What Is Invoice Matching, and Why Does It Matter?

Invoice matching is a process used to verify whether the information on an invoice aligns with that of a purchase order, receipts, and other relevant documentation. Companies and contractors use it to ensure they are paying or being paid the right amount for the correct quantity and quality of goods or services.

In this article, we’ll explain invoice matching in depth and discuss its importance, and then explore different types of invoice matching before giving you a guide on how to do it yourself. Finally, we’ll go through some of the biggest challenges associated with invoice matching and give you tips and strategies to help you overcome them.

What Is Invoice Matching?

Invoice matching (sometimes referred to as purchase order matching) is a reconciliation process used to compare the data in an invoice to a purchase order (PO) and other documentation to ensure its accuracy and legitimacy. This is a type of invoice reconciliation used before the payment has been made.

The main reason behind invoice matching is for invoice recipients to ensure they are paying the correct price for the right goods or services. The goal is to check if the prices and quantities align with the details in the contract that was agreed upon beforehand.

This is done to prevent invoice fraud and billing errors, which can cost companies between 1% and 5% of annual revenue. Invoice matching is a preventive measure that stops revenue leakage; more than that, it ensures that there is a robust paper trail, which is essential for internal record-keeping and useful during IRS audits.

By identifying discrepancies early, businesses can prevent small mistakes from escalating into potential financial, operational, and even reputational problems.

Why Invoice Matching Is Important?

Invoice matching is important for numerous administrative and financial reasons, such as:

#1. Prevents Overpayments and Duplicate Payments

One of the main reasons why businesses do invoice matching is to prevent paying for goods that haven’t been delivered or paying twice for the same order. For example, a vendor may send a duplicate invoice for an order that’s already been paid. If not spotted during the matching process, a buyer may pay the same invoice again.

The vendor may also alter the prices and slightly increase them in an invoice compared to the original agreement in the PO. The matching system needs to catch these instances and prevent the company from accumulating significant losses over time.

#2. Ensures Compliance with Company Policies

Company policies often encompass spending limits and procurement rules. There can also be specific laws regarding internal documentation and financial reporting, such as the Sarbanes-Oxley Act (SOX) for publicly traded companies.

Invoice matching ensures that the company adheres to these rules for both legal and internal purposes. For example, a company may authorize only specific personnel or teams to make purchases and create expenses.

An organization can also segregate the duties to maximize accuracy and compliance. One person can be in charge of making an order, and another may need to approve the payment. This minimizes the chance of mistakes or internal fraud.

#3. Reduces Accounting Errors and Reconciliations

Invoice matching reveals any potential errors that may occur in some of the documents. Document generation is a process prone to error, especially if it’s done manually. Mistakes can vary from wrong number inputs to missing items and incorrect tax calculations.

Side-by-side comparison of documents during invoice matching reveals misalignments that can be rectified before the situation escalates. This can save companies a lot of time they’d otherwise spend “fixing” their books later on or doing year-end reconciliations. It results in clean records and more efficient administrative processes.

#4. Improves Cash Flow Management and Audit Readiness

Invoice matching ensures that payments are made on time and accurately. Timely invoice verification results in predictability, as you know what is due and when. This allows companies to organize and optimize payments in order to align with their financial situation and even take advantage of early payment discounts.

On the other hand, having clean records and verified invoices is essential during internal and IRS audits. You’ll be able to establish and demonstrate a clear link between every order and payment, making audits fast and efficient.

3 Different Types of Invoice Matching

There are three common types of invoice matching:

• Two-way matching
• Three-way matching
• Four-way matching

Each next method offers an increasing level of complexity and analytical rigor.

Two-way invoice matching is the process of comparing an invoice to the purchase order. This is the quickest and most basic form of invoice matching, where the goal is simply to ensure that the prices and items between an invoice and a PO align.

This method is commonly used for service invoices and recurring invoices for repeating expenses, since there’s no physical delivery to track and confirm.

Three-way invoice matching adds another document to the invoice approval process. In addition to a purchase order, an invoice is compared to the receiving document (e.g., a packaging slip or receipt).

