What is the difference between two-way and three-way matching?
Two-way matching compares the bill with the purchase order. It confirms that the supplier, items, quantities and unit prices agree. Three-way matching adds a third document showing what was received, which may be a goods receipt in an inventory system, a signed delivery docket or a completion sign-off for services. Two-way matching catches price and quantity differences against the order. Three-way matching also catches billing for goods that never arrived or arrived short.
How does matching work in Xero?
In Xero, an approved purchase order can be copied to a draft bill. Xero Central explains that a bill can be created from an individual purchase order, with quantities edited to match a partial delivery, or from the approved purchase orders list, up to 25 orders at a time with fewer than 100 line items in total. The bill's history links back to the original order, and the order number appears in the reference field. If no more items are expected, the order can be closed short. Unless an inventory app records receipts, keep the delivery evidence where the person matching can find it, such as attached to the bill.
What tolerances should you set?
A tolerance lets a small difference pass without review. Set it per business, in both dollars and a percentage, and apply whichever is stricter. Common reasons for small differences include freight, rounding and minor price changes. Anything outside tolerance goes to the person who raised the order, who accepts the difference, asks the supplier for a credit note or rejects the bill. Record that decision on the bill so the approver can see why it differs from the order.
Hypothetical example: a business sets a tolerance of $20 or 2%, whichever is smaller. A $1,000 order billed at $1,015 passes. The same order billed at $1,025 goes back to the person who raised it.
Which exceptions need a person?
Matching produces a predictable set of exceptions. Give each type an owner and a list of allowed actions, otherwise bills sit in a queue with nobody deciding. Most can be resolved by the person who placed the order, with finance stepping in when a credit note or a policy decision is needed. Set a time limit for each exception type, such as two business days for a price query, and show finance which exceptions are past it, so supplier payment terms are not missed while a bill waits.
- Partial delivery: bill for what arrived, then keep the order open or close it short.
- Price above the order: the requester accepts it or asks the supplier for a credit.
- Items not on the order: confirm they were requested before coding.
- Bill with no order: decide whether a retrospective order is allowed under the policy.
- Second bill against an order already billed: hold it and check for a duplicate.
- Receipt missing: ask the site or requester to confirm delivery.
Where does automation help with matching?
Automation can read the order number from the bill, find the purchase order, compare lines and quantities, check them against recorded receipts and work out whether differences fall within tolerance. It can chase the requester for a missing receipt and attach the delivery docket to the bill. Decisions outside tolerance stay with people, and payment approval stays separate, so the person who raised an order is not the only check on paying it. The Australian Signals Directorate describes a scam in which criminals order goods in a business's name and the supplier then invoices the real business; a bill with no matching order or receipt is the signal.
Which purchases need an order at all?
Requiring a purchase order for every purchase adds work for low-value or recurring bills such as utilities, subscriptions and rent, where a contract or schedule already sets the amount. One approach is to set a dollar threshold for orders, exempt contracted recurring bills and require orders for stock, equipment and project purchases. Write the policy down, ask suppliers to quote the order number on every bill, and check how many bills arrive without one in the first month after the policy starts.