As a business owner, the last thing you want to do is pay a fraudulent or inaccurate invoice. Three way matching can help safeguard your accounts payable against incorrect or fraudulently submitted invoices.
Today, an increasing number of business owners and departments in charge of finances are using three way match processing to mitigate risk and reign in company spending. To counter the threat of overpaying for goods and services or paying a counterfeit invoice, you should seriously consider using automated three way matching into your accounts payable processes.
What is a 3-Way Match in Accounts Payable?
All online invoice approvals involve some form of matching. This process takes an invoice for the purchase of goods or services and matches it with a purchase order (2-way matching) and receiving information (3-way matching) as applicable in an effort to ensure that the details on each document agree with each other.
To be successfully verified, the invoices must satisfy matching tolerances. If they don’t, a hold is placed on the invoice and payments cannot be rendered until the hold is released or resolved. A held invoice operates as a sort of fail-safe that prevents the payment of an unmatched and unverified order.
How Does 3-Way Matching Work?
There are three documents that are integral for managing payments through accounts payable: invoices, order receipts, and purchase orders. Prior to being fulfilled, accounts payable scrutinizes the details of each of the three documents to verify that the product received matches what was ordered via the order receipt. Below, we’ll touch on each of them and their significance to the matching process:
- Invoices: An invoice, in either paper or EDI form, constitutes a request for payment from the vendor to the buyer. Invoices include necessary information to facilitate the sale, including a unique invoice number, vendor contact details, applicable credits or discounts, and the total amount due.
- Order Receipts: As a proof of payment, order receipts are included with delivered goods to detail which goods have been included in the shipment as well as the payment method.
- Purchase Orders: A purchase order (PO) is the official confirmation receipt of the order sent to the vendor from the buyer. This document is used to authorize the purchase, and it includes a PO number, payment information, and descriptions of the goods or services sold as well as the quantity.
To ensure that every order is complete, 3 way matching of invoices highlights discrepancies or inconsistencies between any of the critical documents listed above.
In the event that issues or errors are detected, such as an incorrect price or a damaged product, payment will be withheld pending a reconciliation of the issue and the invoice has been validated via 3 way matching.
From there, the order is then verified, via the invoice, to ensure that the product received matches what the buyer is charged.
3 Way Matching: Let’s Do the Math
Let’s say you receive a $4,500 invoice from a vendor for 1,500 computer circuit boards. Now, you will need to cross-check the PO and ensure that it has been approved before fulfilling the invoice.
On the PO, you will need to verify that the quantity and details match those specified on the invoice—in this case, that the order is for 1,500 circuit boards at a rate of $3 each, totaling $4,500 altogether.
Next, you will triple-check the PO and invoice using the order receipt (or receiving report). The receiving department should have a packing slip that specifies the cost and quantities of the items ordered. On the packing slip, the numbers should match those detailed on the original invoice and the PO.
Ultimately, your PO, invoice, and order receipt should all agree. In the event that they do, you have a successful three way match, which can be carried forward to your accounts payable for fulfillment.
If the three documents fail to match, a hold is put on the invoice, effectively stalling operations until the issue is rectified.
The Difference Between 2-Way Vs. 3-Way Matching
Although 2-way matching is the default for many invoice verification processes, 3-way matching is becoming more widely adopted to save businesses from overspending on larger, non-recurring orders.
Under a 2-way matching system, the quantity and amount issued on the invoice are verified against the quantity and amount on the corresponding PO notice.
To highlight the differences between 2-way matching vs. 3-way matching, we’ve detailed a step-by-step guide to two-way matching below:
- An invoice is received from a vendor for goods or services ordered through PO
- Accounts payable creates an invoice matched to the PO
- During the invoice approval process, the invoice details are matched to those on the PO receipt to verify that tolerances are met
- If the tolerance is not met, a hold is placed on the invoice until the issue is rectified
- If the tolerance is met, the invoice is approved for fulfillment
The main differentiating factor between the three way match internal control and a standard two-way authentication process is that the former goes one step further by matching the invoice to receiving information via an order receipt or packaging slip.
Why Businesses Benefit From 3 Way Matching
There are several key reasons why business owners are moving to adopt 3 way matching in accounts payable in droves.
- Improve Supplier Relationships: 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.
- Improve Profitability: Three way match processing can positively impact a business’s bottom line. By verifying data, you can protect your business against overpaying, making duplicate payments, or fulfilling fraudulent invoices.
- Prepares Finances for Audits: Having better data on hand can be useful for auditors looking to pinpoint financial inconsistencies. Three way matching helps prepare businesses for audits by having POs, invoices, and order receipts consistent.
Why Automate Three-Way Matching?
Manual matching is a time and labor-intensive endeavor. When trying to scale for growth, manual accounts payable processes can be a major deterrent. By migrating to automated matching processes, you can streamline your accounts payable procedures and handle plenty of invoices, POs, and order receipts without missing a step.
When you should be focused on your bottom line, nothing can take the wind out of your sails like manually matching printed POs with invoices and packing slips. Investigating every invoice can be daunting, and unless systems are highly organized it can take hours to track down the correct documents.
Plus, if you run into any errors during the matching process, you will have to backtrack and start from scratch. By ditching the manual matching and approval workflow, you can rid your accounts payable of the extra work.
Then, 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.
The Drawbacks of Manual Matching
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 invoice matching can put any finance department in jeopardy.
Traditionally, an accountant in the accounts receivable department would have to gather all the relevant paper documents in a transaction in order to satisfy their matching procedures. Over time, documents can get lost or stolen, or figures can be miscommunicated and lead to costly mistakes that can delay business processes.
Naturally, managing stacks of paperwork and invoices is an arduous task that is bound to incur its share of difficulties. Human error and inefficiencies can be avoided simply by migrating to automated three way match best practices.
Upon migration, automated invoice management processes won’t suffer nearly as much from the long delays, bottlenecks, and processing costs that plague manual matching.
Taking the Next Step to Protect Your Assets
By leveraging 3 way matching accounting departments can streamline payment processes, mitigate the risk of human error, and exchange business documents digitally.
Data critical for business, such as invoices, purchase orders, and advanced ship notices (ASN), can all be organized and standardized electronically without the need to tackle mountains of paperwork or pick up the phone to contact a supplier.
Every business can benefit from speeding up payments and reducing the threat of human error. By integrating an automated 3 way matching process into your accounts receivable workflow, you can better position your business to meet early payment terms and potentially earn payment term reductions or discounts while also minimizing losses.
The truth is that accounts payable fraud is a risk that all businesses must contend with. However, incorporating 3 way matching is a critical step in protecting a company’s assets from both bad actors and human error.
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