What is 3-Way Matching in Accounts Payable?
3-way matching in accounts payable (A/P) refers to a validation technique that is used to help confirm that a received invoice is accurate, credible, and should be paid. After all, no business wants to overpay on a purchase or fall victim to fraud, so a cautious, trust-but-verify approach to any request for funds from your suppliers is healthy and should be encouraged.
Here is everything you need to know about 3-way matching, from how it works to its drawbacks.
What is 3-Way Matching - An In-Depth Look
As its name would suggest, 3-way matching is an accounts payable best practice that compares the relevant details from three of the key types of documents generated during a typical procurement process.
- Purchase orders: Routinely sent by the purchasing department of the buyer to the seller to request the procurement of a particular good or service. These records commonly outline a description and quantity for the order alongside related pricing and company information.
- Receiving records: These could be packaging slips, goods receipt notes (GRNs), or any other documentation that accompanies the product or service and clearly identifies the exact details (e.g., receiving date, inventory totals) of the delivery.
- Invoices: A formal request for payment sent from the seller to the buyer. Routinely, these documents include a clear due date and a detailed breakdown of the outstanding charge, outlining pricing and any potential discounts or credits available.
The goal of 3-way matching is to compare these documents and identify any discrepancies—inaccurate quantities, wrong prices, damaged or missing goods, twice-submitted invoices—between the records.
Commonly, these issues can be attributed to simple mistakes like transcription errors or shipment delays. But sometimes, these efforts uncover fraud from inside or outside the business.
Conversely, when all three documents align, a buyer can be more confident that the submitted invoice is legitimate and move forward with payment.
What is the difference between a 2-way and 3-way match?
Proper documentation is a relative term, particularly across industries and geographies. Not all businesses generate each of the needed documents for 3-way matching in every transaction.
For example, you don't typically receive a separate delivery notice for commonly recurring charges, such as a software subscription or utility payment.
Fortunately, even if you don't have access to any receiving or shipping information, you can still use a 2-way matching process to confirm that the relevant details are common between your original purchase order and the final invoice.
While this scaled-down matching process might not flag issues as efficiently, it still helps avoid the common problems previously discussed and can capture increased value for your business.
To learn more about 2-way matching, check out our blog: What is 2-Way Matching in Accounts Payable?
Why is 3-Way Matching Important? What Problems Does it Help You Avoid?
In corporate bookkeeping—or any financial endeavor—you want your records to match. When there are discrepancies, you can lose track of funds, overvalue your real cash position, or undermine general decision-making throughout the business. However, employing a 3-way match system in your accounts payable efforts can help your company avoid the following issues.
1. Problematic vendors
Everyone makes mistakes. And depending on how many manual steps are involved in your vendor's invoicing efforts and your own A/P processes, common errors might even be unavoidable. But it might be time to have a serious conversation with them when most invoices from a particular vendor include mistakes that all err in their favor.
Admittedly, these issues may not be nefarious and merely the result of sloppy processes, but that sloppiness begs the question of where else the supplier could be cutting corners. Ideally, any vendor you work with should value your working relationship and your business enough to mitigate and minimize any invoice or shipping issues proactively.
2. Wasted money
Paying twice for the same purchase or full price for an incomplete shipment isn't the smartest business decision. And while typically, you'll be able to get this overspend back from your long-term suppliers, some businesses might be less cooperative.
Of course, even when you regain these funds, these errors can wreak havoc on your A/P efforts. After all, one of the key focuses of your accounts payable staff should be the strategic controlling and managing of your organization's cash flow—an effort that is severely hampered when portions of your working capital are needlessly tied up for extended periods.
3. Auditing challenges
One of the major red flags that an auditor might encounter in their investigation is discrepancies between financial documents. However, by employing 3-way matching and documenting the results, you'll have already resolved any matching errors related to the payment phase of your A/P operations long before an auditor can raise a complaint.
Your payment efforts will be a common target for criminals and other ne'er-do-wells looking to make a quick buck. No business is truly safe from invoice fraud.
In fact, according to the 2022 AFP Payments Fraud and Control Survey produced by the Association for Financial Professionals (AFP) and JPMorgan Chase & Co., 71% of respondents had either been targeted for or fallen victim to payment fraud in 2021. And that same year, one Lithuanian fraudster pled guilty to using invoice fraud to bilk Google and Facebook together for a combined total of over $100 million.
With 3-way matching, you'll be much more likely to notice those erroneous invoices or payment requests that spontaneously list a different bank account.
How Does 3-Way Matching Work?
The 3-way matching process
While labor intensive, the typical 3-way matching process is relatively straightforward.
- Step 1: After your procurement team has authorized a desired purchase, your business will send a purchase order to the relevant supplier that outlines the quantity, pricing, and delivery terms of the requested goods or services. Routinely, you'll want to save a copy of this purchase order for your internal records.
