Invoice Matching

Invoice matching is the process of checking a supplier's invoice against the buyer's own records of what was ordered and what was received, before the invoice is accepted as a liability and paid. It answers three questions: did we order this, did we receive it, and are we being charged the agreed price? It is carried out by the accounts payable function, increasingly by software, and it is the central control in the purchase-to-pay cycle.

The purpose is to prevent overpayment, duplicate payment and payment for goods or services that were never delivered, whether these arise from supplier error or from fraud. Matching also gives finance an accurate record of what is owed and when, which supports cash forecasting and the period-end accrual of goods received but not yet invoiced.

• Two-way matching. The invoice is compared with the purchase order for supplier, items, quantity, unit price and terms. It is used for services and low-risk purchases where there is no separate record of receipt.
• Three-way matching. The invoice is compared with both the purchase order and the goods receipt note, so that payment is made only for quantities actually received. This is the standard for physical goods; the receipt comparison is described under goods receipt matching.
• Four-way matching. A fourth document, an inspection or quality acceptance record, is added, so that payment is limited to goods that passed inspection. It is found in manufacturing and regulated industries.

Matching may be done at the level of the whole invoice or line by line. Line-level matching is more accurate where deliveries are partial or orders have many items.

Invoices arrive on paper, as email attachments, through supplier portals or as structured electronic documents. Data is captured by keying, by optical character recognition or directly from the electronic file, and the supplier is identified against vendor master data. The system then looks for the purchase order quoted on the invoice and for receipts booked against it, a step covered under purchase order matching.

If everything agrees within set tolerances, the invoice is approved for payment on its due date without anyone handling it. If not, it becomes an exception. Common exceptions are a missing or wrong order number, a price different from the order, a quantity invoiced above the quantity received, freight or tax not provided for, and a receipt not yet recorded. Exceptions are routed to the buyer, the requester or the warehouse to resolve, following the invoice approval workflow. The outcome may be a corrected receipt, an amended order, a request for a credit note, handled under credit note processing, or a formally disputed invoice.

Requiring exact agreement would stop too many invoices for trivial reasons. Organisations therefore define tolerances, such as a small percentage or absolute amount by which price or quantity may differ before an exception is raised. Tolerances are set by policy, may vary by supplier or category, and are reviewed periodically, since limits that are too loose allow steady overcharging while limits that are too tight flood staff with exceptions. Many systems also apply a rule on over-delivery, accepting or rejecting quantities beyond the order.

Matching is a defence against several familiar schemes: invoices from fictitious suppliers, inflated quantities or prices agreed with a colluding employee, and duplicate submission of a genuine invoice. Its strength depends on segregation of duties. The people who raise orders, record receipts, maintain supplier records and approve payments should be different, since someone who controls two of these steps can create documents that match each other. Additional checks search for duplicate invoice numbers, amounts and dates, and for changes to supplier bank details shortly before payment. After payment, supplier statement reconciliation provides a further check that both parties' records agree.

Modern enterprise resource planning and accounts payable systems perform matching automatically, and the proportion of invoices paid without manual touch is a standard performance measure. Structured electronic invoicing, sent through electronic data interchange or national e-invoicing networks, removes data capture errors, and a growing number of countries require it for tax reporting. Some buyers go further and dispense with supplier invoices for regular supplies, paying on the basis of the order and the receipt alone, a method known as evaluated receipt settlement. Machine learning is applied to suggest account codes for non-order invoices and to predict which exceptions are likely to be resolved in the supplier's favour.

Matching confirms that documents agree with each other, not that the underlying transaction was sound. It will not detect an order placed at an inflated price, a receipt booked for goods that never arrived, or a service of poor quality. It depends on timely and accurate recording of receipts, which is often the weakest link, and on clean purchase order data. High exception rates usually indicate problems upstream, in ordering or master data, more than in accounts payable itself.