3-way matching is a system for verifying documents, such as purchase orders, delivery invoices, and supplier receipts, through a three-way method.
It’s to prove that the invoices are legit, reduce fraud risks, plus it’s an easy way to manage a large number of supplier invoices.
Let’s learn about the 3-way matching definition, process, benefits for small businesses, and the best software recommendations here!
What Is 3-Way Matching?
Three-way matching is a process used in accounting to verify the legitimacy of supplier invoices before they are paid.
It’s an important tool for ensuring accurate and efficient payment processing in the accounts payable (AP) function.
The 3-Way matching process involves cross-checking three key documents, they are:
- The Purchase Order: issued by the buyer to the supplier to request goods or services.
- Delivery Receipt: proof of delivery that confirms that the goods or services have been received by the buyer.
- Supplier Invoice: lists of details of the goods or services provided and the amount due for payment.
We should check all those documents to ensure that they all match up and are precise. Omit any pricing or data mistakes before agreeing to the payment.
Overall, this will help companies identify discrepancies and avoid duplicate invoices so that businesses can avoid costly errors and improve their accounting and financial management.
Components of 3-Way Matching
As we mentioned before, the three key documents in 3-way matching work together to confirm that a company pays only for the goods or services it actually received with the correct amount of prices and quantities.
Let’s learn more detailed components in three-way matching for accounts payable.
1. The Purchase Order
A purchase order is a document created when a buyer orders a product or service. This document contains product/service details, quantities, prices, criteria, and all records of their needs.
The purchasing department receives this and records it as a PO–agreed upon by the buyer and supplier.
The purchase order also has a unique reference number for company tracking purposes.
2. The Invoice
An invoice or Goods Receipt Note (GRN) is the supplier’s request for payment. This document contains information about the amount owed, payment details, and an invoice number.
It outlines the goods or services provided, the quantity supplied, and the unit price of each product.
3. The Receipt
Delivery receipt or goods receipt note contains data confirming that the goods or services have been received and accepted by the buyer.
It records the quantity, delivery conditions, and any other relevant details of the products/services. The recipe also includes invoice number information and payment details.
An example of 3-way matching for inventory, the purchase order specifies that the buyer ordered 100 units of inventory products at a certain price.
Then, the invoice should reflect this information, and the receipt should confirm that the buyer received 100 units of the product.
If the invoice, purchase order, and receipt all match correctly, then the accounts payable department approves the invoice for payment.
However, if there are discrepancies between any of the documents, the accounts payable department will contact the supplier to resolve the issue before making payment.
How Does 3-Way Matching Work?
The three-way or 3-way matching process should be in the basic accounting system for companies to manage invoices. Briefly, here’s the 3-way matching procedure systematically:
- The buyer places an order with the supplier and a corresponding purchase order (PO) is sent to the supplier based on the order placed.
- The accounts payable (AP) department creates an invoice based on the PO, including the goods’ or services’ details, quantity, and price.
- The supplier sends an invoice to the buyer based on the PO, stating the details of the goods or services provided and the amount due for payment.
- The invoice details are checked by the AP department to confirm that they match the PO. This checking is done through an invoice approval process, which includes verifying the accuracy of the information, checking the invoice’s mathematical accuracy, and confirming that the correct goods or services have been received.
- The buyer acknowledges a receiving report issued by the supplier as proof of payment and order completion. The receiving report confirms that the goods or services have been received. This includes details such as the quantity, date, and condition of the goods.
- If all the details in the three documents match and are accurate, the invoice is approved, and payment is released. If any discrepancies are found during the matching process, the AP department contacts the supplier to resolve the issue before approving the invoice for payment.
By using the three-way matching process, businesses can ensure that they only pay for goods or services that have been received and approved–preventing losses due to fraud and carelessness. The process is allowing businesses to resolve them before payment is made.
