What is 3-way matching & why do you need it in accounts payable?
Business Process Management
Discover the steps included in a three-way match and why they’re important, plus learn the difference between two-way, three-way, and four-way matching.
Three-way matching is a method used to ensure that purchase orders, invoices, and delivery receipts all contain the same information. The benefit of using three-way matching is that businesses can be confident they pay only legitimate invoices.
While matching these documents seems easy, manually doing so is time-consuming and prone to error. Luckily there are a few safeguards companies can put in place to ensure a more accurate process, including utilizing software solutions.
Let’s look at the steps included in a three-way match, why they’re important, and the difference between two-way, three-way, and four-way matching.
What is a 3-way match?
A three-way match is a process of matching receipt notes, purchase orders, and supplier invoices to verify legitimacy, reduce fraudulent transactions, and maintain proper audit records.
Businesses determine the validity of an invoice by first verifying that they ordered the goods. This is done by confirming the purchase order against the invoice. The third element involved is the receipt, which details what was delivered.
You have a three-way match if the items and quantities ordered and received are the same across all three documents.
Why 3-way matching is important
Three-way matching focuses on correcting inconsistencies in the purchasing process.
Here are a few ways three-way matching provides value for accounts payable and procurement teams:
- Three-way matching helps companies save time and money. Following the three-way match process, businesses find potential payment or overpaying problems before the payment is made.
- The three-way matching process both strengthens and maintains supplier relationships. Suppliers feel valued and respected when important documents are filed and submitted on time. They consider your company a worthy business partner they can trust.
- Procurement teams can use the three-way matching process to make auditing easier by ensuring payment accuracy.
- Unplanned expenses, including extra fees, processing costs, or shipping charges that are tacked on after the fact, are accounted for during the three-way process.
- The process gives buyers making international purchases a way to verify fluctuations in exchange rates to ensure accurate billing and payment.
Components of a 3-way match
There are three primary documents required to enact the three-way matching process:
- Purchase order (PO) – A PO has a unique reference number for tracking purposes. It includes details regarding requested goods or services and their agreed-upon prices.
- Receiving report – Also known as the delivery receipt, the receiving report confirms the delivery of a purchase.
- Supplier’s invoice – This document details the total amount a buyer owes a supplier. It includes vital details like the amount due, the supplier’s information, the payment schedule, and the invoice number.
How does a 3-way match work?
The three-way matching process happens in a series of repeatable steps.
- The buyer sends the purchase order to the supplier.
- The supplier’s accounting department creates an invoice based on the fulfilled PO.
- The buyer receives that invoice from the supplier.
- The invoice is approved to check the line items against the purchase order.
- The buyer gets a receiving report to verify the supplier fulfilled the order.
- If all three documents match, the invoice is approved, and payment to the supplier is finalized.
How to do a 3-way match [example]
Let’s look at a more detailed example of how the three-way matching process works.
Say the IT department needs 30 new laptops for its team. After submitting an internal requisition order, the purchasing department approves it and creates a purchase order.
Once that PO is approved internally, it’s sent to the supplier. The supplier looks through the specifications of the purchase order to determine if it can fulfill the order within the terms and conditions at the agreed-upon price. If so, the supplier accepts the PO, notifies the buyer, and begins to fulfill the order.
The supplier then delivers the 30 laptops to the provided delivery address per the specified timeline. The buyer fills out a receiving report and sends it to the supplier to verify the delivery of goods.
At this point, the buyer runs the three-way matching process to ensure the accurate fulfillment of the order. If the three relevant documents—the invoice, PO, and receiving report—contain the same information, it’s a three-way match.
A three-way match allows the buyer to submit payment to the supplier for the goods delivered confidently. Each time the buyer needs to make a new purchase, the procurement lifecycle—which includes the three-way matching process—starts over again.
When to use a 3-way match
When integrating three-way matching into your existing process, perform the process after the goods arrive before payment is issued to the supplier.
While three-way matching is a helpful measure for protecting against invoice fraud and minimizing undue expenditure, it does add another step to what might already be a complex purchasing process.
As such, some organizations set a dollar limit above which invoices must be three-way matched before payment is released. This allows smaller invoices to be processed more rapidly and keeps a reasonable balance between operational efficiency and risk mitigation.
Challenges of 3-way matching
The requirement for inter-department collaboration
While removing silos and encouraging departments to collaborate can be good overall, it can challenge the efficiency of a three-way matching process.
When goods arrive, the receiving department must communicate with the accounts payable department and confirm that the correct PO number is on the packing slip. And sometimes, the finance team may need to communicate with the purchasing department to verify vendor invoice details before releasing payment.
