How to Select the Best Invoice Matching Software

AP team: Spending too much time in matching invoices with purchase orders?

Then implementing invoice matching software is the right strategy for you. 

By automating the invoice matching process, you can reduce the time spent on processing anywhere from 30% to 50%.

What that could mean to you and your team?

No more working over the weekends during month-end close.

Your team has more time to work on other higher priority items, for example paying vendors sooner and getting those early payment discounts.

You probably don’t need to hire an extra headcount to just stay above water.

You are avoiding late payment fees because the invoices are paid on time. 

A touchless invoice process that enables faster invoice processing. 

In this article, we are going to walk you through the process of selecting the best purchasing software for your organization so that your team is free from a time-consuming invoice matching process.

Here is what we are going to cover:

  1. How the invoice matching process works and how it speeds up the payable process.
  2. What to expect from Invoice matching software or invoice matching automation
  3. The key features you need for invoice matching automation. 

But before you get started, click on the button below and download our Invoice matching software checklist

Invoice_Matching_Software

Then follow along to identify the key features that you would need for invoice matching software. 

Invoicing matching defined

Invoice matching is defined as the process of matching supplier invoices with the related documents so that you can verify whether it is a valid invoice or not.

 

The related documents are generally listed on the invoice document so that the Accounts payables (AP) team can easily match them with the relevant documents. 

 

Invoice matching Triangle

 

The related documents generally include the following 

  1. Purchase order 
  2. Receipt

A purchase order is an order you have created and sent to the vendor.

A purchase order looks like this:

Standard-Purchase-order-Example

 

The vendor then invoicing against that purchase order.

Receipt (a.k.a good receipt note) is the proof that the product has been delivered and accepted. 

A receipt document is the proof of delivery and one can also include a packaging slip that came along with the package. 

Depending upon the type of purchase, the matching can be defined in two categories – 2-way matching and 3-way matching.

What is two-way Invoice matching?

As the name suggests a 2-way matching process includes matching two related documents. 

The two related documents are 

  1. Purchase order
  2. Invoice

PO and Invoice matching

 

When is this used?

A 2-way matching process is used for non-tangible item purchases. For example, professional services.

When you purchase a service, there is no tangible product that can be received.

Hence there is no receipt created.

Since there is no receipt, you can only match two relevant documents (Purchase order and Invoice). 

Here is how the process works:

  1. A purchase order is issued to the vendor after the purchase request is approved.
  2. The vendor generally acknowledges the purchase order confirming whether they can deliver the product or service as per the buyer’s requirement.
  3. The vendor performs the service and issues an invoice to the customer. 
  4. The customer then matches the purchase order and invoice and then sends the invoice for payment. 

What is matched:

In a 2-way match, you are verifying the following information 

  1. Whether the price mentioned on the invoice matches the amount on the PO. for example. You raised a PO for window cleaning services for $5,000. Then by matching you are confirming that the invoice is indeed for $5000.
  1. Whether the quantity matches what you have on the purchase order. 

For example, you have requested 5 hours of consulting services at $250/hour. Now by matching the invoice with the PO, you can verify whether the invoice is indeed for 5 hours.

What is a three-way match?

In a 3-way matching process, you match three associated documents to confirm if the invoice is ready for payment or not. The three documents are:

  1. Purchase order
  2. Receipt
  3. Invoice

3-way invoice matching process

When is this used:

A 3-way match process is used in the case of tangible products. For example, you are purchasing a new laptop. 

Here is how the 3-way process works:

Here is how the 3-way invoice matching works:

  1. A purchase order is issued to the vendor
  2. Vendor ships the product.
  3. The product is delivered and the buyer creates the receipt in the system a.k.a GRN (Goods Receipt Note)
  4. When the vendor sends the invoice, the invoice is uploaded and matched against the PO and the receipt.
  5. If all three documents are matched perfectly, the invoice is sent for payment and paid per agreed payment terms. 

What is matched:

In a 3-way match process, the following items are matched 

Quantity: 

When a vendor sends the invoice, it mentions the quantity they are invoicing for. By comparing the unit quantity across purchase order, receipt and invoice, you are confirming the following 

  1. Did we receive the product that the vendor is invoicing for?
  2. Did they under or over the ship the product

Unit price:

With the unit price, you are matching the unit price on the PO and invoice, so that you can answer the following question

Are we paying what we agreed to pay on the PO?

 

Benefits of AP Automation with Invoice Matching Software

Having looked at the different types of invoice matching scenarios, let’s cover the top 3 benefits of automating the invoice matching process. 

Understanding the benefits would help you in building the automation business case. 

