For manufacturers, distributors, and CPG companies, 80 to 90 percent of their spend is tied to purchase orders. POs may contain hundreds or thousands of lines and each invoice could include lines from several POs. The challenge for accounts payable teams is matching: comparing vendor invoices with corresponding POs and receipts to make sure key pieces of information like cost and quantity are the same on both documents.
Many, many AP teams use a manual approach to invoice matching. They print the documents, consult their ERP on a screen, and go line-by-line with a pen, marking the status of each invoice line.
Why is invoice matching important?
Invoice matching is an important safeguard, especially for companies that spend heavily on direct materials. With the sheer volume of transactions they process, the risk gets pretty dang high. We’re talking about lost money on overpayment, fraudulent invoices, missed early payment discounts, and perhaps most costly of all: wasted time and resources.
It’s important to get this one right. Three-way matching works very well for almost all manufacturers, distributors, and CPG companies. Let’s take a quick look at the three-way matching process.
A supplier sends an invoice and requests payment. A buyer uploads this info to the ERP.
Quantity variances are identified and a receiving report is generated.
CONFIRM INVOICE DETAILS
Compare the PO with the invoice and receipt to ensure costs are the same across all three. Invoices might include lines from multiple POs, and POs could include several ship dates.
VOUCHER & ISSUE PAYMENT
If everything matches within the tolerance threshold, the invoice is vouchered in the ERP and the payment process begins.
If the documents don’t match, AP must decide: voucher the payment anyway, or ask procurement and receiving to help investigate.
Your teams can’t do all of this by hand. They need a payable process that reflects modern business operations, eliminates over-payments, and takes advantage of the high number of cost-savings opportunities—all without adding new salaries. But most matching solutions on the market are geared toward businesses that purchase finished goods because direct spend has long been written off as “too complex to automate.”
Invoice Automation for Direct Spend
Direct spend requires a different kind of solution. It requires one that compares total invoice amount to total purchase amount, then prompts accounting to voucher and pay the invoice immediately. It requires a solution that analyzes and matches every line, which requires a few additional steps. Let’s take a look at how automation tackles those steps.
Step One: Digital Extraction
Your solution should extract all the needed information from the purchase order, invoice, and receipt data. Invoices are generated by suppliers and can vary widely from one supplier to another, making them difficult to extract data from. A solid Invoice Automation tool will automatically read and digitize the contents of emails containing invoices. If there are inaccuracies, a support team helps resolve them—by exception only.
Step Two: Smart PO Association
Let’s say you place 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. Your Invoice Automation software can compare those bike seats to the PO line, even when the numbers don’t match exactly and the other items haven’t shipped.
This is when the invoice information is extracted and compared to PO and receipt data. This step is sometimes called multivariate association, and for most AP teams working manually without automation, it’s the most time-consuming step in the process.
Step Three: Automated Three-Way Matching by PO Lines
Okay, so you’ve done the hard work on multivariate association. Now, three-way matching is a breeze. Your solution has identified the right line items on your invoice and POs. Now you can voucher payment based on your tolerance criteria—another very important step. An Invoice Automation solution allows specific tolerances to be set for specific vendors. One rule might say that as long as the total line item amount is within two percent of original purchase order cost, it’s a match. For other suppliers, you might want that rule to be one percent. At the end of the day, you want this process automated. Procurement will never have the time or resources to streamline the use of these rules manually.
Step Four: Voucher & Pay
When matching is complete, a simple click is all it takes for AP to voucher an invoice in the ERP. Auto-vouchering rules are set and certain invoices can be vouchered without a click altogether.
What does it get you?
- Time to complete root cause analysis of incorrect orders
- Avoid overpayment on incorrect invoices
- Take advantage of early payment discounts from suppliers
- Strengthen supplier relationships through on-time payments
- Scale AP operations with company growth
- Find tangible cost savings
When POs are tracked in a software (and not in dreaded email), checking on an order’s complete history takes minutes rather than days. AP teams now have a LOT more time to work strategically to foster supplier relationships, understand the root causes of issues, and identify additional savings or improvement opportunities.
SourceDay bridges the gap between the ERP and the supplier network, making it simple to manage changes throughout the direct spend lifecycle. Ready to learn more? Let’s book a demo.