When a business receives an invoice, how can they be sure it’s legitimate? One method is the “three-way match.”
The 3 way match for accounts payable means that a company compares three documents — the purchase order, the goods receipt note, and the supplier invoice — to verify that the invoice is accurate. This process helps ensure that the business only pays for goods or services it actually ordered and received.
Accurate accounts payable processes are critical for a company’s financial health. Paying erroneous or fraudulent invoices can significantly impact the bottom line. This article will provide a comprehensive overview of three-way matching, its benefits, and how to implement it effectively within your accounts payable department.
What is Three-Way Matching and Why is it Important?
Three-way matching is a process used in accounts payable to make sure that the money a company pays out lines up with what it ordered and received. It’s like a triple-check system that relies on three core documents: the purchase order (PO), the goods received note (GRN), and the supplier invoice.
- Purchase Order (PO): This is what the buyer sends to the supplier, spelling out exactly what they want to order.
- Goods Received Note (GRN): This confirms that the ordered items have arrived and been inspected.
- Supplier Invoice: This is the bill from the supplier, asking for payment.
The matching process involves verifying that the quantities, prices, and terms are consistent across all three documents.
Why does three-way matching matter?
Three-way matching is a key tool for fraud prevention. As the Association for Financial Professionals (AFP) reported, 80% of businesses saw payment fraud in 2023. It also helps catch errors and improves financial control by ensuring that your financial records are accurate and trustworthy.
The Three-Way Matching Process: A Step-by-Step Guide
Three-way matching is a simple process that can save businesses a lot of money. Here’s how it works:
- The invoice arrives. The accounts payable team gets the invoice from the supplier.
- Match the invoice to the purchase order. The team checks that the invoice number, supplier details, items ordered, quantities, prices, and payment terms match the original purchase order (PO).
- Match the invoice to the Goods Received Note (GRN). The team confirms that the items listed on the invoice are the same items, and the same quantities, that were marked as received in the GRN.
- Resolve discrepancies. If anything doesn’t match, the accounts payable team follows up with the supplier to figure out what went wrong.
- Approve payment. Once everything matches and any issues have been resolved, the invoice gets approved for payment.
Three-Way Match Example
Imagine ABC Software orders office chairs. The three-way matching process makes sure they only pay for the chairs they ordered and received, at the agreed-upon price.
Two-way vs. three-way vs. four-way matching
The three-way match is a common and powerful tool for accounts payable departments, but it’s not the only option. Here’s a rundown of two-, three-, and four-way matching and when each is most useful.
Two-way matching
With two-way matching, the accounts payable team only compares the purchase order and the supplier invoice.
This method is useful for low-risk transactions or when a goods received note (GRN) isn’t available. However, it’s less secure than three-way matching, particularly for physical goods.
Three-way matching
In a three-way match, the purchase order, GRN, and supplier invoice are all compared to make sure the information agrees. This is considered a best practice for most businesses that purchase physical goods.
Three-way matching reduces the risk of errors and fraud.
Four-way matching
Four-way matching adds another document to the mix: the quality inspection report. With this method, the purchase order, GRN, supplier invoice, and quality inspection report all need to align.
This method is often used in industries where quality control is essential, such as pharmaceuticals and aerospace, because it provides the highest level of assurance, especially in high-risk situations.
Why use three-way matching?
Three-way matching comes with a lot of benefits for your accounts payable department:
- It stops overpayments. Three-way matching makes sure you only pay for the things you actually ordered and that you actually received.
- It cuts down on fraud. Invoice fraud can cost companies an average of $133,000 per incident. Three-way matching helps you spot and stop fake invoices.
- It improves accuracy. Matching documents reduces the chances of errors in your accounts payable process.
- It simplifies audits. Auditors love a clear paper trail. Three-way matching provides a record of every transaction, making audits much easier.
- It strengthens relationships with vendors. When you can quickly sort out any issues, you build trust and improve your relationships with your vendors.
The problems with matching invoices manually
Matching invoices, purchase orders, and receiving reports by hand can create problems for your accounts payable department.