Benefits of 3-Way Matching for Accounts Payable
Some small-scale businesses with unsystematic accounting management tend to be overwhelmed managing the large number of invoices that must be completed in time
Not infrequently they experience mistakes that cause losses, such as fraudulent billing twice or paying more than they should.
Thus, they can apply the 3-Way Matching Procedure to help manage invoices in a more structured method.
1. Accurate Record Keeping
By cross-checking and matching three separate documents, a business can ensure:
- All purchases have been authorized,
- All goods have been received and are of the correct quality,
- All invoices are correct.
Businesses should do this three-way matching to avoid costly errors, such as duplicate payments or payments for goods or services that were never received.
Indeed, it creates a strong audit trail that can be easily traced in the future and can be helpful when a business needs to provide evidence of compliance with regulations or internal policies.
2. Fraud Prevention
By comparing these documents, a company can confidently issue payments knowing that they are accurate and valid.
The accounts payable team can quickly verify whether the goods and services were actually provided. Automating the procurement process is an effective way to eliminate fraud in the system.
3. Payment Accuracy
The PS Team can identify when there are discrepancies in invoices to minimize the risk of vendors overpaying or underpaying which can impact cash flow and relationships with suppliers.
With the three-way matching system in place, companies can confidently issue accurate payments and maintain positive relationships with vendors.
4. Cost Savings
Catching discrepancies early on can also prevent overpayment and save money. Businesses can avoid overpaying or paying fake suppliers, which translates to real dollars saved.
Therefore, the three-way matching system implementation can help cost savings for companies in the long run.
When to Use 3-Way Matching
Here are some scenarios when companies should or may want to consider using the three-way matching system:
1. Business is Required to Use 3-Way Matching
It’s best for businesses to implement 3-way matching for purchasing if:
- A company that frequently deals with high-value purchases;
- A company that has a large number of suppliers;
- A company who has experienced fraud or discrepancies frequently in the past;
- When a company is audited. The auditor may require businesses to use three-way matching as the best control measure to verify that payments are accurate and valid.
In addition, some industries, such as healthcare and government contracting, may be required by law or regulation to use the three-way matching system.
2. Business is Optional to Use 3-Way Matching
It’s optional for businesses to implement 3-way matching procedures or better to use two-way matching instead, if:
- Businesses with service-based suppliers that do not make GRNs;
- Businesses that use direct shipping where products are sent straight from the supplier;
- Businesses want to lower costs.
3-Way Matching vs. 2-Way Matching
2-way matching is the process of cross-checking invoices that businesses usually practice. The process only requires two documents, the invoice and purchase order to ensure that the items, quantities, and prices match.
This method is useful for businesses that purchase standard items in large quantities, such as office supplies or raw materials.
On the other hand, 3-way matching involves an additional step of matching the goods received note (GRN) to the purchase order and supplier’s invoice.
This method verifies that the items ordered have been received and that the quantities and prices match the purchase order and invoice. It’s typically used for more complex purchases, such as expensive equipment or custom-made products.
Which Method Is Best for Your Business?
The choice between 2-way and 3-way matching depends on the nature, the type, and the complexity’s business process. Here’s the guide.
|2-Way Matching||3-Way Matching|
Ultimately, the option between 2-way matching or 3-way matching should be based on the business specific needs and requirements.
Businesses should evaluate the benefits, process, costs, and challenges of each method and choose the one that best suits their procurement process.
How to Implement 3-Way Matching Best Practices
Before implementing 3-way matching for purchasing, there are a few requirements that should be met. These include:
- An electronic system for managing purchase orders, invoices, and receipts;
- A standard purchase order form;
- A standard invoice template:
- Vendor code;
- Supplier name;
- Address and phone number;
- Total amount of purchase;
- Corresponding purchase order number;
- Line items or product descriptions;
- Custom fields.
- A standard receipt or delivery note template;
- A clear understanding of the company’s purchasing process and policies.
Here are some steps to implement 3-way matching in your company or organization:
1. Identify Key Personnel
The team responsible for managing the 3-way matching process are payable staff, purchasing staff, and any other relevant personnel.
