Maintaining accurate financial records and ensuring timely vendor payments are crucial for any organization’s success. One fundamental process that helps achieve these goals is 2-way PO matching. This article explores the ins and outs of 2-way matching, its importance, and how it compares to other matching methods.
What is 2-way PO matching in accounts payable?
2-way PO matching is a verification process in accounts payable where two documents are compared: the purchase order (PO) and the vendor invoice. It’s a control mechanism to ensure accuracy in payments and prevent fraud. The process involves confirming that the details on the invoice align with the agreed-upon terms in the purchase order before paying a vendor.
This matching process is an essential part of the payable process. It helps companies maintain control over their spending and ensure that they only pay for goods or services they’ve actually ordered. The two-way matching process acts as a safeguard against incorrect payments and helps maintain healthy supplier relationships.
The role of purchase orders
Companies use purchase orders for several reasons:
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To communicate their needs to vendors
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To set expectations regarding pricing, quantity, and delivery terms
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To create a legally binding document that protects both parties
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To get upfront approvals on spend
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To facilitate the matching process in accounts payable
Companies essentially pre-approve future spending by issuing a PO, which is crucial for budgeting and financial planning.
Components involved in 2-way PO matching
The 2-way matching process primarily involves two key documents:
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Purchase orders (POs): Official documents issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.
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Invoices: Bills sent by vendors detailing the goods or services provided and the amount due.
The accounts payable department manages this process and ensures timely and accurate payments to vendors. If the organization has a procurement organization, that team works closely with the AP department to ensure smooth operations.
Why is 2-way PO matching important?
2-way matching plays a crucial role in maintaining financial accuracy and operational efficiency. Let’s look at the key benefits:
Financial accuracy
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2-way matching helps maintain the integrity of financial records by ensuring that payments match agreed-upon terms.
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It prevents overpayments by catching discrepancies between POs and invoices before payment is made.
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This process aids in compliance with accounting standards and provides a clear audit trail.
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It helps maintain accurate cash flow projections by aligning actual spend with approved purchase orders.
Operational efficiency
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By systematizing the verification process, 2-way matching reduces the time spent on manual approvals.
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It minimizes errors that can occur with manual data entry and comparison.
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The streamlined process allows AP staff to handle more transactions more efficiently.
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It reduces the need for lengthy approvals, speeding up the accounts payable workflow.
Controls and visibility
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2-way matching provides better control over company spending by ensuring that all purchases are pre-approved.
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It offers increased visibility into future spend, helping with budgeting and cash flow management.
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The process helps maintain strong vendor relationships by ensuring timely and accurate payments.
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It can help identify potential fraudulent invoices or billing errors early.
How does 2-way PO matching work?
The 2-way matching process follows a systematic approach to verify invoices against purchase orders. Here’s a step-by-step breakdown:
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A purchase requisition and approved
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Creation of a purchase order in the company’s ERP system.
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Approval of the PO, essentially pre-approving the spend.
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The approved PO is sent to the vendor.
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Goods or services are provided.
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The vendor sends an invoice for the goods or services provided.
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The AP department receives the invoice from the vendor.
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They retrieve the corresponding purchase order from the company’s records.
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Key data points on both documents are compared for consistency.
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If all details match, the invoice is approved for payment.
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If discrepancies are found, the invoice is flagged for further investigation.
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Approval workflows may be initiated to approve the discrepancy or edit the PO to resolve the mismatch.
Key data points for matching
During the 2-way matching process, several crucial data points are compared:
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Vendor information: Name, address, and vendor ID must match on both documents.
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Purchase order number: This should be referenced correctly on the invoice.
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Quantities and prices: The number of items and their individual prices should align.
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Total amount due: The final payable amount should be calculated correctly and match on both documents.
Tolerance levels in 2-way matching
Many companies set tolerance levels for price and quantity deviations to allow for minor discrepancies without flagging every small difference. For example:
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A price tolerance of 1% might allow for slight currency fluctuations or rounding differences.
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A quantity tolerance of +/- 1 unit might accommodate minor shipping variances.
These tolerance values help streamline the process while still maintaining a high level of accuracy.
Is 3-way matching better than 2-way matching?
While 2-way matching is effective, some companies opt for 3-way matching for added security. Let’s compare these approaches:
Understanding 3-way matching
3-way matching includes a third document: the receiving report, which confirms that the goods were actually received. This method provides an additional layer of verification compared to 2-way matching.
It’s worth noting that 3-way matching is particularly relevant for companies that manage inventory. Software or services-based companies may not require this additional step, as there are often no physical goods to receive.
Pros and cons
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Advantages: 3-way matching offers enhanced security and accuracy, reducing the risk of paying for undelivered or substandard goods/services.
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Drawbacks: They require more time, resources, and complex systems to manage the additional documentation.
In practice, many companies use a combination of matching methods. 2-way matching might be sufficient for low-value or routine purchases, while 3-way could be reserved for high-value or critical items.
What causes mismatches?
Despite best efforts, mismatches can occur in the 2-way matching process. Understanding the common reasons for discrepancies can help prevent them:
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Human error in data entry, such as typos in quantities or prices.
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Changes in pricing that weren’t updated in the system.
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Partial shipments or backorders are not properly documented.
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Miscommunication between departments leads to discrepancies in expectations vs. reality.
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In rare cases, fraudulent activities.
Impact of mismatches
Mismatches can have several negative consequences:
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Payment delays can strain relationships with vendors and potentially disrupt supply chains.
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AP staff must spend additional time investigating and resolving discrepancies.
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Frequent mismatches may indicate systemic issues in the procurement or invoicing processes that need addressing.
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There’s a potential to overpay or pay for unapproved funds.
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Late payments due to unresolved mismatches might result in missed early payment discounts or late payment penalties.
Should you automate invoice matching?
Given the time-consuming nature of manual matching processes, many companies are turning to automation. Here are some key considerations:
Benefits of automation
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Automated systems can process a high volume of invoices quickly and accurately.
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They can flag discrepancies immediately, allowing for faster resolution.
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Automation reduces the risk of human error and frees up AP staff for more strategic tasks.
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Many automation solutions incorporate optical character recognition (OCR) technology to extract data from invoices, further reducing manual data entry.
Considerations for implementation
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There are initial costs for software and implementation, but ROI is often realized quickly through efficiency gains.
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The automation system needs to integrate smoothly with existing ERP or accounting software.
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Staff will need training on the new system, and resistance to change may need to be managed.
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Consider the scalability of the solution – can it grow with your business?
Choosing the right automation solution
When selecting an automation tool for invoice matching, consider the following factors:
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Integration capabilities with your existing systems
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Customization options to fit your specific matching criteria and workflows
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Reporting and analytics features for better visibility into your AP processes
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Vendor portal functionality to improve communication with suppliers
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Mobile accessibility for approvals on-the-go
Conclusion
2-way PO matching is a crucial process in accounts payable that helps ensure accuracy, prevent fraud, and maintain healthy vendor relationships. While it may seem simple on the surface, implementing an effective 2-way matching system requires careful consideration of your company’s needs, resources, and existing processes.
Whether you choose to stick with manual 2-way PO matching or invest in an automated solution, the goal remains the same: to create a more efficient, accurate, and controlled accounts payable process. By understanding the ins and outs of 2-way matching, you’re better equipped to make informed decisions about your company’s financial operations.
Remember, the right matching process can significantly impact your company’s bottom line by reducing errors, preventing overpayments, and improving vendor relationships. As you evaluate your current processes, consider how 2-way matching – or its variations – can be optimized to best serve your organization’s needs.
