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Your company made a purchase, you sent the purchase order, followed all the procedures, and received the goods along with the invoice from the supplier side. Would you say that the job is done and the only thing left is to carry out the payment?
Well, not so fast.
Before rushing to make the due payment, you first need to verify if the information you are reading on the invoice is correct.
But how?
Something called 2-way matching can help you with that question.
What’s Invoice Matching?
Before diving into the specifics of 2-way matching let’s remember that when we speak about matching in finances, we are talking about the action of checking if the information on the invoice matches the details written on the purchase order.
What’s 2-Way Matching?
Two-way matching is a process used in accounts payable to ensure that you’re only paying for what you actually ordered and received.
Okay, but why it’s called that?
The term comes from the comparison between two key documents: the purchase order (PO) and the supplier's invoice.
And what about the purpose?
Well, it’s pretty simple if the items, quantities, and prices listed on the invoice don’t align with what was agreed upon in the purchase order, the invoice needs to be reviewed.
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2-Way vs 3-Way Matching
Yes, there’s more than one method for performing invoice matching, and one of the most common is 3-way matching. Here’s how it differs from 2-way matching.
- Two-way: This compares the purchase order and the invoice. It’s simpler and faster, but it doesn’t account for discrepancies in received goods.
- Three-way: This involves matching the purchase order, the invoice, and the receiving report. It’s ideal if you want to gain a deeper review but it can be more time-consuming.
How 2-Way Matching Works?
Invoice received
Regardless of your internal processes, any matching mechanism will start when your company receives an invoice from the supplier, detailing the items purchased, the quantities, and of course, the price.
PO comparison
Okay, you got the invoice, what’s next? The AP team compares the invoice against the original purchase order. Key elements to match include item descriptions, unit prices, and quantities.
Approval or…not.
If everything matches, the invoice is approved for payment. If there are discrepancies, the invoice is reported, and further investigation is required before any payment is made.
Reasons to Choose 2-Way Matching
Yes, there’s nothing special about matching your purchase order with the invoices you receive, but there are certain special benefits that you can enjoy if you choose to stick with a 2-way matching process.
Prevents overpayments
This is probably the biggest advantage you’ll find if you have confidence in the information written in the invoice and know that everything is aligned with what you first ordered, then you can avoid erroneous payments to your suppliers.
Reduces errors
Especially true for all those AP manual processes, having a moment to stop and check that things are as expected, saves you from the pain of dealing with a mistake later.
Better approval process
While it may seem like an extra step, two-way matching can speed up the invoice approval process. The reason? It provides a clear, efficient way to validate invoices.
Fraud protection
That’s right, following a quick verification process, like the 2-way matching gives you that extra layer of protection against accounts payable fraud.
Should you Automate the Process?
Short answer: Yes.
But let’s try to give a better explanation
We are well aware that we are constantly talking about the wonders automation can do for your business, but really, everything we say it’s with complete honesty. Working with software for your matching processes means that you can be more quick and efficient as it scans and matches invoices to purchase orders, drastically cutting down processing time.
Worried about human mistakes?
Well, automation also reduces errors, as it reduces the need for manual input, resulting in a more accurate matching process. Additionally, automated systems provide a clear audit trail, simplifying financial audits and demonstrating compliance with internal controls.
How to Choose between 2-Way and 3-Way Matching?
We have previously reviewed the differences between 2-way and 3-way matching, but how can you be sure that you are choosing the right method for your company?
To discover that, you first need to know that in most cases, a 2-way matching process is ideal for recurring purchases, that’s it items that constantly are acquiring, usually from the same suppliers so the chances of a mistake in the invoice are pretty slim. On the other hand, you should choose a 3-way matching mechanism if you are making a large purchase and need to be absolutely sure that the information in all the key documents is the same.
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Best Practices for 2-Way Matching
Standardize
A simple but quite practical tip is to ensure that purchase orders and invoices follow a consistent format. This makes matching easier and more accurate.
Communicate with suppliers
Where do the invoices come from? Suppliers, right? So it makes sense to let your suppliers know that you use two-way matching and explain your expectations for invoices. Doing that will help you to reduce discrepancies and speed up the matching process.
Regularly Review
As your business evolves, your matching process might need to be updated. Schedule regular reviews so your system remains effective.
Use technology
Just go a few paragraphs before to convince yourself about this one. The time and cost savings can be significant, regardless of your industry or company size.
Track metrics
Yep, the relevance of KPIs shouldn't be underestimated Monitor metrics such as the number of matched invoices, discrepancies found, and processing times. Use these factors s to continuously improve your AP process.
Invoice Matching Terms
- Purchase Order (PO): This is a document you create and send to your supplier, outlining the products or services you need, the quantities, and the agreed prices. It’s the starting point for matching invoices later on.
- Invoice: This is a payment request from your supplier for the goods or services they provided. It includes important details like item descriptions, quantities, prices, and the payment terms you agreed on.
- Goods Received Note (GRN): When you receive your order, this document confirms everything arrived as expected. It’s used to check that what you got matches what you ordered.
- Invoice hold: If something doesn’t add up between the invoice and other documents, like the PO or GRN, the invoice gets put on hold. It won’t be paid until someone investigates and resolves the issue.
- Tolerance: This is the acceptable range of differences between documents, like small price or quantity discrepancies. If deviations fall within this range, the invoice can be approved without extra review.
- Touchless processing: This is an automated system that handles invoices from start to finish without anyone needing to step in. It takes care of everything from receiving and validating the invoice to approving it.
- Price deviation: This happens when the price on the invoice doesn’t match the price on the PO or other documents. It usually leads to the invoice being put on hold until the discrepancy is checked out.
- Quantity deviation: If the number of items listed on the invoice doesn’t match what was ordered or received, it’s a quantity mismatch. This often triggers an invoice hold for further investigation.
Key Takeaways
- What Is Two-Way Matching?: Two-way matching is a process in accounts payable that compares the purchase order with the vendor's invoice to ensure details like item descriptions, quantities, and prices align before payment is approved.
- How It Works: The AP team receives an invoice and checks it against the original purchase order. If everything matches, the payment is approved. Any discrepancies are flagged for further review, preventing overpayments and errors.
- Why It’s Important: Two-way matching helps prevent overpayments, reduce errors, improve financial accuracy, speed up invoice approvals, and enhance fraud prevention. It’s a key tool for maintaining control over company spending.
- Two-Way vs. Three-Way Matching: While two-way matching compares invoices to purchase orders, three-way matching adds an extra step by including the receiving report. Choose based on your company’s needs, balancing efficiency with the level of verification required.
- Common Issues Solved: Two-way matching helps address problems like duplicate invoices, pricing discrepancies, incorrect quantities, and unapproved purchases, saving time and money.
- Benefits of Automation: Automating two-way matching speeds up the process, reduces human error, increases productivity, and provides a clear audit trail. It’s a worthwhile investment for larger organizations.
- Steps to Implement: Start by assessing your current AP process, choosing suitable software if needed, training your team, setting up matching criteria, and continuously monitoring and adjusting the system for improvement.
Best Practices: Standardize documentation, communicate expectations with suppliers, regularly review procedures, use technology for efficiency, and track performance metrics to optimize your two-way matching process.
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