3 Way Invoice Matching for Manufacturers, Distributors, and CPG Companies

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3 Way Invoice Matching for Manufacturers, Distributors, and CPG Companies

Invoice matching is a process that accounting teams in most industries have to handle. In its simplest form, it simply means comparing vendor invoices with corresponding purchase orders and material receipts to make sure key pieces of information, like the cost and quantity of what was purchased, are the same on both documents

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Direct Spend and Invoice Matching

For many teams, invoice matching is just part of their process for closing the books. But for businesses that deal largely in direct spending, like manufacturers, distributors, and CPG companies, which typically see about 80-90% of their spend tied to a purchase order, purchase orders may contain hundreds (if not thousands) of lines and an invoice could include lines from several purchase orders. 

So what’s an accounts payable team to do but to print these documents, have their ERP system up on a screen, and go line-by-line with a pen marking the status of each invoice line? Luckily, there’s plenty that can be done to speed up the process

Why Is Invoice Matching Important? 

Matching invoices with their corresponding purchase orders is standard practice for accounting or bookkeeping professionals. Without this step, companies might overspend on invoices, pay out fraudulent invoices, or otherwise waste valuable company resources. 

In other words, invoice matching is an important safeguard for companies. And in the case of those companies that spend heavily on direct materials, they face greater risk due to the sheer volume of transactions they have to review. 

Based on a company’s needs, there are a few different processes they can follow. The most common is the three-way match process, which looks at a goods receipt, in addition to the invoice and purchase order. Two-way match and four-way match are also options, depending on a business’s invoice approval process and the rigor with which they want to review their outbound payments. 

Check out SourceDay’s custom matching rules.

2-Way Matc​​​​hing, 3-Way Matching, & 4-Way Matching

While three-way match is the most common process AP teams follow in these industries, let’s quickly review the differences between these other options. 

  • 2-Way Matching: AP teams will look to match an invoice and a receipt of goods. 
  • 3-Way Matching: AP teams will look to match an invoice, purchase order, and receipt of goods. 
  • 4-Way Matching: AP teams will look to match an invoice, purchase order, receipt of goods, and quality check.

As their names imply, these matching methods increase in rigor—and often the time required to complete them. 

Tolerance (noun): When a company orders 300 parts, suppliers are often allowed some flexibility in how many parts they actually deliver. For example, a manufacturer might allow for a 10% tolerance, meaning the supplier could deliver between 270 and 330 parts, while still being within the terms of their agreement. This is one reason three-way matching is difficult—the PO says 300, but the receipt might show 327 parts were delivered.

The 3-Way Matching Process

Because three-way matching is the most common for manufacturers, distributors, and CPG companies in particular, we won’t spend much time on two-way or four-way matching methods. 

To complete the three-way matching process by hand, here are the steps you’d take. (If you’d like to skip ahead and learn how this process can be automated, feel free to do so here.) 

Step 1: Invoice Received

A vendor or supplier sends you an invoice, asking for payment for the goods they provided. Here you’ll make sure that invoice is uploaded to your ERP, which also stores receipts and purchase orders. 

Step 2: Goods Received 

In many cases, especially when goods are shipped from overseas, the invoice may arrive before the goods themselves. If that’s the case, you’ll classify these invoices as “Pending” until the goods arrive to the receiving department and a receiving report is generated. 

This is when you’ll get precise details about how many parts or materials were actually received. Remember, in many cases ordering 300 parts does not mean exactly 300 will show up. This is the step when order variances are noted. 

Step 3: Confirm Invoice Details

With the goods in the warehouse, now is the time to gather the purchase order, invoice, and receipt of goods and make sure that what your team received is, in fact, what they ordered and that costs are consistent across all three documents, given tolerance thresholds. 

In some cases, the ERP can quickly pull PO numbers, receiving reports, and invoice numbers so the bookkeeping team can look at these documents side-by-side. This is often the case for indirect spend, like purchasing new chairs for an office. You place one order for chairs, all of which arrive on the same day and show up on a single invoice. As long as a manager approves the expense, the AP team can pay the invoice and move on.  

For companies with heavy direct spends, an invoice might include lines from several purchase orders. And a purchase order could include several ship dates, meaning that goods will arrive and be processed into the system on staggered timeframes. 

This is where the bookkeepers start to have a hard time. Rather than looking across three documents and making sure the numbers line up, they have to look across dozens, maybe even hundreds, of documents, honing in on specific line items and taking partial shipments and tolerances into consideration. 