- It takes too long. “Our previous bill pay process probably took a good 10 hours per AP batch,” said Jason Hershey, VP of Finance and Accounting, Hospital Association of Oregon. “Now it just takes a couple of minutes between getting an invoice entered, approved, and processed.”
- Humans make errors. No matter how detail-oriented your AP staff is, mistakes happen.
- It’s inefficient. Manual matching can cause delays and missed discount opportunities.
- You might make late payments. Late payments can damage your relationship with suppliers.
Automating Three-Way Matching: A Solution for Efficiency
The three-way match is crucial for accuracy in accounts payable, but it can also be tedious and time-consuming. Fortunately, automation offers a way to streamline the process. Here’s what you need to know about automating three-way matching.
Benefits of Automation
- Increased Efficiency: Automation can take over the matching process, saving your team time and freeing up resources. For example, Skin Pharm reduced approval timelines from weeks to just 48 hours using automation.
- Reduced Errors: By minimizing manual data entry and matching, automation reduces the risk of human error and improves accuracy.
- Improved Visibility: Real-time dashboards and reporting provide a clear view into the entire accounts payable process, allowing you to track invoices, identify bottlenecks, and make informed decisions.
- Better Compliance: Automation helps ensure adherence to internal controls and regulatory requirements, reducing the risk of fraud and non-compliance.
How Automation Works
Modern accounts payable automation software uses a combination of technologies to streamline the three-way matching process:
- Invoice Capture: Optical Character Recognition (OCR) technology automatically extracts data from invoices, eliminating the need for manual data entry.
- Data Matching: The software automatically matches invoice data with corresponding purchase order (PO) and goods receipt note (GRN) data.
- Exception Handling: Any discrepancies or mismatches are flagged for review and resolution, allowing your team to focus on the exceptions rather than manually reviewing every invoice.
- Workflow Automation: The software streamlines the approval process, automatically routing invoices to the appropriate approvers and facilitating timely payments.
How to improve and accelerate three-way matching
A slow, inefficient three-way match process can be a major drag on productivity. Here are a few ways to speed things up:
- Implement Vendor Scorecards: Holding your vendors accountable can make them more likely to send accurate invoices and ship the right products.
- Use AI-Powered Invoice Processing: Artificial intelligence can spot discrepancies that humans might miss, and it can automate much of the invoice processing workflow.
- Integrate Dynamic Discounting: Offer vendors a discount for early payments.
3-Way Match in Action
Want to see how 3-way matching works in the real world? Here are a few quick case studies:
- Skin Pharm: Skin Pharm was able to use automation to cut its invoice approval times from weeks to just 48 hours.
- Mix Talent: By automating its accounts payable process, Mix Talent reduced the amount of time spent on each invoice to roughly 15 minutes.
- Dragonfly Pond Works: Dragonfly Pond Works was able to scale its vendor payments smoothly and efficiently by implementing a 3-way match system.
- GNS: GNS achieved significant improvements in its accounts payable process by using Serrala’s automation solution.
Choosing the Right Invoice Matching Method
So, how do you pick between two-way, three-way, and even four-way matching? Think about a few things:
- How risky is the transaction? High-value or frequent transactions might need more scrutiny.
- Do you have a GRN or inspection report? If so, you can use a three-way match.
- How much will each method cost to set up and maintain? More complex methods require more resources.
Ultimately, the best approach is to tailor your invoice matching method to your company’s specific needs and risk tolerance.
To Conclude
The three-way match is more than just a process; it’s a cornerstone of robust accounts payable practices. By carefully verifying invoices against purchase orders and receiving reports, businesses can significantly reduce the risk of errors, prevent fraudulent activities, and maintain tighter financial control.
While the three-way match is essential, it can also be time-consuming. That’s where automation comes in. By automating the matching process, businesses can drastically improve efficiency and accuracy, minimizing manual errors and accelerating payment cycles.
If you’re not already using a three-way match, now is the time to implement one. And if you are, consider exploring automation solutions to streamline your accounts payable processes and unlock even greater benefits.