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What is three-way matching?

What is three-way matching?

An AFP Payments Fraud and Control Survey revealed that 82% of companies were hit with payments fraud in 2019. That same year, Facebook and Google paid millions for invoices they didn’t incur. If you see a common theme, that’s because there is one: A lack of invoice verification. A sophisticated invoice control system using three-way matching could have prevented some of these fraudulent payments, so let’s dive in and find out how it could’ve helped these companies—and how it could help your own.

Three-way invoice matching falls within the accounts payable process. It’s used to check whether a supplier invoice should be paid or not. So, instead of simply paying invoices as they come in, your business cross-references the invoice with two other documents to ensure everything adds up: The purchase order (PO) and the goods receipt.

Account managers or the billing department look at these documents and verify that the goods or services ordered match the outstanding invoice.

Why three-way matching is important

Although it may be time-consuming, the three-way matching process can save your business many headaches in the long run. Here’s how:

Reason #1: Verifies orders

For many companies, receipt of an invoice puts the payment process, and three-way matching, in motion. At that point the company should already have the PO and proof that an order was received. By verifying that the purchase order, order receipt, and supplier’s invoice match, you know that an invoice is valid and correct before paying it. It benefits your business by ensuring that the supplier invoice matches your ordered goods or services.

Reason #2: Increases control and visibility

With a three-way match, you can confirm that the business’ established purchase approval process was followed. When an invoice, PO, and receipt are all compared, it’s much easier to double check your work. It also increases visibility, because it is more clear where company money is being spent. And when you find discrepancies, you can act on them as needed, such as by reaching out to the supplier to correct the price.

Reason #3: Prevents fraud

People are willing to try and scam businesses out of money. Sometimes vendors inflate invoices. Other times, it’s a third-party posing as your supplier committing the fraud. There can also be cases where internal fraud occurs.

Unfortunately, fraud happens, and it’s up to your business to have a system in place to prevent it, internally and externally. Three-way matching serves as a checks and balances to make sure an invoice is legitimate. By comparing the three documents, PO, invoice and delivery/order information, your business can be confident about issuing a payment.

Reason #4: Prevents mistake

Mistakes happen all the time: A supplier might overcharge your business without realizing it, or they might accidentally send a double invoice.

The reality is that a lot can go wrong, so it’s essential to have a process to check that your business is never losing money to inaccurate or fraudulent invoices. With the three-way matching process, you won’t overpay because of these issues.

Three-way matching in action

Let’s say your business orders ten boxes of printing paper. You send the purchase order (PO) to the supplier. Then, the supplier delivers ten boxes of paper accompanied by the goods receipt note. But when you receive the invoice, you notice that the supplier billed you for eleven boxes.

After you compared the purchase order to the goods receipt note, you determined that you did, in fact, request the delivery of ten boxes, and the additional box on the invoice was an error. Because you used three-way matching, resolving this issue is simple. You contact the supplier and ask for a corrected invoice.

Without it, your business would have lost money, or you and the supplier would have wasted time trying to unravel the overpayment when it was discovered.

What you need to perform a three-way invoice match

As the name implies, the three-way matching process involves three documents: A purchase order, a goods receipt note, and a supplier’s invoice.

AP departments must check all three against each other to ensure legitimacy and consistency.

Purchase order

A purchase order (PO) is a document, often legally binding, that confirms an order of products or services without requiring immediate payment. This document is sent by the company to a vendor with the intention to track and control the purchasing process. Most companies will require purchase order approvals as a key control activity in the accounts payable cycle.

When you require goods or services, you send a request to a supplier. The request is in the form of an approved PO containing the quantities of goods or services needed, the required delivery date, and other details necessary for the supplier to fulfill the order.

Goods receipt note

A goods receipt note is a document that confirms the acquisition of goods or services. It should include your receiver’s signature, the name of the vendor, date and time of delivery, products delivered, and quantity of each product. The goods receipt note should be provided to the department ordering goods or services and the finance department.

Supplier’s invoice

The supplier’s invoice is a document that details the goods or services supplied and is a request for payment from the buyer. It includes the supplier’s contact information, a description of the goods or services provided, payment details, and the total owed.

How the three-way matching process works

Before processing vendor payments, your accounts payable (AP) team reviews the purchase order to ensure it matches the goods or services listed on the invoice. Then, they check the goods receipt note to ensure that the delivery matches the request. The final check is the supplier invoice to the goods receipt note.

Three-way match example

Your business needs ten new printer toners. Each toner costs $100. After ordering the toners, your accounts payable department receives an invoice for $1,000. They check that the items, quantities, price, and payment terms match the approved PO. All looks good: For ten new toners at $100 each, the $1,000 invoice is correct.

But the verification doesn’t stop there: Your AP team then compares the PO and invoice details to the goods receipt note. All three documents must contain the same information, and the supplier should issue a credit note for damaged toners. If all the documents correspond to the delivered items, then it’s a three-way match, and you can pay the invoice.

Diagram showing the 6 steps to three-way matching

Sometimes, your AP department might identify errors, like price and quantity issues or product damages. If there are any issues, your business will usually withhold payment until the discrepancy is rectified.

