March 9, 2023

Top 3 best practices for invoice reconciliation in construction

Kojo founder Maria Davidson presents at SMACNA 2023

Three-way invoice reconciliation is an important quality check for construction accounting. It goes beyond traditional two-way reconciliation, which compares the purchase order with the supplier invoice.

For example, when buying out a job you might submit a $6,000 order for conduit. The supplier delivers the materials, and you receive an invoice for the total.

If you're doing two-way reconciliation, you compare that invoice to your purchase order. Accounting pays the invoice when everything matches. But what if the supplier only delivered half the conduit in the first shipment?

With three-way reconciliation, you also check the delivery receipt before paying. If there's a discrepancy, you hold payment until you can clear it up. Sometimes, that third check prevents you from paying for an item you didn't receive or which arrived damaged.

The importance of invoice reconciliation in construction

According to data collected by Kojo, 27% of all vendor invoices contain errors. If the accounts payable teams don't catch those errors before the payment goes out, they can lead to tens of thousands in "mistake costs."

Invoice reconciliation can catch those errors before they erode your profit margin. Each catch saves you money, but the process itself has a cost. That's because most contractors manually reconcile invoices using PDF or paper. Trade contractors report investing 20 hours a week in this manual process.

And even with all those hours invested, a manual process is notoriously prone to errors. Take delivery receipts, for example. These receipts are often small slips of paper that get lost on a job site or inside a cluttered work vehicle.

If you lose a document, you can't fully reconcile the invoice for that order.

So how do you do invoice reconciliation without adding more effort into your existing workflow?

3 best practices for doing invoice matching

Here are three best practices to keep the invoice matching process accessible and efficient.

1. Connect invoice matching to your purchasing process

Document sourcing is one of the most challenging parts of invoice reconciliation. Accounts payable needs three separate documents to complete each match. The longer it takes to find each one, the lower the team’s productivity.

The first step is to digitize your procurement process so that two of the three required documents — purchase order and delivery confirmation — are already in one place.

Then, instead of hosting your invoice matching process elsewhere, integrate it into your purchasing system. This way, all three documents are in one place and easily accessible. This change reduces the amount of time you waste chasing down documents. Everything is already where you expect it to be — assuming your system is well-designed and user-friendly.

Your system should offer a simple way to upload or track all three of those crucial documents. Purchasing employees should have a simple way to create and manage the purchase order. Those in the field should be able to log delivery receipts on-site quickly and easily. Invoices should be easily received into the system.

Most importantly, all purchasing and field employees must be able and willing to use your system. If they aren't, they'll likely revert to manual processes. Choosing a user-friendly automated tool is the best way to avoid this backslide.

2. Use technology to identify errors

Manual invoice reconciliation is time-consuming. A team member must cross-reference each line item across documents, looking for differences. The process is not only slow but also prone to human error.

Luckily, we now have automated technology that can quickly and accurately compare information across multiple documents. Well-designed tools will highlight the errors they found and flag those errors for users. Ideally, they also make those errors easy to resolve with the materials supplier.

This automated technology is accessible and affordable even for small contracting companies. When used, it saves hours of labor effort and reduces the chances of mistakes slipping through the cracks

The technology available - so use it. It's less expensive than peoples’ time and doesn't require an overhaul of your purchasing workflow.

3. Connect invoice matching to the accounting system

The goal of invoice matching is to verify invoice accuracy before approval. But an invoice’s journey doesn't end after approval. All invoices must be logged in the accounting system to track the project’s actual costs and the company’s overall finances.

Office employees should be able to sync the approved invoice to your accounting system quickly without adding to their workload.

Most importantly, the entry process shouldn't introduce new manual steps. Each manual step is another opportunity for errors to happen. Therefore, the connection between invoice matching and the accounting system should be as automatic as possible.

If automation simply isn’t possible with your accounting system, then familiarity is the next best thing. At a minimum, the accounting department's invoice entry process shouldn't change. For example, suppose someone keys the invoice into the accounting system manually. The invoice matching process should at least preserve accounting’s ability to do this easily.

Generally, when invoice matching improves, so does accounting. Employees get better information faster, with fewer steps involved.

Automate invoice matching with Kojo

Automated invoice matching helps construction companies avoid paying for costly mistakes, without a big investment of time and effort.

Kojo has the first automated invoice matching solution built for trade contractors. With a user-friendly interface, automatic error flagging, and direct accounting integrations, Kojo helps you avoid the cost of payment errors with virtually no effort. Book a demo today and see it for yourself.

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