match it to an existing PO, including quantity and price considerations.
Step 3:
If the tolerances of the invoice match the PO, the invoice is scheduled for payment. If there is a discrepancy, the process moves on to the next step.
Step 4:
The invoice is placed on an invoice hold. This means that no payment will be received by the vendor until the hold is resolved.
Step 5:
Once the hold is resolved, the invoice approval process is restarted or a manual approval is authorized. The invoice is then scheduled for payment and the transaction is considered complete.
Steps to Perform a Three-Way Match:
Performing a three-way match is a little more complicated. When you complete a three-way match, you pair a receipt with an invoice and a corresponding PO.
The benefit of adding this extra layer is to ensure that your company only pays for what they ordered and that they received it in full.
A three-way match is performed as follows:
Step 1:
When goods are received, the central receiving department retains the packing slip and enters the receipt information into a database.
Step 2:
Locate the PO in the purchasing module of the database to match the receipt.
Step 3:
Record the invoice as received by accounts payable in the database.
Step 4:
Match the invoice against the purchase order and delivery information.
Step 5:
If no tolerance discrepancies exist, the invoice is cleared for payment. If there is a discrepancy, the process moves on to the next step.
Step 6:
Place the invoice on hold if there are any tolerance discrepancies.
Step 7:
Resolve the invoice hold so that the payment can occur. When the invoice hold is resolved, the process starts over again unless a manual approval is received.
Steps to Perform a Four-Way Match
A four-way invoice match requires the most steps and documents before it can be approved and paid.
A four-way match is performed as follows:
Step 1:
When goods are received, the central receiving department saves the packing slip and enters the data into the system. They also inspect the items to ensure the quantity is correct. This produces an inspection slip, which must be matched with all other documents for the invoice to be approved.
Step 2:
Locate the purchase order in the database and match it to the receipt in the system.
Step 3:
Record the invoice as received by AP.
Step 4:
Match the invoice against the PO number, shipping slip, and inspection report.
Step 5:
If no tolerance discrepancies exist, the invoice is sent through for payment. If there is a discrepancy, the invoice gets kicked back until the proper paperwork is provided.
Step 6:
Place an invoice hold until tolerances are met.
Step 7:
Resolve the invoice hold—which may include manual approval. Process the payment.
Why Should You Use Invoice Matching?
Invoice matching is a standard system that businesses use to ensure all payments are verified against a purchase order and in the case of three-way or four-way matching, against a delivery receipt and inspection report too.
Implementing one of these processes has the following benefits:
- It saves money by ensuring you’re only paying for items or services requested and received.
- It helps prepare a company for routine audits.
- It organizes a company’s accounting records and prevents duplicate work.
- It promotes transparency and accountability while reducing errors and mispayments.
Cut Manual Invoice Processing Time With Touchless Invoice Processing
When you automate anything in business, there is a multitude of benefits to your process. 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.
Some key benefits that can add tangible value to your company today include:
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.
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 by automating the vendor invoice process.
Cash Flow
Automated coding support 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.
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.
Touchless invoice processes are accurate and scheduled. Your vendor invoice is paid the same way and time, for every term. Matching the original purchase order quickly means no late payments or fees as well.
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 touchless invoice matching include:
- Automate routing of a supplier invoice to the correct approvers.
- Find the lowest unit price on products through accurate forecasting.
- Enforce company rules, compliance, regulations, and security.
- Leverage an ERP investment by integrating accounting systems.
How Touchless Invoice Processing Works
Touchless 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:
- Received
- Scanned
- Converted to digital
- Routed
- Matched
- Approved or disapproved
- Processed
All without the single need for a human hand or piece of paper. Automating the entire system from end-to-end has taken some time.
In the past, an accounts payable clerk still had to receive and scan the invoice to jump-start the workflow. The software would then convert the image into data. 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
Most types of automation software integrate with common organizational ERP systems like Oracle, Microsoft, and SAP.
Optical Character Recognition
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 or OCR. It extracts and captures invoice data and sends it into the system for automatic matching against the PO. As discussed above, the matching process can then go 2, 3, or 4 different ways.
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.
For example, if a vendor emails you a brochure, purchase order, invoice, etc., scanning the document would only produce what’s called a raster image. This is nothing but a collection of dots and cannot be converted into any data.
Regular scanners only make documents viewable and not workable. OCR, on the other hand, uses artificial intelligence to decipher the image and convert it into something that can be used for processing. It individually reads and extracts the letters and numbers and puts them in the categories they belong to. This also enables a business to search, read, and edit all documents received in the original format.
While OCR plays a large role in automating your AP processes, investing time and money solely into this technology is missing the bigger picture. Companies using an automated invoice matching process with OCR should also consider RPA.
Robotic Process Automation
Robotic process automation (also referred to as RPA) 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.
A recent report found that by the year 2021, the RPA market will reach $2.9 billion. The popularity of this technology continues to grow in a wide range of industries and business sectors.
These robots use the entire platform to capture and analyze data much like a human would. To perform a desired task, they collect the necessary information, interpret it into useful tools, communicate with other parts of the system, and initiate the appropriate responses. They can do this all in a fraction of the time it takes for a human labor force.
In accounting, RPA is uniquely transformative. That’s because there are a ton of manual processes. While an employee would typically take anywhere from 3-10 minutes to receive, scan, and process an invoice, RPA (working in conjunction with OCR) can do it in seconds.
RPA can create critical changes in a company’s accounting process. From receiving the invoice to an automated approval workflow, here are 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 human labor, 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.