They must work together in cross-checking that all invoices are in accordance with the specified system to reduce the risks of human errors.
2. Establish Purchase Order Procedures
Develop and implement standardized procedures for creating and issuing purchase orders.
This includes specifying the necessary information on the purchase order, such as product descriptions, details, quantities, and prices.
3. Implement Invoice Verification Procedures
Establish procedures for verifying the accuracy of incoming invoices, including comparing them to purchase orders and delivery receipts. This ensures that invoices accurately reflect the goods or services received.
4. Develop Receipt Procedures
Create procedures for recording and tracking the receipt of goods or services.
The process includes identifying the person responsible for receiving and inspecting deliveries – as well as procedures for documenting and reporting any errors.
5. Train Personnel
Provide training and education to personnel involved in the 3-way matching process, including accounts payable staff, purchasing staff, and other relevant personnel.
This ensures that everyone understands the process and procedures and can effectively perform their roles.
6. Monitor Compliance
Regularly review and monitor the 3-way matching process to ensure that all procedures are being followed, and any issues or discrepancies are identified and addressed promptly.
This includes tracking key performance metrics, such as the percentage of invoices that are accurately matched to purchase orders and delivery receipts.
Challenges of 3-Way Matching
Indeed, there is some importance of 3-way matching to ensure invoice and purchase accuracy, but there are also many challenges. Here are some key drawbacks.
1. It Can Be Complex
3-way matching involves comparing three separate documents, which can be complicated and time-consuming.
The process becomes even more challenging when discrepancies arise, leading to potential payment delays, and dissatisfaction among both suppliers and buyers.
This can put extra pressure on the accounts payable team, forcing them to work overtime, thus increasing costs.
2. It Can Be Hard to Handle High Volume
When a company has a high volume of purchases at certain moments, the manual three-way matching process can become overwhelming.
It may result in delays in processing invoices, and require additional resources to handle the increased workload.
3. It May Not Work for Services Purchase
Typically, three-way matching is used for tracking goods purchases. It may not work as well for service purchases cause it can be more difficult to track and verify.
4. Possible Errors
Manual handling of the three-way matching process can be prone to human errors that lead to discrepancies in the final result, such as:
- Misplaced paperwork,
- Misread figures,
- Misinterpretation of agreement terms.
5. Lack of Automation
Manually matching documents and checking for discrepancies can be tedious. It can lead to delays in processing payments, issues with tracking and analyzing data, and it’ll be harder for companies to make informed financial decisions.
Strategies for Overcoming Challenges of 3-Way Matching
- Simplify The Process: Review the three-way matching process and simplify it where possible to reduce complexity.
- Customize for Services Purchases: Develop customized 3-way matching procedures for service purchases that take into account the unique aspects of these transactions.
- Double-Check for Errors: Develop a process for double-checking documents to help prevent errors.
- Communicate and Train: Communicate the benefits of the three-way matching process and provide training to help employees understand the new procedures and feel comfortable with the changes.
- Use Technology: Implement technology solutions, such as automated 3-way matching software or scanning systems, to help handle high volumes, and reduce errors.
In conclusion, 3-way matching is a crucial process for businesses to ensure accuracy and prevent errors in their financial transactions.
It helps organizations streamline their accounting procedures, increase financial accuracy, and build stronger partnerships with their vendors.
By matching purchase orders, receiving reports, and vendor invoices, companies can verify that they have received the correct items at the agreed-upon price and quantity.
It’s important to prevent overpayments, underpayments, and potential fraud.
Additionally, 3-way matching can help improve supplier relationships by ensuring timely payments and reducing payment disputes.
Manual 3-way matching can be time-consuming and error-prone. Using an automation solution, you can save man-hours and costs. In one dashboard, manage and match the details of your POs, GRN, and bill. Our system will validate the quantity and unit cost accurately, so you can improve your inventory management.
Try out Peakflo today and automate your most tedious finance tasks!