Invoice reconciliation is a challenging job that most accounts payable (AP) organizations take on due to the large number of invoices received each month. Despite being a critical function in B2B transactions, the manual effort of matching purchase orders (PO) to invoices is often tedious, laborious and highly prone to errors and delays. This two-way matching process, while inefficient, allows finance organizations to validate the invoices are real prior to paying.
Three-way matching involves a third step of cross-referencing the PO and respective invoice to a delivery receipt. The addition of a delivery receipt further assists AP organizations by comparing quantities purchased, invoiced and received as well as rooting out fake invoices. Unauthorized transactions can cost a company an estimated 5 percent of its annual revenue according to a report by the Association of Certified Fraud Examiners. While this process can help reduce the chances of a fraudulent invoice going undetected, the main component of the traditional three-way match relies on humans to complete the order receipt and promptly submit it to AP for reconciliation.
Sophisticated companies are increasingly leveraging data transformation via B2B connected commerce solutions to streamline and accelerate three-way matching. When PO Automation, Invoice Automation and Advance Shipping Notices are combined, businesses have access to clean, in-sync data that eliminates headaches during the PO-to-invoice reconciliation process. These companies rely less on manual processes and the hope that someone will complete the order receipt, and instead leverage thresholds and automated system checks to capture exceptions while triggering the payment process in a timely way.
Manual processes create challenges in three-way matching
To complete a three-way match, a PO, an invoice and a goods receipt are cross-referenced to confirm consistency within the order data across all documents. Historically, these documents have been sent as PDFs in emails or submitted in other non-automated means, which AP teams then must manually review line-by-line before rekeying the information into the appropriate systems and ultimately approving payment to the supplier.
Not only is this process slow and laborious, but it also leaves a high margin of error. If an employee does not input the information correctly or a piece of data is missing, the invoice will be rejected, and AP must begin the search for the discrepancy to resolve payment.
For example, if there are three line items on a PO and the corresponding invoice shows four line items (the three line items from the PO plus a fourth line item for a shipping fee), the invoice would be rejected due to inconsistencies between the two documents. Other scenarios that would disrupt the three-way matching process include if item, quantity or price data were input incorrectly or a goods receipt were not submitted. When errors like those occur, there can be significant delays in both reconciliation and payment processing.
Now consider the impact of this process across hundreds or thousands of transactions. The result is a massive headache for AP in addition to strained trading relationships and, in worst-case scenarios, credit holds or late payment penalties from suppliers.
Leveraging connected commerce to automate three-way matching
Connected commerce solves the challenges of three-way matching. Data transformation ensures the meta data (address, bill to info, pricing, line items, etc.) across all three documents are clean and in sync to streamline the matching process. If any discrepancies are identified outside of the allowed exceptions set by the buyer, connected commerce solutions will automatically flag the document and send it back to the supplier before it ever even reaches the buyer’s system. By catching errors and discrepancies sooner, disputes can be resolved in seconds rather than the weeks or months it would take if, for example, a PDF document sat in an email inbox or AP had to search for an error.
Further, companies that pair Advance Shipping Notices (ASNs) with PO Automation and Invoice Automation can bypass the need for goods receipt. This is particularly beneficial because it speeds up the reconciliation process in cases where a goods receipt may not be available. In situations where a good receipt is required, ASNs, which include complete order and tracking details, could be leveraged to help reinforce the fact that the order was received and allow for override approval.
Faster and easier three-way matching eliminates the possibility of credit holds or penalty fees and improves relationships with strategic suppliers. In some cases, stronger trading partnerships can prompt better terms and prices.
Looking forward to an automated future
As businesses increasingly look toward digitization, there will be an exponential increase in investment in connected commerce solutions that streamline and automate key aspects of B2B transactions, including three-way matching. Companies will prioritize solutions that improve operational efficiency so buyers can reduce invoice processing time and free up resources to focus on other key aspects of the business.
To learn how to enhance eProcurement with connected commerce solutions, visit TradeCentric.