What Is Invoice Matching?

What is Invoice Matching and How Does it Work?

Invoice matching is a financial process designed to ensure the accuracy of payments made to suppliers or vendors by verifying that the invoice matches corresponding documents like purchase orders and receiving reports. The goal is to confirm that what a business is being billed for aligns with what it ordered and received, ensuring payments are accurate and preventing financial discrepancies.

In essence, this is how invoice matching typically goes: 

1. Purchase order: The process begins when a company issues a purchase order to a supplier, specifying the quantity, price, and agreed terms for the goods or services being ordered.
2. Receiving report: Once the goods or services are delivered, a receiving report is generated, documenting what was actually received by the business. This report typically includes details such as the quantity, condition, and date of receipt.
3. Invoice: The supplier then sends an invoice requesting payment. This document outlines the items or services delivered, along with their prices and any additional charges like shipping or taxes.
4. Matching process: Invoice matching involves comparing these documents side by side to ensure consistency regarding quantities, prices, and product descriptions. There are different types of invoice matching:

• • Two-way matching: Involves comparing the invoice with the purchase order.
  • Three-way matching: Compares the invoice with both the purchase order and the receiving report.
  • Four-way matching: Includes an additional step of verifying inspection or quality reports, particularly for industries that require stricter quality control.

If there are any discrepancies, such as differences in pricing or missing items, the invoice is flagged for further investigation. By performing these checks, businesses can ensure that they pay the correct amount for the goods or services actually received, minimizing the risk of overpayment, underpayment, or fraud. 

What Are Tolerances and Holds in Invoice Matching?

In the invoice matching process, tolerances and holds are key in managing discrepancies that may arise between the purchase order, receiving report, and invoice. They help businesses handle minor variations and prevent payments from being processed prematurely when significant issues are detected.

Tolerances

Tolerances refer to the allowable range of differences between the amounts on the purchase order, receiving report, and invoice. Since minor discrepancies are common in business transactions (such as slight differences in quantity or pricing due to rounding or shipping variations), tolerances provide flexibility in the invoice-matching process. They help companies avoid flagging every minor deviation as a potential issue.

Tolerances are typically set for:

• Price differences (e.g., a slight variance in unit cost)
• Quantity differences (e.g., small deviations in delivered quantities)
• Tax or shipping charges, which may fluctuate slightly from estimates

Setting tolerances helps streamline the matching process and ensures that only significant discrepancies are flagged for review.

Holds

Holds are triggered when an invoice fails to meet the established matching criteria, either due to discrepancies outside of the set tolerances or other issues. When an invoice is placed on hold, it’s flagged for further investigation, and payment is temporarily halted until the discrepancy is resolved.

For instance, an invoice might be placed on hold due to quantity and price discrepancies, missing documentation, and unapproved items or services. When a hold is placed, the accounts payable team or procurement department must investigate the issue, communicate with suppliers, or review internal records to resolve the discrepancy. Once resolved, the invoice can either be approved for payment or rejected, depending on the outcome.

The Importance of Tolerances and Holds

Tolerances and holds are key mechanisms in invoice matching because they balance efficiency and accuracy. Tolerances ensure that the process isn’t bogged down by minor, acceptable differences, while holds act as safeguards to prevent unauthorized payments or significant errors from slipping through. Together, they help businesses manage discrepancies effectively, reducing the risk of financial loss or payment delays.

Benefits of Invoice Matching

Invoice matching offers several advantages that help businesses improve financial accuracy, enhance operational efficiency, and minimize risks:

1. Prevents overpayments and underpayments. By comparing invoices with purchase orders and receiving reports, invoice matching ensures that businesses only pay for the goods or services they actually ordered and received. This prevents overpayment, underpayment, or paying for items that were not delivered, helping maintain financial accuracy.
2. Reduces risk of fraud. Invoice matching serves as a key control to detect and prevent fraudulent activities. Fraudsters may try to submit false or inflated invoices, but the matching process flags discrepancies, allowing businesses to catch suspicious activity before making payments.
3. Improves supplier relationships. Consistent, accurate payments foster trust and transparency between businesses and their suppliers. By using invoice matching, businesses can avoid payment disputes, late payments, or errors, resulting in stronger vendor relationships and more efficient supply chain management.
4. Streamlines audits and compliance. Invoice matching helps maintain clear records and compliance with financial regulations. Since the process ensures that all transactions are verified and documented, it simplifies internal audits and supports compliance with industry standards, tax laws, and company policies.
5. Enhances operational efficiency. Automating the invoice matching process through accounting software or ERP systems can significantly reduce manual work, minimize human error, and speed up the payment process. This leads to faster invoice approvals, better cash flow management, and reduced administrative costs.
6. Strengthens financial controls. Implementing invoice matching as part of a broader financial control system helps businesses maintain tight oversight of their spending. It ensures that purchases align with budgets and approved orders, reducing the risk of unauthorized or unapproved expenditures.

By incorporating invoice matching into your payment processes, you can protect your business’s financial health, improve accuracy, and gain better control over its payables operations.

Summary

• Invoice matching ensures the accuracy of payments by comparing invoices with related documents, such as purchase orders and receiving reports, verifying that billed goods or services match what was ordered and received.
• Tolerances are allowable differences between documents, helping businesses avoid flagging minor discrepancies, while holds temporarily stop payments when significant discrepancies are detected, ensuring issues are investigated.
• Benefits include preventing overpayments, reducing fraud risk, improving supplier relationships, streamlining audits, enhancing efficiency, and strengthening financial controls.