What is a three-way matching and Why is it important?

Maintaining financial accuracy while managing countless supplier transactions can be both essential and challenging. Think about a system where every invoice, purchase order, and receiving report seamlessly aligns, minimizing the risk of errors, fraud, and overpayments. This is the promise of three-way matching—an accounts payable process that meticulously cross-checks these documents before any payment is released. By automating it, companies not only streamline their financial workflows but also enhance supplier relationships and protect their bottom line. As we dive into the benefits and mechanisms of three-way matching, it becomes clear why this process is a critical for effective financial management in procurement.

What is a 3-way matching?

Three-way matching is a control process in procurement that involves cross-verifying the supplier invoice with the purchase order, and the goods receipt note prior to approving the invoice for payment. It helps prevent errors, overpayments, and fraud, ultimately supporting financial accuracy and accountability in the procurement process.

What is 2 vs 3 way matching?

2-Way matching compares a purchase order and invoice to ensure they match before payment. 3-Way Matching adds a receiving report, verifying that the ordered items were received as specified, enhancing accuracy and control in the payment process.

• 2-Way Matching: It involves comparing the purchase order (PO) to the invoice from the supplier. The purpose is to confirm that the billed amount, quantities, and terms match the original purchase order. It’s a simpler process and is generally used for lower-risk transactions or services where receiving a product (like in inventory) isn’t necessary.
• 3-Way Matching: This method adds an additional layer by comparing the purchase order, invoice, and receiving report (goods receipt or proof of delivery). The receiving report confirms that the goods were delivered as specified in the PO and align with the invoice. This is commonly used for goods-based transactions to ensure the organization has received what it ordered before issuing payment.

How Does Three-Way Matching Work?

Three-way matching in procurement is a process that verifies the accuracy of purchase orders, supplier invoices, and receiving reports to ensure that goods or services were delivered as specified before releasing payment.

Here’s a step-by-step breakdown of how it works:

• Purchase Order Verification: When an organization places an order, it issues a purchase order to the supplier detailing the items or services ordered, quantities, prices, delivery dates, and terms. This PO is the baseline document in the matching process.
• Receiving Report Verification: Upon delivery, the receiving department creates a receiving report (also known as a goods receipt) to confirm that the goods or services were delivered as per the PO. The receiving report typically includes details such as item quantities, descriptions, any visible damages, and discrepancies with the PO.
• Invoice Verification: After fulfilling the order, the supplier sends an invoice to the organization, which includes the items or services provided, quantities, unit prices, and total amounts billed. This invoice is the final document in the 3-way matching process.
• Comparison Across Documents:
  • Quantity Check: Ensures the quantity received matches the quantity ordered and invoiced.
  • Price and Total Cost Check: Confirms that the unit price on the PO matches the invoice, ensuring the organization is billed correctly.
  • Quality and Condition Check: Any issues like damage or discrepancies reported in the receiving report are flagged. If goods are damaged or not as ordered, adjustments may be made before the invoice is approved.
• Approval and Payment: If all three documents match, the invoice is approved for payment, ensuring that the company only pays for goods or services that were ordered and received as expected. If there are discrepancies, these must be resolved before payment is authorized, potentially through negotiation with the supplier or adjustments to the invoice.

Who are the stakeholders in three-way matching?

Several stakeholders are involved in the three-way matching process, each with distinct roles and responsibilities:

• Procurement Department: Responsible for creating purchase orders and selecting suppliers. They initiate the procurement process and define the terms and conditions of the purchase.
• Receiving Department: Ensures the goods received match the purchase order and reports any discrepancies. They physically inspect and verify the quantity and quality of the received items.
• Accounts Payable Department: Matches the purchase order, receiving report, and invoice to approve payments. They ensure that payments are made only for the goods and services that meet the purchase order specifications.
• Suppliers: Provide the goods and services and issue invoices for payment. They are responsible for delivering the ordered items as per the agreed terms and conditions.

Benefits of Three-Way Matching for Businesses

Three-way matching offers several key benefits for businesses, primarily by enhancing accuracy, reducing risks, and improving supplier relationships. Here’s how it supports operational efficiency and financial integrity:

• Prevents Overpayments: By matching the purchase order, receiving report, and invoice, three-way matching ensures that businesses only pay for what was actually received and at the agreed-upon price, reducing costly payment errors.
• Improves Data Accuracy: Since all documentation must align, discrepancies such as incorrect quantities or billing errors are caught early, ensuring that records are accurate across procurement, inventory, and finance systems.
• Mitigates Risk of Fraudulent Invoices: Three-way matching makes it difficult for unauthorized or duplicate invoices to slip through since all three documents must be consistent before payment is approved.
• Promotes Accountability: Suppliers are aware of the three-way matching process and are therefore more likely to deliver accurately and honestly, knowing discrepancies will be detected.
• Streamlines Payment Processing: The process helps clarify payment obligations, enabling timely and accurate payment to suppliers, which can lead to better credit terms or early payment discounts.
• Builds Trust Through Accurate Transactions: Suppliers appreciate clients who maintain transparent, reliable payment processes. With fewer payment disputes and clear expectations, relationships with suppliers strengthen over time.
• Facilitates Audits: Documenting each stage of a transaction provides a clear audit trail, ensuring that the company can demonstrate due diligence and accurate financial practices in compliance with regulatory requirements.