This interdepartmental communication can slow down the payment process and result in delayed payments, which could prevent the ability to leverage an early payment discount.
The possibility of human error
A manual invoice approval process is always subject to the potential for human error, such as making duplicate payments or matching invoices incorrectly.
That said, teams can use accounts payable automation solutions to rectify this.
Adding another step to an already complex process
There is always a tension between the need to mitigate risk during the purchasing process and the desire to move quickly and maximize efficiency.
Adding three-way matching to the mix throws another step into the process. However, you can speed this up by using the automated three-way invoice matching functionality in your accounts payable tool.
Limitations in terms of data points
Three-way matching verifies price and purchase orders numbers are correct, but it is limited in scope and can’t check critical information like:
- Vendor payment terms
- Delivery timeframes
- Compliance with SLAs
- Volume discounts
As such, three-way matching is not your AP process's be-all and end-all of risk mitigation.
Differences between 2-way, 3-way, and 4-way matching
Two-way, three-way, and four-way matching are all vital parts of accounting within the procurement process. They’re solid internal control strategies that keep companies from overpaying for goods or services. Here’s a closer look at how each of them differs.
A two-way match involves matching an invoice with the purchase order. While it’s not as comprehensive as three-way matching, a two-way matching process is a good fit for companies that manually match documents. Two-way matching is also appropriate for recurring purchases that are less complex.
A three-way match is an ideal choice for a tight internal control process. A three-way process minimizes the risk of fraudulent invoices or human error. Three-way matching helps AP departments avoid potentially costly accounting mistakes that require extra time to correct.
Without a three-way matching process, buyers also risk harming vendor relationships. When invoices aren’t paid on time or incorrectly, vendors have to spend time chasing after compensation from the buyer, which puts a damper on future deals and transactions by lowering trust.
A four-way match adds another layer of protection.
All relevant documents are checked and verified as per the three-way process. Still, the person who manages the vendor relationship must also confirm that the delivery of goods or services and related invoices and pricing meet the expectations outlined in the supplier contract.
Performing a four-way match is time-consuming, but it is valuable when strict compliance verification is required.
Automating your 3-way matching process
The matching process takes time, and though it’s designed to catch errors, it can be susceptible to errors. Automating the process mitigates that.
Automating your matching process promotes accuracy when recording data, ensures accessibility, and can help procurement teams stay on top of billing and transaction dates without doing much extra legwork. It ultimately saves you resources—including money, time, and energy.
An automated three-way process sends invoices digitally, and the purchase order and delivery details are automatically added to the database. This makes it easy for procurement and accounting teams to prevent fraud, promote accuracy, and operate more efficiently. An automated three-way matching process also ensures companies avoid late payment fees and opens the possibility of potential early payment discounts.
How to improve your 3-way matching process
Use the 3-way matching process with only large invoices
To make the three-way matching process less time-consuming, consider using the method with only larger invoices. Small, recurring invoices can be verified during the setup process, reducing any chance of fraudulent transactions.
Automate the 3-way matching process
Use procurement software to create an automated system. This reduces the chances of error while processing purchase orders and receipts, and sometimes the reconciling process is instantaneous. Onboarding the right procurement solution is vital to ensuring an optimized workflow.
Use a vendor rating process
Assign each vendor a rating based on the accuracy of their invoices. Suppliers that send accurate invoices receive a higher rating, signaling that their invoices may only need a random, periodic check.
Communicate with vendors about double-checking invoices
It’s a good idea to communicate with vendors and ask them to check for accuracy by comparing PO documents with invoices before submission. This is a way to add another verification layer to the matching process and ensure fewer errors.
Centralize your 3-way matching process
Centralization is key to automating three-way matching using a procurement solution. As you establish your procurement workflow, opt for a system where all your documents and key data are centralized in one dashboard. This creates workflow efficiencies that cannot be achieved when records are siloed in separate applications.
Improve your procurement and finance processes with Vendr
Manually matching all three procurement documents is a labor-intensive process that takes time, effort, and discipline to ensure every order is fulfilled without discrepancies and is paid for correctly. By establishing a procurement workflow that centralizes and streamlines the process for you, your business reaps savings to add to its bottom line.
Vendr streamlines the three-way match process by:
- Defining and automating the approval process for a faster procurement cycle
- Tracking spending and reports on activities by department, project, or line level
- Helping procurement professionals manage the renewal and supplier management process without getting mired in spreadsheets or a manual tracking process