You can also use these as key KPIs to track the impact of invoice process automation. Here are the top 3 benefits:

Benefits of Invoice Matching

1. Productivity improvement of the payable department

The obvious benefit is improvement in AP team productivity, here are some additional benefits: 

  1. The AP team spends less time creating and matching invoices to purchase orders and receipts. 
  2. You eliminate the need for approving invoices that are linked to approved purchase orders.
  3. There are fewer data entry errors because the system automatically populates the important data from the purchase order.

So how to measure the impact of automating the invoice matching software on productivity?

On average, an invoice costs $15 (Accounts Payable benchmark) to process. 

Let’s say you process 200 invoices per month. That is a monthly cost of $3,000 ($15*200). 

Let’s say you on average you can this cost by 30% due to automation.

That is approx. $900/month in cost savings. 

2. Better visibility and compliance

Invoice matching increases productivity and increases compliance.

By matching the document electronically, you keep an online record of how the document was matched, and issues were resolved (if any).

During the audit season, instead of searching for your emails and providing evidence of control. You can just point the auditors to the invoice matching software. 

Online audit information, provides relevant financial control information to the auditors.

How to quantify results?

Sleeping without worry about cost controls, priceless!

3. Capture early payment discounts

The third benefit of invoice matching software is that it speeds up the time it takes to process invoices. 

Since invoices are processed faster, you can pay your vendors faster. 

Let’s say you pay $500,000 per month at Net 30 terms and your vendors offer you an early payment discount. 

For example: 2% 15 Net 30. 

That means the vendor would offer you a 2% discount if the invoice is paid within 15 days. 

That is a savings of $10,000.

Now some of you might be thinking what if I don’t have enough cash flow to pay the vendor.

What If I am using AR (Accounts receivable) to finance AP (Accounts Payable). In other words, you are borrowing capital to pay off your liabilities (vendor invoices).

These are valid points, let do some math. 

Let’s assume your annual WAC(Weighted Average Cost of Capital) is 15%.

And assume you pay $500,000/month earlier than when it is due.

With the above example of 2% 15 Net 30, you would land up paying this invoice 15 days sooner.

The cost of capital is $3,082

Cost of capital =( .15/365)*(15)*(500,000)

The savings from early payment discounts = $10,000 (.002*$500,000)

Even with paying 15 days earlier, you are still saving approx. $7,000

That is $84,000 in annual savings!

Features of Invoice Matching Software

Before you get started, download the checklist and review your requirements as you go along:

Invoice_Matching_Software 

Now let’s look at the key features of invoice matching software. 

We assume that you either have a separate purchase order software or integrated purchase order and invoicing software like ProcureDesk.

Since matching is across 3 different documents (Purchase order, Receipt & Invoicing) – it is critical to have all this data in a single system.

The first three features are focused on receiving the invoice from the supplier. The rest of the features are focused on matching and exception management. 

1. Invoice data capture through emails

The first step in the invoice matching process is to capture the supplier invoices in one central place. 

The most common way for vendors to send invoices is through emails.

The problem though is that the vendors might be sending invoices to different stakeholders within your company. 

For example, they might send it to operational owners, procurement, or worst through snail mail. 

You should set up an email for AP invoices so that all vendors can send the invoices to that email. For example Invoices@acmedesign.com

Once the email is set up, your invoice matching software should automatically pull the invoices from the email and create the invoices for you. 

The challenge though is how to ensure that the vendors actually send the invoice to the central email. We covered more of this here.

Invoice approval workflow

How does this help?

  1. By centralizing the invoices in one single place, you don’t have to worry about missing invoices. 
  2. You don’t have to spend time downloading invoices from your email and then uploading them to the invoicing system.
  3. You don’t have to do data entry because the system can automatically extract the data from your invoice attachment. More on this later.

2. Automated invoice creation and OCR (Optical Character Recognition)

This feature automatically creates the invoice for you. 

If the invoice is for a purchase order, then the system extracts the data from the invoice and matches it with a purchase order. 

This way, you don’t have to spend time matching invoices with purchase order lines and identify which invoice line matches with what PO line. 

In the case of non-PO invoices, automated invoice creation is very helpful. Especially with the recurring invoices. 

For example, you have a monthly rent payment. So instead of creating a new invoice every month, you can use the automated invoice creation feature to generate the invoice and submit it for approval. 

Set it and forget it and let the system do the rest.

Here is how this works in ProcureDesk:

Invoice_PO_3-waymatch

 

How does this help?

  1. Needless to say that it helps improve the productivity of your team. Your team can process invoices faster without any manual data entry.
  1. It leads to a lower error rate because the system pulls data from the purchase order and then matches it with the purchase order for accuracy. 

3. Supplier portal 

What if you can completely avoid entering and reviewing invoices?