This method provides much better protection against fraud and error than two-way matching. It is common for inventory-based businesses, manufacturing, and retail firms to verify that the goods were ordered, received, and billed correctly.

And finally, four-way invoice matching is the most rigorous of the three invoice processing workflows. It involves an inspection report or an acceptance document that ensures the goods were delivered and meet the required quality standards.

This type of matching is critical in regulated industries and fields that have high standards and strict quality control systems, like medicine or aerospace. There are usually defined quality metrics and technical requirements that need to be met before an invoice is cleared and the payment can be made.

How Invoice Matching Works in 4 Steps

While large organizations typically use ERP systems for accounts payable automation and invoice matching, many small businesses, as well as freelancers and independent contractors, do it manually. Let’s see how the manual method works.

Step 1: Document Preparation

The process begins when a business receives an invoice from the vendor, typically via email, mail, or accounting software. For manual verification, the invoice is typically printed or opened in a PDF viewer.

Then, the person responsible for invoice matching (a business owner or an accountant) needs to find a corresponding purchase order based on the PO number on the invoice. This is the initial step, also used to verify that the expense was approved in advance and that the invoice is valid in the first place.

Manual search for a purchase order usually involves checking the folder for a digital copy or browsing the file cabinets for a printed version.

Step 2: Comparison and Verification

Once you have the documents ready, you need to compare the information on them. This is the “matching” phase in which you look at the quantities and unit prices on the invoice and the purchase order. If you’re performing three-way matching, you’ll also look at the receiving document to ensure you aren’t paying for more than was delivered.

Depending on the situation, additional details you can analyze include tax rates and shipping fees. If it’s an invoice for rendered services, you’ll need to verify that the required work has been completed as agreed.

If everything is in order, you’ll verify the invoice and proceed with the payment; if, however, there’s a mismatch, you need to proceed with invoice discrepancy resolution.

Step 3: Exception Handling

The third step doesn’t always happen since an exception occurs when the documents don’t match. If that happens, you need to conduct an investigation to determine why there’s a mismatch between the documents.

In general, one of the first things you should do is contact the vendor. If the mistake is on their end, you can work with them to rectify the issue. For instance, if they overcharged, you can ask for a credit memo (credit invoice).

If you’re running a large operation, a mistake can also be internal, in which case you may need to contact someone from your team. On the other hand, if you received a partial shipment, you may need to talk to the carrier or the warehouse manager, and the invoice is put on hold until the discrepancy is resolved.

Step 4: Authorization and Payment Processing

The final step happens once the documents align perfectly or within the acceptable tolerance. At this point, the invoice gets scheduled for payment according to the payment terms, and the document and the transaction end up recorded in the accounting system.

Depending on the size of the business and its structure, one person or department may conduct invoice matching while the other (e.g., business owner or department head) needs to do the final approval.

5 Common Invoice Matching Challenges

While invoice matching is an important process that has clearly outlined steps, it’s not without its challenges that can pose issues to businesses, so let’s see the most common ones.

#1. Manual Data Entry Errors

Manually creating invoices or inputting data from paper documents into accounting software can lead to mistakes in the form of typos, incorrect amounts, and wrong details. Creating invoices by hand also makes them prone to data entry errors, which often grow with the volume of generated invoices.

These small mistakes can escalate and result in significant discrepancies during invoice matching, requiring a lot of time and attention to resolve.

#2. Missing or Incomplete POs or Receipts

When POs or receipts are missing or incomplete, there’s no data required for invoice matching. A common way that this happens is if someone makes an order for supplies or services without creating a formal PO.

If an invoice doesn’t have a receipt or a PO, the accounting team can’t easily verify it. This leads to delays, slowing down the approval process and increasing the risk of overpayment or fraud.

#3. Discrepancies in Quantities or Pricing

Discrepancies in quantities and pricing can pose significant challenges for invoice matching. Anything from an undisclosed price hike by the vendor to a portion of goods lost during shipping can stall the approval process.

