AP invoice automation insights by Medius

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Learn the Fundamentals of Invoice Matching

Find out the complete answer to the question, “What is invoice matching?” and discover the role AP automation solutions play in saving time and money while improving accuracy and productivity.

Invoice matching is one of the key activities in the accounts payable department. It is a task that can be complex, time sucking and resource heavy. But, when done right and leveraging modern automation tools, invoice matching can instead give the AP team time back by enabling touchless invoice processing via robust AP automation solutions.

What is Invoice Matching?

The definition of invoice matching is the process of comparing information on the invoice with supporting documents such as a purchase order, goods receipt, and contract. The invoice matching process aims to ensure accurate vendor payments, correct accounting of costs and compliance to purchasing contracts as well as to detect potential fraudulent invoices.

Invoice matching is used when a vendor invoice is preceded by a purchase order (PO) from the buying organization. This means the buyer has created a purchase requisition stating the goods or services needed, quantity, vendor and contracted price. Once the appropriate approvers within the organization have approved the purchase requisition, a purchase order is generated and sent to the vendor. Upon delivery of the goods or services, the buyer often needs to register a goods receipt in the ERP or procurement system.

Since the approval of the cost is gathered at the purchase requisition phase, the invoice does not need another round for approval as long as the invoice details match the purchase order and goods receipt.

What is a Deviation – When Data Doesn’t Match Up

A deviation (or invoice exception) appears when the details on the invoice do not match the supporting documents. There are two most common deviation types:

  • Quantity deviation: the number of items invoiced does not match the number on the purchase order and/or the goods receipt
  • Price deviation: the item price on the invoice does not match the item price stated on the purchase order

When a deviation is identified as part of the invoice matching process, an investigation is needed to understand if this is an acceptable deviation and the invoice can be pursued to payment or if the vendor needs to be contacted to correct the errors on the invoice.

Managing deviations is often one of the most time-consuming tasks in the AP department. In fact, Ardent Partners’ State of ePayables Report shows that 41 percent of organizations see exceptions as a top challenge for accounts payable. Unfortunately, the issue with deviations seems to be growing. The same report found that the average invoice exception rate among surveyed companies had increased by 26% in 2018.

Two, Three and Four-Way Matching

You might have heard of these different levels of invoice matching. These refer to the number of supporting documents an invoice is matched against.

  • 2-way matching verifies that invoice information matches the corresponding purchase order
  • 3-way matching verifies that invoice information matches both the purchase order and the goods receipt
  • 4-way matching adds another criterion to verify that the invoice details also match the acceptance or inspection document in the case this step is part of the purchasing process

Most companies use 3-way matching. It is essential to understand that to enable automated 3-way matching you need to ensure that master data, including vendor ledgers, purchase order details and goods receipts, can synchronize seamlessly between the ERP system and the AP automation solution.

Matching Invoices to Contracts

Purchase orders are often not used for indirect expenses; hence these invoices usually fall outside of the invoice matching process, requiring manual handling. If this type of indirect expense is regulated by a vendor contract with a payment plan, for example when using contractors, leasing office space or cleaning services, invoice matching can be done automatically in AP automation solutions. In this case, the invoice details are matched to the contract and payment plan instead of a purchase order.

It All Comes Down to Data Quality

Automated invoice matching is a real advantage for AP teams, saving tons of time and resources. When it works. It’s not just as easy as implementing AP automation solutions – you need to ensure there is a reliable connection between the AP automation solution and the ERP to ensure master data synchronization for total success.

We live in an ever-changing business world, and must ensure our data records carries the most recent and up-to-date information. As new vendors are onboarded, price lists are updated, and inventory lists changed the AP, finance and procurement teams need to keep updating data ledgers to enable the high levels of automated invoice matching required to stay efficient.

Improving Automated Invoice Matching Levels

Reaching high levels of automated invoice matching does not happen overnight or by only implementing a new system. Accounts payable need to apply a continuous improvements approach to automating their process. There are two main actions that AP teams can take on to improve automation.

First, continuously improving the data quality internally and with vendors. Here, you should leverage the data that sits within the AP automation solution to identify bottlenecks in the invoice matching process. Are invoices from a specific vendor more likely to get stuck in the process? If these are missing a PO number or information is entered in the wrong field, then a simple phone call to the vendor informing them of the problem can be a quick fix. If a certain type of invoice always results in price deviations it might be because the price list with procurement has not been updated.

Secondly, the AP team can configure the AP automation solution to allow a certain level of deviation to increase the number of invoices that are matched automatically and hence reduce manual reviews. Pre-configured tolerance levels are often used to accept common additional costs such as freight, administrative fees or currency exchange. You can also decide to allow a small price deviation for a certain vendor or type of invoice. Just allowing a deviation of 50 cents can make a big difference in the volume of invoice exceptions needing manual treatment.

The Goal: Touchless Invoice Processing

Automated invoice matching can enable fully touchless invoice processing. That means when all data on the invoice match with the supporting documents (and applied tolerance levels) the invoice can go directly from receipt and data capture to final posting in the ERP for payment without any human reviewing or touching it.

This might seem like a far-fetched dream for many, but it is possible. In fact, benchmarks show that companies using modern AP automation solutions in average reach 67% touchless rate with best-in-class companies hitting well above 90%. Imagine the time you could save if only 1 out of 10 invoices needed manual attention. Surely invoice matching is an operation that’s well worth automating.

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