Accounts Payable Matching (#82)
/In this podcast episode, we discuss the many variations on accounts payable matching, and the situations in which they should be used. Key points made are noted below.
What is Accounts Payable Matching?
Matching is the process of comparing an approved supplier invoice to the original purchase order, to make sure that the price being charged is the same as the one that the company originally agreed to. And, on top of that, matching also involves comparing the billed quantity to the amount the receiving staff says actually arrived at the receiving dock.
This is by far the most time consuming part of accounts payable, because there are a multitude of errors in the matching process that have to be reconciled before you can pay the supplier. If you handle matching too carefully, then it takes a lot of staff time and delays payments to suppliers; but if you don’t do matching, then there’s a risk of paying for something that’s either overpriced or wasn’t fully received. So, what’s the best way to handle matching?
When Not to Do Matching
Well, there are quite a few ways. We’ll start with the simplest approach, which is no matching at all. This is not appropriate for a company that receives a lot of inventory, but it may work very well for a services business that only receives office supplies. In this later case, even if the company is being grossly overcharged and received quantities are seriously off, it’s still pretty hard to lose much money.
Use Two-Way Matching
The next step up from there is to match received quantities to the supplier invoice, or the company’s purchase order to the supplier invoice, but not both. This may work if you’ve had problems in one area, but not the other. So essentially, you’re saying that there’s a certain level of mistrust of your suppliers’ ability to either ship the right goods or to bill the right price.
Allow Larger Variances
The next step up from there is to allow some pretty large variances in the matching process. For example, prices or quantities can be off by five percent before you’ll bother to make an adjustment to the supplier’s invoice. This works if the total amount of purchased goods is low, so your total potential variance is also low. However, if a supplier figures out that the company uses this variance, then there’s a chance that the billed amounts will always be too high, so watch out for that.
So far, these have all been manual processes. Now we get into more computerized solutions.
Use Automated Matching
First up is completely automated matching, which is nowhere near as perfect a solution as it sounds. Under this method, the company installs some pretty high-end accounting software that does the matching for you. This means that the purchasing department has to enter all purchase orders into the computer system, and has to do so line by line, so that the receipts can be matched against individual line items.
Next, the receiving department has to have computer access, so that they can call up the purchase order and check off items as they’re received. So, this shifts the quantity matching process from accounting over to the receiving dock. And finally, the accounting staff has to enter each individual line of every supplier invoice into the computer. The software then automatically matches everything up, and returns a list of items that don’t match, which the accounting staff has to reconcile.
While this may sound neat, the bit about entering every single line in every supplier invoice can be pretty aggravating. Nonetheless, this is about as far as many of the larger companies have taken the matching concept.
And before I go to the next step, keep in mind that you can also implement just part of that last solution. This usually means having the receiving staff check off items in the computer as they come in, which is a good way to at least ensure that the quantities are correct. As for price matching, it’s possible to just audit those numbers from time to time, and then investigate those suppliers in detail who have pricing errors.
Use Evaluated Receipts
And that brings us to the niftiest of all the matching alternatives, which is called evaluated receipts. Under this system, the company has suppliers deliver goods directly to its own production process, with no receiving people around to examine the goods. Everything is immediately incorporated into the company’s products, so the assumption is that if something was produced, then the goods must have been delivered.
Then the accounting software uses the bill of materials to calculate how much of the supplier’s product must have been used, multiplies it by the unit price listed in the purchase order, and sends a payment to the supplier. There is no supplier invoice at all. In fact, there’s really not much of anything for the accounting staff to do.
This is really cool. But, it only works if the setup is exactly right. First, you have to pre-certify every supplier in the program, so that you can trust them to deliver the right products at the right time, and in the right quantity. Second, only one supplier can supply each part. Otherwise, its really hard to figure out who to pay. Third, the bills of material have to be totally accurate. If they’re not, then suppliers won’t be paid for the correct quantity of delivered parts.
A fourth issue is that suppliers should be located nearby. If they’re distant, then the company is more likely to order in bulk, and this type of system works best with small quantities that are delivered continuously. And finally, there needs to be a system for paying suppliers for parts that are scrapped during the production process.
So, clearly, evaluated receipts only works in a sophisticated production environment. And also, because this requires close coordination with suppliers, the company probably needs to be a fairly large one. A smaller company that can’t offer much volume to its suppliers isn’t going to be able to attract enough supplier interest to make this work.
And finally, you need to buy the accounting software for it. Evaluated receipts is not a common accounting module, so be prepared to install something in the price range of either Oracle or SAP software.
But if you are big enough, and can afford the software, and you have enough purchasing volume to warrant it, then evaluate receipts is a good solution.