In the finance world, there tends to be some confusion and questions surrounding 2-way vs. 3-way matching.
What’s the difference between the two? How does matching help businesses save time, reduce mistakes and grow faster?
We’re going to help answer these questions for you.
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What is matching and why does it matter?
Matching in finance is very much what it sounds like. It’s when you check an invoice to make sure the information aligns with the information on your purchase order or sales receipt.
Matching matters because it ensures you pay for what you bought. Mismatching means something’s off such as the amount of the purchase order doesn’t equal the invoice amount. Something needs fixing.
A business can have a person do this manually using paper. Or the business can use AP software, which gets this done automatically using a lot less paper.
Read more: How to Solve the Headache of Manually Matching Invoices to Purchase Orders
What is 2-way vs. 3-way matching in accounts payable?
2-way matching in accounts payable makes sure all data on the purchase order and invoice aligns. 3-way matching in accounts payable goes one step further and makes certain the data on the purchase order, invoice and sales receipt are the same.
2-way vs. 3-way matching: Which is better?
You’ll find benefits and drawbacks of both types of matching. With 2-way matching, it takes less time to cross-check two documents instead of three.
However, 3-way matching is more likely to find more mistakes because you’re checking three documents instead of two.
But that’s not all.
AvidXchange finds many business owners use 3-way matching to improve supplier relationships, boost profits and prepare finance for audits.
Suppliers and vendors place significant importance on verified data. If invoices and receipts are error-prone or frequently inaccurate, then they may lose trust and consider taking their business elsewhere.
You’ll find 3-way also better protects your business against overpaying, making duplicate payments or fulfilling fraudulent invoices.
Recurring vs. non-recurring purchases
In your evaluation of two- and three-way matching, you’ll want to be aware of this big difference. It comes up when your business buys products or services on a recurring (regular) versus non-recurring basis.
For instance, if you order financial software for your business monthly, you may want to do a 2-way match because you’ll be familiar with the costs and less likely to have a matching mix-up.
But if you make a one-time purchase of a major database computer for your office, it may be best to use 3-way matching. Why? Because you may not know be as familiar with how much the computer and related services cost. In this case you’ll want to be extra careful to catch errors by making sure all three documents sync up.
What causes mismatches?
Speaking of errors, here’s something to remember: Sometimes the invoice and purchase order data don’t match. These are called either mismatches, deviations or discrepancies.
Why the mismatches?
It could be a financial error on the invoice because of constantly changing international currency exchange rates. Someone may have entered data incorrectly. Unexpected shipping costs may have been added.
Medius specifies the two most common types of deviations:
- when the number of items on the invoice doesn’t equal the number on the purchase order or the sales receipt; and
- when the invoice price doesn’t sync with the purchase order price.
When – and when not – to tolerate mismatches
You’ll want to decide if your business can “tolerate” the mismatch. Here’s how you can do this:
Let’s say you order 100 packages of AP software for your finance team and set up a 5-percent tolerance level. You get an invoice for 102 packages. That’s within the 5-percent tolerance level, so your automated matching system accepts the invoice.
Turning the situation around, you may get an invoice for 115 software packages. That’s outside your 5-percent tolerance level, so the system flags that invoice for manual review.
If you can’t resolve the deviation, the vendor may have to re-send the invoice with the correct amount. Whatever the case, it’ll help for you to solve this financial issue quickly.
Read more: Is Paperless Accounts Payable Right for Your Business?
What does all this mean for you?
It means you’ve got choices. You can use 2-way of 3-way matching. It’s best to evaluate the specific situation and weigh the costs and benefits of each.
In many cases the 3-way match will be your better option because it catches more mistakes which gives you more control of your finances.
What else does this mean?
That you can go with manual or automated matching.
In making your decision, here’s something to consider. Our latest research, summarized our report “Expert Insights: Standout Strategies in a New Business Era,” found improving automation across processes has become the top priority for middle market businesses since the pandemic began.
It’s clear that automation is becoming more of a priority for finance pros moving forward, and that can make a major impact for how your business matches invoices and improves cashflow.