Step 4: Voucher & Issue Payment

Once the AP team has matched the receipt, invoice, and purchase order, they might face two different scenarios. In the first, everything matches within their company’s tolerance threshold and they can voucher the invoice in the ERP and begin the payment process. In this scenario when things go according to plan, they may be able to take advantage of early payment discounts, an incentive many suppliers offer. 

If, on the other hand, the team has uncovered problems and the documents don’t match, the AP team will need to decide whether to voucher the payment anyway or bring in the procurement team to help investigate. This can lead to a back-and-forth with suppliers that takes time, especially when buyers and suppliers need to go through their emails to prove whether pricing changes were, in fact, communicated. 

Go straight to the source.

Watch the webinar recording featuring Napoleon Products, as they discuss SourceDay's AP Automation product.

Direct Procurement & 3-Way Match

The method of performing three-way matches described above is hairy for businesses that produce products. Most matching solutions on the market are geared toward businesses that purchase finished goods, like the office chairs, and direct spend has long been written off as “too complex to automate.” 

What that leaves these businesses with, however, is a payable process that doesn’t reflect the modern operations of these businesses. And it impacts the bottom line. From needing to hire more headcount in order to scale operations to overpaying invoices in the name of speed, the payable process is rife with cost savings opportunities. 

AP Automation for Direct Spend

So while other industries move toward AP automation, is it possible for companies with direct spend requirements? You bet. It just requires a different kind of automation

In other industries, an automated AP solution will compare the total invoice amount to the total purchase order amount. If they match, it will allow the accounting department to voucher and pay the invoice without any manual work. 

When it comes to direct spend, automation means reading the entire purchase order and invoice, rather than just the total amounts. In order for automation to do its job, the software must match items on the line level. This requires a few additional steps (on the software side) to complete. 

Step 1: Digital Extraction

The first step is extracting all of that information from the documents in question: the purchase order, invoice, and receipt data. Because the invoice is generated by suppliers and can vary widely from one supplier to the next, this is the hardest document to extract data from. 

In SourceDay’s AP Automation product, suppliers simply have to email their invoices the way they always do and the software will read and digitize its contents. If there are any anomalies or inaccuracies, a support team is standing by to resolve them. 

Step 2: Smart PO Association

This step is a biggie, and it’s the one other automated solutions don’t do. In this step, SourceDay’s software compares the extracted information from the invoice to the purchase order and receipt data. Because there are so many variables involved in this kind of matching, we also call this step “multivariate association.” 

Let’s say you’ve placed an order for 300 bike seats, 600 tires, and 450 bike brakes from your top supplier. They ship 302 seats early and include that line item on an invoice with a dozen other items. Software has the ability to compare those bike seats to the purchase order line—even given that the numbers don’t match exactly. Even though the other items didn’t ship yet.

For most AP teams, this is the most time-consuming step in the process. Or at least it was. 

Step 3: Automated 3-Way Matching by PO Lines

After the hard work of multivariate association is done, three-way matching is a breeze. You’ve found the right line items on your invoice and purchase orders. Now, as long as they match within your set tolerances, you can voucher the payment. 

Of course, setting your tolerances correctly goes a long way here. This is why it’s crucial to find a solution like SourceDay’s that allows you complete flexibility in how you match. You might set a rule that as long as the total line item amount is within 2% of the original purchase order, it’s a match! For certain suppliers, you might want to constrain them to 1%. 

How you determine a match will vary depending on your business and your supplier relationships. 

Step 4: Voucher & Pay 

When matching is complete, a simple button click is all it takes for accounting teams to voucher an invoice to the ERP. They can even set auto-vouchering rules for certain invoices and skip that button-click altogether. 

Benefits of AP Automation for Direct Spend

  • Time to complete root cause analysis of incorrect orders.
  • Avoid overpaying on incorrect invoices. 
  • Take advantage of early payment discounts from suppliers. 
  • Strengthen supplier relationships through on-time payments. 
  • Payables operations that can scale with company growth. 
  • Tangible cost savings. 

With all the time saved in the steps above, automation allows payables teams more time to get to the bottom of any mismatches—or the orders that fall outside of your tolerance thresholds. Best of all, if purchase orders are also tracked in software (and not in dreaded email), checking on an order’s complete history takes minutes instead of days. 

This means companies can avoid paying more than they owe due to human error and that they can take advantage of early payment discounts and other supplier incentives if they choose. 

The world of automatic three-way invoice matching has come a long way in recent years. If your business is still struggling through the process by hand, it might be time to upgrade to an automated solution. Meet SourceDay’s AP Automation solution that was tailor-made for manufacturers, distributors, and CPG companies for whom other solutions just don’t cut it.