What is a 2 Way Match?
A 2 way match is defined as an accounts payable process for verifying a vendor/ supplier invoice, by matching it with the corresponding purchase order (PO) document. This process is applicable for goods/ services purchases made on credit from vendors.
The purpose of a 2 way match is to ensure that vendor invoices are valid and accurate, thereby preventing incorrect billing or any fraudulent attempts. If the match is a success, the payment is processed by the accounting team. Whereas, in case of a mismatch the issue is investigated for resolution, and the payment is kept on hold.
For example, a team in a company requires a new software that is to be billed on a post-paid monthly cycle. After vendor selection and deal finalization, a purchase order (PO) is created and sent to the vendor. This PO document entails the details of the item to be purchased, at what price, when and how much. At the time of the monthly payment, the invoice is generated by the vendor company. This invoice is then received by the accounting team for verification against the initial purchase order and matched for validity and accuracy in a 2 way match.
Rever enables companies to automate the accounts payable processes, where every invoice is automatically captured, matched, verified and reconciled in real-time.
Related: What is 3 Way Matching?
Key Components in a 2 Way Match
2 way match has two core components - the purchase order and the vendor invoice.
For enterprises, the data of both these components typically rest in the Enterprise Resource Management (ERP) system or accounting software. Let us dig deeper into both these components and how they flow through typical enterprise operations:
- Purchase order:
The purchase order (PO) is generated by the company that has decided to make a purchase from a vendor on credit basis. This document is shared with the vendor and the delivery is expected based on the requirements detailed here. The timeline of credit to payment is based on agreement between the company and its vendor and is typically monthly or quarterly.
- Vendor invoice:
Vendor invoices are raised by seller of goods/ services with the company who purchased on credit based on agreement. This invoice is received and then processed by the accounts payable team, through record matching, approvals and final payment scheduling.
Let's take an example of a manufacturing company, where a new raw materials agreement is signed with a vendor. As per documented agreement, a monthly billing cycle is set. For each new requirement a purchase order is documented and shared with the supplier. After delivery, the total invoices are shared by the vendor with the company for payment. The company then uses 2 way match process to validate each invoice.
2 Way Match Process: Key Steps
The 2 way match process is triggered when accounting team receives a vendor's invoice for payment. Here are the key steps in this process:
- Step 1: Purchase order (PO) extraction based on vendor invoice
The 2 way match process is triggered when the business receives a vendor invoice. The accounts payable team extracts the corresponding purchase order (PO) based on header details in the invoice. For enterprises, the PO is typically captured and stores in an enterprise resource planning (ERP) or finance/ accounting software. If the purchase order is not found, the invoice is deemed invalid even before a match and the issue may be investigated.
- Step 2: Purchase order and vendor invoice match
Once the purchase order is extracted, the vendor invoice is matched line-by-line for accuracy based on what was ordered and what is being billed for payment. In case of a discrepancy, an investigation is launched to understand the error. In case of a match success, where no issues are found, the invoice is authorized for further approvals.
- Step 3: Invoice approval
The matched invoice is sent for approval based on set workflows and protocols. Typically, it requires sign-off by key stakeholders such as lead of the team who utilized the goods/ services, accounting/ finance head etc.
- Step 4: Payment processing
Payment processing of matched and approved invoices are scheduled based on the agreed upon payment cycle agreements with vendors, typically monthly or quarterly.
Related: What is Invoice Approval Workflow?
Benefits of Using a 2 Way Match Process
2 way matching provides several significant benefits for enterprise accounts payable accuracy:
- Checks at the header gate
The 2 way match process requires immediate extraction of the corresponding PO based on header details of the invoice. This ensure that any invalid invoices are caught quickly even before detailed line item checks are needed.
- Prevents unauthorized or excess payments
2 way match helps filter out any unauthorized payments or excess payments billed by a vendor in the details of the line items such as quantity and value. It provides simple, reliable accounting checks and controls for validation. However, in comparison, a 3 way match is a more reliable form of accounts payable verification.
- Provides a traceable financial recording system
The 2 way matching method is a traceable financial recording method that lays down the key foundation for financial reconciliation. It allows for data-based budget monitoring, resolving accounting discrepancies, identifying potential financial fraud and keeping books ready for external reporting etc.x
- Provides outflow data for budget monitoring and financial forecasting
Budget monitoring and any degree of financial forecasting requires inflow and outflow data. The 2 way match process provides a reliable method for ensuring data accuracy around company cash outflows in the form of payments and helps create a clearer picture for monitoring planned-to-actual spend. This data in turn helps create reliable financial forecasting reports, which is key for enterprise financial planning.
- Helps companies stay audit-ready
Effective financial reconciliation is key for any company’s expense book. Ensuring a clear and verifiable record on how much is paid, when and for what, is key for healthy financial book keeping. The 2 way match provides all the essential elements required to maintain an audit-read book keeping.
Related: What is Accounts Receivable?
Potential Challenges of 2 Way Match
While the 2 way process clearly has some key benefits, it is not a fully sealed process and has some gaps:
- Does not include good received note (GRN)
Unlike a 3 way match, a 2 way match does not include a 3rd key element in matching accounts payable - the goods received note (GRN). This is a note from the team/ team member who required the item for which the purchase order (PO) to be raised.
The GRN ensures that the goods/ services promised were actually delivered as per PO. Without this, a PO may have been raised, the delivery never made it through, but if the vendor raised an invoice, and it may get paid in error.
- Leaves room for delivery errors
The 2 way match leaves room for delivery errors or quality issues that may go unaccounted in the absence of a GRN.
Best Practices for 2 Way Matching
- Setting detailed purchase order formats
The first step to ensure an effective 2 way match process is to have detailed, pre-set and mandatory fields for raising a purchase order. This ensures that all essential fields of data capture are present when a PO is processed, such that it leaves no room for quantity, quality or pricing related discrepancy during 2 way match when the vendor invoice is received.
- Setting financial tolerance threshold based on budget
Setting a financial tolerance limits based on the company's budget helps prevent any significant straying away from the expense plan. In case of purchase requirements that cross the set tolerance threshold, they can be sent through an exception handling process for approval or rejection.
- Setting exception handling process
An exception handling process is required for escalating, responding and managing cases of fraud, errors or situations that require involvement of other stakeholders. Clearly defining an invoice approval workflow can help with the management of exceptions and adhoc issues that may crop up with supply chain invoice management.
- Ensuring reliability of data storage and retrieval systems
Both purchase orders and vendor invoices need to be stored in such a way that they can be easily extracted for matching and reconciliation.
At the very minimum, strong authentication based access and retrieval data systems should be used. And on an advanced level, Rever provides multi-layered data protection for storage and retrieval, and automation of the accounts payable process.
