Every month, accounting departments worldwide have to deal with supplier invoices. While these are piling up, one of the greatest challenges in the accounting process is to verify them. It is important, that all invoices received by the company are checked for accuracy before payment is permitted.
To verify the invoice, all details of the purchase (mentioned in the invoice) need to be matched with other documents (e.g., purchase order). This verification process is called invoice matching and can turn into a very tedious task when done manually.
But before we talk about how this manual process can be improved, we discuss what 2-way matching is, how it works, and why it is important in accounts payable.
What is two-way matching?
Two-way matching, also known as purchase order matching, is a process that checks for discrepancies between the invoice and the purchase order (PO), comparing specific details on both documents within the invoice processing function. Only once this step is completed is the invoice approved, paid, or denied.
If the two documents don’t align, the invoice is held without being paid until mistakes are addressed or corrected.
Generally, companies use two-way matching to reduce time spent on invoice verification, avoid the risk of human error, and ensure that invoice amounts are correct.
Now that we know what two-way matching is, we should have a look at how the process of invoice matching works.
How two-way invoice matching works
There are several steps an accountant has to go through in the invoice matching process. These steps look as followed:
Step 1: A company receives an invoice from a vendor for the goods/services ordered via the purchase order.
Step 2: The invoice is manually stored in the database of the receiving company and matched to the corresponding PO.
Step 3: How this step is executed is determined by the so-called tolerance. The tolerance values are set beforehand and decide the action to take when documents match (or not). Two situations can occur:
- Situation 1: If the tolerance is met, the invoice is approved and paid.
- Situation 2: If the tolerance isn’t met and discrepancies between the invoice and PO occur, the invoice is placed on hold. In this case, the invoice is not approved and paid. The accounts payable manager has to manually resolve the issue.
Step 4: Either the invoice is approved manually or is sent back to the invoice matching process for approval. Once the invoice is approved, the payment is scheduled and the transaction between the company and the vendor completed.
If you feel like this process doesn’t offer your company enough security against invoice fraud, you could also opt for different types of invoice matching. We shortly describe them in the following section.
Common types of invoice matching
While two-way matching is the simplest and most straightforward form of invoice matching, it isn’t the only type of matching. Some companies choose the use of three-way or four-way invoice matching, which increases the level of complexity, but also the level of security and accuracy drastically.
Let’s have a quick look at how these methods work.
For the most part, two-way and three-way matching follow the same process. The main difference is that three-way matching compares an invoice, a purchase order, and a receipt of the invoice. Only when all three documents match, the invoice is approved and paid.
With four-way matching, the complexity and therefore the security of the process really increases. First, the receiving department stores the data of the packing slip that comes with a purchase and ensures that all items are inspected for the correct quantities. Then an inspection slip is issued by the department.
As the next step, the purchase order, packing slip, inspection slip, and invoice are matched against each other. Only if all information aligns, is the invoice approved and paid.
Sounds quite complex and time-consuming. So, why would an accounting department go through these processes?
Why is 2-way matching important in accounts payable (AP)?
The answer is quite simple: 2-way matching is an essential process ensuring that discrepancies, mistakes, or even dishonesty by the vendor don’t result in incorrect payments.
Let’s look at a common example within the accounts payable process. A business sends a purchase order for a set of new office furniture for the price of $10,000. The vendor receives, reviews, and accepts the purchase order and then delivers the requested furniture.
After you manually entered all information into your database and PO and invoice are matched against each other, you discover that, either by mistake or deliberately, the vendor issued a receipt for $12,000. This is where two-way matching helps you discover mistakes or prevent invoice fraud, ensuring that the invoice isn’t paid immediately. Thanks to this process, you saved yourself $2,000!
While this is great news of course, there are still many things that can go wrong if the invoice matching process is done manually. Inaccurate data, lengthy approval, and payment flows, lack of concentration of employees, and fraudulent documents make manual two-way matching a fragile process.
But it doesn’t have to be like that, as the invoice matching process can be automated with software. Let’s have a look at a possible solution next.
Automate invoice matching with software by Klippa
Above, we mentioned a few things that could go wrong in a manual invoice-matching process. With OCR-based software for AP processing such as Klippa SpendControl, these challenges are history. SpendControl can help you automate two-way matching from the very first step (data entry) of invoice matching.
Data entry from POs, invoices and other documents is a crucial step in the matching process, as the entire process is based on this information. As our software is able to automatically enter data into your accounting system, human errors resulting from manual data entry are prevented.
In general, Klippa’s software is able to read and extract relevant data from invoices, purchase orders, and other documents with the help of OCR. This means that the variety of documents involved in the matching process can reliably be captured and information stored in your database.
Since all documents are now converted from physical to digital format, the software is able to compare and match them automatically. This is possible because of the conditions specified prior to the matching process. These conditions, determined by you, tell the software which information to pay attention to on a document. This is how two-way matching looks like when it’s automated.
Klippa SpendControl can support your accounting team with even more features. Your accounting team is able to set custom rules within the approval management that determine what happens when certain conditions are met or not met by documents. This results in automated workflows where documents are instantly moved to relevant stakeholders within your accounts payable process, saving time and effort.
Additionally, our software can automatically recognize fraudulent and duplicate financial documents helping you to always pay the right amounts.
Do you want to know more about Klippa and how SpendControl can automate your invoice-matching process? Please book a free demo below or contact one of our experts!