An Example of Three-Way Matching

Imagine an organization orders 100 laptops at $800 each from a supplier:

• PO: Specifies 100 laptops at $800 each, totaling $80,000.
• Receiving Report: Confirms receipt of 100 laptops, but notes that two laptops arrived damaged.
• Invoice: Lists 100 laptops at $800 each.

During three-way matching, the discrepancy (two damaged laptops) is flagged. The organization contacts the supplier for a resolution, such as a replacement or credit adjustment, before approving payment for 98 laptops instead of 100.

Three-way matching is commonly automated through procurement or ERP systems to streamline the process and minimize manual errors, especially in organizations with high transaction volumes.

Why automate 3-way matching?

Automating three-way matching can greatly enhance efficiency, accuracy, and control over the procurement and accounts payable process. Here are some key reasons why businesses choose to automate three-way matching:

Reduces Manual Effort and Saves Time

Automating three-way matching significantly reduces the time and effort required to process transactions. Manual matching of purchase orders, invoices, and receiving reports can be labor-intensive, especially in organizations with high transaction volumes. By automating this process, businesses streamline verification, allowing accounts payable teams to focus on more strategic tasks. Additionally, automation enables rapid cross-checking, transforming what could take hours or even days into a matter of minutes. This speed helps companies meet payment deadlines more consistently and avoid late fees.

Minimizes Human Errors

Human error is a common issue in manual processing, where mistakes in data entry or overlooked discrepancies can lead to costly errors. Automated three-way matching minimizes these risks by using software to systematically cross-verify each document. This process eliminates errors associated with repetitive manual tasks, ensuring greater accuracy in each transaction. Automation also brings consistency to the verification process, applying the same set of rules to every transaction and improving data integrity across all matched records.

Enhances Fraud Detection and Compliance

Automating three-way matching strengthens internal controls, making it easier to detect and prevent fraudulent activities. With automated systems in place, it’s difficult for unauthorized or duplicate invoices to bypass verification, as the system flags discrepancies in real-time. This enhanced visibility not only helps in fraud prevention but also supports compliance with regulatory standards. Automated three-way matching provides a reliable audit trail, documenting each step of the transaction process, which is valuable during audits and regulatory reviews.

Improves Cash Flow Management

Effective cash flow management relies on accurate, timely payments, which automated three-way matching can help achieve. By automating verification, businesses ensure that payments are only released for accurate invoices and received goods or services. This control over cash flow prevents overpayments and unexpected financial outflows, making it easier to predict and manage expenditures. Additionally, faster processing of invoices can lead to early payment discounts offered by suppliers, further enhancing cash flow benefits.

Enhances Supplier Relationships

Automated three-way matching allows for prompt and accurate payments, reducing delays and errors that could harm supplier relationships. Suppliers value clients who pay on time and with minimal errors, and automation helps companies fulfill these expectations by quickly resolving any payment-related issues. Improved payment accuracy and timeliness foster a positive supplier relationship, which can lead to better terms, discounts, and partnership opportunities over time.

Enables Scalability and Growth

As businesses grow, the volume of transactions tends to increase, making manual matching unsustainable. Automation prepares businesses to scale their operations efficiently by handling high transaction volumes without additional manual effort. Automated three-way matching systems can accommodate increased complexity and volume, enabling businesses to process more transactions with the same or even fewer resources. This scalability is particularly beneficial for expanding organizations or those experiencing seasonal transaction peaks.

Supports Cost Savings

Automating three-way matching can lead to significant cost savings in various ways. By reducing the number of manual tasks, businesses cut down on labor costs related to accounts payable processing. Additionally, automation reduces the likelihood of overpayments and duplicate payments, directly saving on expenses that result from transactional errors. Cost savings are also realized through improved cash flow management, early payment discounts, and minimized reliance on manual error correction.

Enjoy accuracy, accountability, and efficiency

Three-way matching is more than just a financial safeguard; it's a strategic tool that enhances operational efficiency, strengthens supplier trust, and fortifies a company's financial controls. In a competitive business landscape, where accuracy and speed can define success, automating three-way matching equips organizations to scale seamlessly, avoid costly errors, and achieve better cash flow management. For any company looking to optimize its procurement and payment processes, three-way matching is not merely an option—it's a necessity for sustainable growth and sound financial practices.

FAQ

What is the 3 way match issue?

Three way match issue refers to problems arising when the purchase order, invoice, and receiving report do not align, leading to payment delays or disputes.

What is a Three way match discrepancies?

3-way match discrepancies are inconsistencies between the three documents, such as mismatched quantities, prices, or descriptions, requiring resolution before payment.

What is 4 ways matching?

4-Way matching extends three-way matching by adding a contract or agreement document. It ensures that the purchase order, invoice, receiving report, and contract all align, providing thorough verification for payment authorization.