Barbara Cook is a freelance writer and former CFO with subject matter expertise in financial and accounting topics and automation software. To illustrate how three-way matching works, let’s look at a hypothetical situation. An event-planning agency has ordered 1,000 copies of placeholder cards for a client. Our software provides automated account validation, detailed risk analytics, and customized workflows. The difference in matching methods refers to the number of times that orders are matched.
The AP department is responsible for verifying the invoices are real, which is incredibly important since organizations lose an estimated 5% of their annual revenues to fraud. And three-way matching doesn’t only benefit your business—because of the expedited invoice approval process, it also maintains a positive buyer-supplier relationship. A purchase order (PO) is a document, often legally binding, that confirms an order of products or services without requiring immediate payment. This document is sent by the company to a vendor with the intention to track and control the purchasing process. Most companies will require purchase order approvals as a key control activity in the accounts payable cycle. Comparing details across three documents helps identify errors and fraudulent invoices.
The Difference Between a 2-Way and 3-Way Matching
The 3-way match helps organizations avoid AP issues by resolving any possible mismatches on bills and orders before payments are processed. The reality is that a lot can go wrong, so it’s essential to have a process to check that your business is never losing money to inaccurate or fraudulent invoices. With the three-way matching process, you won’t overpay because of these issues. The goal here is to ensure that financial details (order quantity, order amount, total amount, PO number etc.) match across all 3 documents.
- 3 way matching helps approve AP invoice payments faster and also help the procurement management team flag any inconsistencies, errors or potential fraud.
- To better understand the process, we’ll show the series of phases, from procurement to payment.
- This payment verification technique validates the information across the trio of related documents.
- They may impersonate suppliers and claim that they supplied more goods than they did and that they are owed more money.
- Four-way matching goes even further by adding an inspection process after the delivery.
Pros Of 3-Way Matching
Also called a receiving report or delivery receipt, the GRN confirms that the receiving department has received the delivery. It contains information about the delivered items and states whether the delivery was full or partial. Three-way matching is your key to preventing invoice fraud and overpaying due to invoice errors.Here’s why you need it, how to do it, and what software can help with. A variation arises when the line items, quantities, extended amounts, or total due on a vendor invoice don’t match the purchase order or receipt of goods or services. Handling variations or exceptions manually can be extremely tricky and hard to document.
When trying to scale for growth, manual AP processes can be a major deterrent. By migrating to automated matching processes, you can streamline your accounts payable procedures and handle an increased workload without missing a step. As much as companies want to pay their suppliers promptly, manual processing may cause delays because of backlogs or misplaced documents. Late payments tarnish a company’s reputation and may affect future transactions. In the world of accounts payable (AP), one of the most challenging jobs is managing the onslaught of supplier invoices that arrive.
What are the steps of 3-way matching?
Three-way matching is the process of matching the invoice with the purchase order and Goods Received Note (GRN) to verify invoice details. If the 3 documents don’t match then the invoice is put on hold until the errors/issues are sorted. The chances of missing a fraudulent invoice or payment are really low with a 3 way match process in place.
At the same time, it delivers the placeholder cards to the receiving department with a delivery note and a packing slip. Two-way matching only compares the invoice to its purchase order. A three-way match process adds another step understand payroll tax wage bases and limits in verifying the delivery of the purchased products. The delivery receipt or a goods receipt note is a receiving report.
Most companies use a manual matching processes to record financial transactions. Manual processing includes obtaining physical documents in the form of journals or ledgers. That’s because the order receipts and vendor invoices are two standard documents needed for audits. Requiring these tips for keeping your tax data secure two documents before the completion of a transaction contributes to a straightforward tax process.
The three documents this process requires are also critical in internal and external audits. The 3-way match process ensures consistency of purchase orders, invoices, and order receipts. Savvy finance departments know there are plenty of vulnerabilities that come with manual invoice matching and processing. From lost invoices to late payments and less-than-stellar payables visibility, manual 3-way invoice matching can put any finance department in jeopardy.
One effective way to improve payment processes and supplier relationships is to adapt the three-way matching process to your supply chain. Manual three-way matching requires a lot of time, especially if you’re using paper documents. Someone from the accounts payable team must review three documents for each invoice. The process is even more demanding for businesses with many suppliers. With three-way invoice matching, it is easy to identify discrepancies between the goods and services ordered, delivered, and invoiced. Since all these documents are compared, the accounts payable team can determine if they should make a payment, make only a partial payment, or wait until an issue is resolved.
An accounts payable (AP) department creates an invoice based on the PO. Thus, a three-way match should be utilized as often as possible (for a business of any size) when the necessary paperwork and resources are available. Additionally, the AP team can be empowered to determine the best course of action when they encounter a discrepancy. They can decide if they want to pre-pay the amount, or reach out to the vendor for credit, or find another possible solution. You can also use technologies like fuzzy matching to detect invoices from fake companies. This approach compares various aspects, including the invoice amount, invoice number, and order quantities, with the corresponding purchase order (PO) and GRN.
Unfortunately, this high volume of purchases offers plenty of opportunities for billing fraud. To mitigate the invoice fraud risk, many business owners and finance departments use 3-way matching. This way, they can verify the validity of the received invoices. If your business did invest in automation software like Kofax for 3-way matching, a platform like Trustpair would be an addition to accounts payable software for more security. The software secures the account payable process by consistently monitoring vendor data.
Understanding what your company needs and how you can improve, especially with invoice processing, can be a good starting point for gaining long-term traction. AP innovations are vital elements for a sustainable and centralized global business solution, one payment at a time. Manual data processing and invoice matching is laborious and may be prone to errors and misinterpretation.
The number of items delivered should match the quantity on the purchase order. In the event of an audit, you can rest assured knowing that all of your approved files and documents are organized and secured in one centralized, accessible location. For companies attempting to scale operations, automating accounts payable is a necessary step in enabling future growth.
Upon migration, automated invoice management will improve existing delays, bottlenecks and processing costs that plague manual matching. It works by comparing the details on the PO, RR, and supplier invoice. Payment is approved only when all of these three documents match.