When discrepancies occur, they often lead to a lot of back-and-forth communication with the vendor or another responsible party. This prolongs the authorization process and results in delayed payments. Plus, if the communication isn’t quick and transparent, it can lead to damaged relationships with vendors.

#4. Late Submissions and Delayed Approvals

The matching process gets stalled if the vendor sends an invoice late or if the document waits too long for approval. If the delay is on the buyer’s end, they can incur penalties for being late with payments, or they may lose out on potential discounts.

For example, if the vendor offers 2/10 net 30 credit, the business gets a 2% discount for paying within 10 days. Not meeting this deadline due to delayed approvals results in a direct financial loss.

#5. Duplicate Invoices

Vendors often send payment reminders for invoices that haven’t been paid promptly. If the client doesn’t have a robust invoice matching and tracking system in place, they may pay both the original invoice and the reminder. This can create big problems in the future and require a lot of work to reconcile.

6 Invoice Matching Best Practices and Tips

Due to the importance of invoice matching, it’s essential to know how to optimize the process. Here are some of the best expert tips and practices to help you achieve that:

1. Set clear tolerance levels. Invoice matching doesn’t always require a 100% alignment. Some companies allow for a price variance (e.g., a 2% discrepancy compared to the initial agreement). This allows them to maintain regular operations and not stall the entire process over statistically insignificant sums.
   
   
2. Establish strict policies. A good policy to implement is that no purchases can be made without a PO. This should be communicated both internally and to the vendors, to ensure you always have the necessary documentation and data needed to perform invoice matching.
   
   
3. Standardize the invoices. If you establish a long-term relationship with the vendor, you can ask them to maintain consistent formatting for their invoices. You can even ask them to include your PO number in a specific spot to make it easier to find and to speed up the matching process.
   
   
4. Use digital documentation. While reading paper documents can be up to 30% faster compared to digital files, they make the matching process tedious and more prone to error. That’s why you should always request digital invoices, POs, and receipts, and you should scan and digitize all paper documents to make retrieval and comparison faster.
   
   
5. Streamline communication. Have one dedicated email address for receiving invoices to ensure that all communication is centralized. In cases of exceptions, have clear protocols on how to approach contacting the vendor and resolving the issue.
   
   
6. Perform regular audits. If you have a team or an employee doing invoice matching, periodically review their work to ensure everything is according to policy. Moreover, you should regularly reconcile invoices so that any potential mistakes are caught and corrected early.

How Paystub.org Can Help You

Paystub.org can help sellers create professional, accurate, and standardized invoices that make the matching process quick and straightforward. Our invoice generator allows you to create different types of invoices in minutes; simply pick a template, fill out the form, preview the document, and download a finished invoice.

The tool comes with a built-in calculator to help with subtotals, taxes, and totals. Plus, it makes numbering your invoice, dating it, and adding terms streamlined and intuitive.

Final Thoughts

Invoice matching is an essential process for buyers to ensure they aren’t overpaying and that they receive what they ordered. When performed manually, it requires a disciplined approach with clear tolerance levels and strict policies.

This will protect your business from fraud and financial loss while helping it stay compliant with regulations. Plus, it’s a critical step toward stability and a strong cash flow, regardless of whether you’re running a startup or an enterprise-level organization.

Invoice Matching FAQ

#1. How does invoice matching prevent overpayments?

Invoice matching prevents overpayments by ensuring that the prices and quantities align between an invoice and a purchase order. As a result, the buyer isn’t paying more than was authorized in the purchase order, nor are they paying the same amount for a lower quantity.

#2. Can I automate invoice matching with Paystub.org?

You can’t automate invoice matching with Paystub.org, but you can create professional and accurate invoices that facilitate the matching process. Our tool helps you generate precise and highly detailed invoices effortlessly, minimizing the risk of error due to manual input, which is critical for successful automated matching.

#3. What happens if an invoice doesn’t match the PO?

If an invoice doesn’t match the PO and exceeds a tolerance, it must be put on hold. This means the payment will not be made until the invoice is manually released or the discrepancy is resolved in another way.