Then a supplier portal is a must-have feature for you. 

A supplier portal enables self-service for your suppliers. 

Suppliers don’t need to email or mail invoices. They can simply log in to a portal where they can see all the open Purchase orders. 

Example of supplier portal:

Supplier_portal

They can then create an invoice by simply flipping the purchase order to an invoice and attaching a copy of the invoice.

Once the vendor submits the invoice, the system does the rest.  

All you have to do is to review the invoices in case of a mismatch between purchase orders, invoices, and receipts. 

How does this help?

  1. With vendor self-service, a vendor can submit their invoice faster and as a result, they can get paid faster.
  2. Since the invoices are processed faster, you now have the opportunity to avail any early payment discounts from the vendor. 
  3. The vendors can easily track the status of the invoice and they don’t have to reach out to your team to know the invoice status.

Doesn’t your team loves answering vendor payment inquiries!

4. Automated matching rule engine and approvals

So far we discussed features that help you speed up the invoice creation process. 

Now let’s discuss what helps you speed up the matching process between invoices and related documents like purchase orders and receipts. 

There are two types of matching scenarios – as we have discussed above.

2- way matching

If you are purchasing services, then there is no receipt. 

So the invoice system should be able to match the purchase order to the invoice and identify any discrepancies. 

For example, whether the unit price matches or not. 

In case there is a mismatch, the system should be able to route the invoice for approval.

We recommend that approvals should come from the person who requested the service. Because the person who requested the service would know if the service has been delivered or not. 

The system should also allow you to route the documents for exception approval. 

For example, if the invoice amount is over the approved amount, the system should be able to route the invoice document for approval.

3- way matching 

With a 3 way matching, the system can match purchase orders, receipts, and invoices.

The Invoice matching engine  should be able to handle the following scenarios

  1. If a receipt is missing, then automatically route the invoice for exception approval.
  2. If the quantity is over the received amount then route to the buyer for review and approval.
  3. If the unit price doesn’t match then route for review and approval to the purchasing team so that they can work with the vendor to resolve the discrepancy. 

Here is an example of a 3-way match:

3-way invoice matching

How does this help?

With an automated invoice matching engine, your team benefits as follows:

  1. Increased productivity as you don’t have to chase stakeholders for invoice approvals. The system automatically does the routing for you.
  2. There is a complete audit trail of why an exception was approved and who approved it. When the auditors want to review the controls, this information is very handy.

5. Tolerance matching 

Tolerance matching allows you to automatically accept certain invoices if there are within an acceptable range.

Let’s say you don’t add taxes on purchase orders and vendors always add taxes on the invoice.

With the added tax, the total invoice amount is always greater than the purchase order amount.

In a normal scenario, a stakeholder needs to be approved before the supplier can be paid. 

With a tolerance engine, you can set up a tolerance so that the system ignores this exception while matching.

You can set tolerance not just for taxes but also for unit price, quantity, etc.

Here is an example of tolerance matching:

Tolerance_matching

How does this help?

With an automated tolerance engine, you can:

  1. Automated the exception review process for certain invoices 
  2. You can process invoices much faster because now fewer invoices need additional approvals.

6. Automated reminders

It is not uncommon for the stakeholders to forget to approve the invoices that are in their queue for approval. We all are busy!

So rather than the AP team chasing stakeholders for invoice approval, let the system send automated reminders to employees who have not yet approved their invoices.

automated reminders

How does this help?

Automated reminders help you with the following:

  1. Free your team from chasing stakeholders for invoice approvals.
  2. Speeds up invoice processing and allows you to close books on time.

7. Approval workflow for Non-PO Invoices

Not all invoices have a purchase order. For example, you are paying for legal services or some other professional services. 

So the invoice matching process doesn’t work here because there is no other document to match the invoice to.

You don’t want another system to manage non PO invoices, so your invoice matching software should have the following capabilities:

  1. Allow a non-PO invoice to be created and coded to the right chart of accounts. 
  2. Allow an invoice to be routed for approvals based on different conditions. For example, route the invoice based on the dollar amount or the department to which it belongs. 
  3. Post-approval, send the invoice to the accounting system for payment. The system should support integration with our accounting or ERP system so that you don’t have to manually enter the data into the system. 

Here is an example of an invoice workflow:

Invoice_Approval_Workflow

How does this help?

With non PO invoice approval, you can streamline your invoice matching process:

  1. Employees don’t have to use a different system for PO and non-PO invoices. You have one system to manage and approve all your invoices. 
  2. With the non-PO invoices in the same system, it is easy to keep track of spending against the budgets. 

Now your turn!

If you want to see an invoice matching software that can improve your team’s productivity, book a demo by clicking on the button below. 

 

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