How does three-way invoice matching benefit your business?

An effective accounts payable process ensures accurate, secure, streamlined payment processing.

But besides providing helpful context and documentation, three-way matching can help identify and resolve mistakes, simplify auditing, and eliminate fraud in ways other methods—like two-way invoice matching—can’t.

Benefit #1: Identifies discrepancies

Receiving high-quality goods and services is vital for improving your business. If you don’t get the materials or other goods or services you paid for, your business will suffer one way or another, whether it’s through defective products or impaired internal processes.

With three-way invoice matching, it is easy to identify discrepancies between the goods and services ordered, delivered, and invoiced. Since all these documents are compared, the accounts payable team can determine if they should make a payment, make only a partial payment, or wait until an issue is resolved.

Additionally, the AP team can be empowered to determine the best course of action when they encounter a discrepancy. They can decide if they want to pre-pay the amount, or reach out to the vendor for credit, or find another possible solution.

Benefit #2: Simplifies the auditing process

The auditing process can be long and demanding. However, a three-way match can simplify it. A three-way invoice match ensures that all documents are complete and provide the correct information.

Having complete and accurate documents will help your auditor check data and complete an audit quickly. This isn’t just more efficient—it can help you save money, too. A timely audit helps your business avoid costs you would have incurred if the auditor had needed extra time going through your documents.

Benefit #3: Prevents fraud

Did you know that one in seven large corporations commits fraud every year? A three-way invoice match helps you avoid falling prey to fraudsters claiming they provided goods or services. It identifies illegitimate invoices and enables your accountants to prevent overpayment for purchases that were not authorized for the specified amount. Preventing fraud, detecting overpayment, and managing purchases is an important part of small, mid-size and large corporations that invoice matching can help solve.

Benefit #4: Improves supplier-buyer relationships

Three-way matching creates a built-in check to the vendor payment process, ensuring a positive supplier-buyer relationship.

Because you, as the buyer, are taking the time to identify errors, you can quickly resolve issues before making a payment (such as whether a vendor under or over-invoiced an order). When a supplier consistently sends accurate invoices, the purchasing company can pay the supplier faster. A good supplier relationship may also result in better pricing and credit terms.

Additionally, informing your suppliers of discrepancies enables them to deliver the correct goods and services in the future, saving both your time and money.

The differences between two-way and three-way matching

The two most common types of matching are two-way and three-way matching.

Most companies use two-way invoice matching, which compares the purchase order information to the vendor invoice to check for discrepancies. Many businesses find this to be a good fit for their current processes, especially those that need to pay for services and don’t use a goods receipt note to record these services.

On the other hand, the three-way process checks the purchase order against the goods receipt note and the supplier invoice. The goods receipt note provides information on the actual goods or services delivered and stipulates shortages or damaged goods.

If your business purchases inventory or goods, as opposed to primarily services, and you use item receipts to track delivery, then three-way matching is probably the best choice for your business.

There’s a huge benefit here: By identifying disparities between the ordered and delivered goods or services, your accountants can request a credit note to ensure they make the correct payment (which, in turn, provides more effective cash flow management!).

Three-way matching is also essential for potential audits: Auditors can’t do their job without having a goods receipt note to verify the correct payment. And without a goods receipt note, there’s no existing delivery record.

While three-way matching does require an extra step, you can streamline your processes if you’re using automation. With automation, you’ll get all the benefits of three-way invoice matching without the need to devote valuable AP resources to manual matching.

Using the manual matching process

While three-way invoice matching is important and can save your business time and money, you will run into issues if you’re doing it manually.

That’s why many businesses use an automated system for invoice control: Automation means less hassle, less wasted time and increased control and visibility.

If you’re one of the businesses that use manual matching procedures to track their transactions with suppliers, here are the drawbacks you need to watch out for.

Drawback #1: It’s time-consuming

Manual three-way matching requires a lot of time, especially if you’re using paper documents. Someone from the accounts payable team must review three documents for each invoice. The process is even more demanding for businesses with many suppliers.

Drawback #2: You’re exposed to human error

Manually doing the matches exposes you to mistakes and misinterpretations. Additionally, the documents could be misplaced, lost, or damaged due to poor handling or storage issues.

Drawback #3: You may experience possible late payments

Manual data processing can significantly slow down your workflow. Even though companies want to make payments on time, manual processing can cause delays. In fact, quicker approval of invoices is the top improvement gained through invoice automation!

Make your three-way match process easier with AP automation

Although it requires more steps than the traditional two-way matching method, three-way invoice matching helps your business prevent fraud and mistakes through additional verification procedures.

And three-way matching doesn’t only benefit your business—because of the expedited invoice approval process, it also maintains a positive buyer-supplier relationship.

But since manual matching processes can potentially lead to significant mistakes, many businesses opt for two-way matching instead. Thankfully, three-way matching can be done without the manual work through automation.

BILL provides a solution that streamlines the entire payment process, helping you avoid illegitimate invoices and overpayment and save time. Learn more about how your business can benefit from accounts payable automation.

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