You’re growing like crazy. You’ve automated your payroll and HR. You’re investing heavily in sales and marketing. So why does it take you so long to process your invoices and make payments?
As your company begins to scale, the amount of invoices your finance team is handling can increase dramatically. Matching purchase orders and invoices (two-way matching) and the receiving information (three-way matching) is a quick win that can yield big results. But having a manual matching process can be a major headache for your finance team.
What exactly are two- and three-way matching?
Two-way matching is a way to process supplier invoices by matching things such as the quantity and amount of the invoice to the corresponding information on the purchase order. Three-way matching takes it a step further by also linking this information with the receiving note. This helps ensure that any payments made are complete and accurate.
So what are these documents?
- Purchase order: A purchase order is a document that officially confirms an order. It is sent from the buyer to the supplier and typically includes the company name, type of product or service, quantity being purchased, agreed price, payment information, invoice address and purchase order number.
- Receiving note: The receiving note is the proof that the product or service has been delivered or fulfilled. It is included by the supplier with the goods that have been delivered to the buyer, and comprises details on the contents of the order and delivery information. The information is matched to the purchase order to ensure that whatever was ordered has been delivered correctly.
- Invoice: An invoice is a request for payment of a purchase. It is sent from the supplier to the buyer and typically include similar information to the purchase order as well as an invoice number, any discounts for early payments and payment schedule.
The benefits of three-way matching
Before an invoice is paid, there are several steps the finance team takes to verify the payment. These include ensuring the quantities, prices and terms from the purchase order match the goods received and the amount charged on the invoice. While it is clear that matching provides benefits, it may be surprising how far reaching these benefits can be.
- Reduces payment errors: Three-way matching greatly decreases the chance of making incorrect or duplicate payments because all corresponding documents are connected and tranked together.
- Simplifies audits: Purchase orders and invoices are two common documents auditors use when analyzing a company. Continuously matching these two documents makes the audit process easier.
- Holds suppliers accountable: Purchase orders document the buying terms with the supplier. By matching them to the corresponding invoice and receiving note, they are held suppliers accountable to the original terms that were agreed on. And if there is a discrepancy, the finance team can catch it and investigate further.
- Completes the payment process: A matched invoice can be approved for payment, thus allowing finance to close out the purchase order and complete the transaction. Nothing is left unresolved, and there is no confusion as to whether a payment was made.
Why you should automate your matching process
Although three-way matching is a must for a company’s financial operations, conducting these manually can put a great burden on the finance team and company at large. It is time consuming, inefficient, and prone to human error. Automating the process ensures accuracy and payment validity, and give your finance team the time and information they need to conduct strategic financial planning.
- It saves money: The estimated cost of handling an invoice ranges from $12-$30, and automating the matching process can help bring that cost down substantially. It also greatly reduces the likelihood of making incorrect or duplicate payments, which is another money-saver.
- It saves time: Manually three-way matching is time consuming even when the finance team has all of the necessary information, not to mention when they have to hunt down employees and suppliers for missing documents. Automation software stores the data in real time, reducing the time it takes to process invoices and approve payments.
- It is easier to capture discounts: Many suppliers offer an early payment discount, which could be helpful to a company’s cash flow. If invoice handling takes too long, then the company is unable to capture those discounts. Furthermore, paying invoices early, or at least on time, can help the company’s credit rating.
- It avoids late payments: Being late on a payment doesn’t only add fees and statutory interest; it also affects a company’s reputation. Automation helps reduce invoice handling times, saving the company from these additional costs—and from a poor credit rating. Furthermore, a reputation for paying on-time can improve supplier relationships and negotiations.
- It targets the finance team’s focus: Most invoices, purchase orders, and receiving notes can be matched and approved for payment as they are. Rather than manually processing and approving these invoices, finance teams can leverage automation software to complete the process and instead focus their efforts only on the invoices that have a discrepancy.
- Improves future visibility: By showing what is already owed to suppliers, invoices give finance teams a window into the past. Purchase orders, on the other hand, give them visibility into future committed spend. Being able to review both these document types in the same place helps with financial planning.
Integration is key
The process of collecting information about purchase orders, invoices, and receiving reports—and then three-way matching them—is often fragmented. In many cases, purchase orders are created in one platform, invoices are housed somewhere else, and receiving notes in yet another location.
If these systems don't "talk" to each other, trying to automate the process is useless.
Successful automation requires robust integrations that allow data to flow seamlessly from platform to platform. When it comes to three-way matching, it is the continuous and harmonious sync that enables finance teams to verify payments in real time.
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