- Step 2: The supplier will prepare and deliver the requested order, accompanying the goods or services with corresponding receipt documentation that details what was provided. When your business receives the order, the person or persons who receive it should confirm the accuracy of this paperwork and record it. Ideally, if there are issues with the delivery, your staff should address that problem before finalizing receipt of the order.
- Step 3: At the appropriate phase of its billing cycle, the supplier will provide your business with an invoice that outlines what has been delivered and the expected payment, including pricing information, additional fees such as sales tax, and any other related details.
- Step 4: Your accounts payable team verifies that the transaction was pre-approved by your purchasing department and that you have all relevant records. The team then initiates a 3-way matching process that reviews the document types—purchase order, receiving records, and invoice—looking for any deviations. Routinely, you'll want to verify matches regarding.
- Company information (e.g., business name, payment address, account number)
- Shipment totals or service details
- Tax burden
- Delivery date
- Step 5: If the compared details match, the A/P team authorizes payment, and the relevant funds are transferred. However, if the details do not match, the invoice is escalated for further review to identify the source of the discrepancies. And the payment is not finalized until these variances have been resolved.
An example of 3-way matching in action
Harry's Haberdashery Haven is the premiere seller of hats, capes, tie tacks, cufflinks, and other men's clothing accessories in South Boston. And since St. Patrick's Day and the related parade are a major part of the local culture, Harry sells a ridiculous number of the green bowler and top hats every year in the first weeks of March.
With the holiday quickly approaching, Harry needs to bulk up his inventory, so he submits a purchase order to Put a Lid On It Manufacturing for 50 bowler hats at $25 apiece and 50 top hats at $35 apiece. A few weeks later, the shipment of 100 hats arrives, and after inspecting the packaging slip along with the quality and quantity of the products, Harry accepts the delivery.
A month later, Harry receives an invoice from Put a Lid On It Manufacturing for $3,187.50 to be paid in the next 30 days. Wanting to verify the accuracy of the payment request, he begins a 3-way matching process, gathering his copy of the initial purchase order, the packaging slip, and the recently-received invoice.
Harry initially verifies that the business name and payment details are consistent across the documents, making it unlikely that a rogue fraudster is attempting to misdirect a legitimate payment. He then verifies that the inventory total of the 100 hats that he requested in the initial purchase order is matched by the packaging slip and invoice.
Finally, Harry reviews the pricing details and notes that the $3,187.50 total accurately reflects the pricing information on the original payment order—50 bowler hats at $25 each and 50 top hats at $35 each—along with a 6.25% local sales tax.
Confident that everything checks out, Harry authorizes payment and initiates a wire transfer to Put a Lid On It Manufacturing's bank account.
What Are the Drawbacks of a Manual Matching Process?
Time & labor
Manually handling your 3-way matching process will require increased work from your A/P staff, who routinely have more strategic tasks that they should be performing. Instead, they'll need to physically search through your filing cabinets and relevant databases to secure all documentation related to an invoice. This task grows increasingly burdensome if multiple purchases are covered in a single payment request.
And once everything has been found, your A/P team will still need to meticulously compare the relevant details across several documents, whose layouts will vary with each new supplier.
As is common among manual processes, human error is always a risk. Not only can your employees easily overlook transposed numbers or unintentionally miss process steps, but they also might cause transcription errors on the original documents. Further, companies that don't have a sufficiently-sized workforce to handle all of their matching efforts, these businesses will often need to pick only certain classes or payment sizes to review, meaning more discrepancies and overpayments will slip through the cracks.
Whether caused by a virulent bug rampaging through your office or poorly coordinated vacation periods, you will have days where you are short-staffed in your accounts payable operations, limiting how many sets of eyes you can dedicate to 3-way matching. Unfortunately, your suppliers won't take a day off from submitting new invoices or expecting prompt reimbursement for their efforts.
In addition, with more frequent errors occurring throughout the matching process, you'll likely be escalating a higher percentage of your invoices for further review, extending payment timelines.
The Benefits of Automated 3-Way Matching
A computer-driven matching process—as a component of larger accounts payable automation platform—can avoid these limitations while capturing the full value offered by document comparison. The right solution will let you:
- Avoid calculation and transcription errors
- Capture and store all of the relevant details from the three key document types without human intervention
- Encourage more frequent early payments
- Improve worker satisfaction by offloading monotonous, repetitive tasks
- Make it easier to validate all incoming invoices independent of the available labor
- Scale to accommodate business growth and higher invoice volumes
- Simplify management thanks to accounts payable workflow automation
Learn more in our articles on A/P software features to look for and how to automate accounts payable.
Invoiced: Automated 3-Way Matching Made Easy
No matter the size or scope of your business, 3-way matching in accounts payable is an effective, efficient mechanism to help avoid wasting money. And automation enhances the potency of this advantage while liberating your critical staff to focus on more strategic measures.
Learn how the Invoiced Accounts Payable Automation Software can help your business accelerate payment timelines without compromising accuracy and reducing the likelihood of needless overspending when you schedule a demo today.