What is 3-Way Matching in Accounts Payable?

Corcentric

For busy accounts payable departments, increasing efficiency and accuracy is paramount. Inaccurate invoices can lead to extra time spent processing, as well as overpayment. Many businesses choose to employ a system to improve accuracy, and 3-way matching is one of the most popular. Read on to learn the definition of 3-way matching in accounts payable, understand how it works, and how to apply its benefits for businesses.

Accounts payable departments have multiple methods they can use to verify the accuracy of incoming invoices, down to the prices by item or service and goods received. The accounts payable process depends on the organization, its size, and its needs. As companies grow in size, they need sustainable, scalable methods to cross-reference information contained in a purchase order, receipt of goods, and invoice.

The 3-way invoice matching process involves a close comparison of these documents to ensure that the invoice is accurate to the purchase order and goods receipt note. Some companies attempt to verify this information by hand, especially those who still rely on paper invoicing and manual input of invoice details. Automating 3-way invoice matching is designed to increase efficiency in the payment process, with a lower rate of error.

How does 3-way matching work?

The process of 3-way matching in accounts payable works by verifying relevant information in three unique documents:

    • Purchase order: Procurement generates a purchase order to send to the supplier.
    • Receipt of goods: The warehouse or logistics team verifies the shipment, making changes to adjust for inaccurate quantities or missing items.
    • Invoice: Supplier sends an invoice for services or goods provided.

The 3-way match process ensures that the invoice is not paid until the goods receipt note is complete, with notes on any mismatches between the purchase order and the receipt. Any details that do not match between these documents flags the system for review, so that a member of the accounts payable department can follow up on the differences before issuing payment. Businesses that rely on an automated system for invoice processing and payment need additional steps to verify accuracy as a way to avoid making a payment that is too high or too low.

3-way match best practices

To get the most from this verification process, businesses should follow a few 3-way match best practices. AP departments that note errors during the process must find the source of the error, so that they can determine the best solution. There are several ways that businesses can better ensure an accurate 3-way match:

    • Purchase order accuracy: Does the PO contain the correct information, filled out completely?
    • Order fulfillment: Does the receipt of goods contain a partial or complete fulfillment of the order? If it is a partial delivery, is there another delivery in transit?
    • Price and payment accuracy: Do the prices and figures on the invoice correspond to the approved figures in the purchase order, including any quantity discounts or rebates?
    • 3-way match limits: Is the process limited to invoices of certain quantities or clients?
    • Settlement flexibility: Does the system have a degree of flexibility, to avoid wasting time on invoice differences within a small margin of error?

Use of a company-wide automated system can minimize the likelihood of error in any of these categories.

Benefits of 3-way matching

Using the 3-way match method for verifying invoices provides a number of benefits for accounts payable workflow and the company at-large.

Avoid unnecessary expenses

Overpaying on an invoice leads to wasted money and time spent trying to recover the overage. For businesses operating with tight cash flow, reducing excess overhead and misspending can provide a better cushion and allow other uses of the funds.

Preserve accurate records

For any business, accurate record-keeping is vital for multiple reasons. Consistently following the 3-way match system gives an accurate record of goods and services purchased and received, in the event of any conflicts with vendors. It can also provide effective details to satisfy the requirements of an audit.

Minimize effects of fraud and risk

Setting a clear verification process that refers to the purchase order, goods receipt note, and invoice can help to reduce the risk of fraud. The automated system minimizes the chances of double payment, excessive payment based on incorrect figures, and payment on fraudulent invoices.

3-way matching example

The best way to understand three-way matching is to see an illustrated example. Company ABC issues a purchase order to Vendor XYZ for 20 boxes of pens. Each box contains 10 pens and costs $10 apiece. The total on the purchase order is $200. As Company ABC receives the shipment, the warehouse team creates a receipt of goods to verify the quantity in the boxes of pens, as well as the number of boxes received.

Once Company ABC’s AP department receives the invoice from Vendor XYZ, the system compares the invoice to the purchase order and goods receipt note. Within a set margin of tolerance, the system is designed to raise flags for the following issues:

    • Inaccurate product received
    • Inaccurate number of boxes
    • Price mismatch between purchase order and invoice
    • Other mismatches in details, such as payment method, payment address, and/or banking information

If all of these details match up, Company ABC can issue a payment without delay. Any mismatches, such as a receipt of 11 boxes instead of 10, may flag the invoice for additional review by a member of the accounts payable team.

Corcentric ensures an accurate 3-way match

The success of the 3-way match depends on the system that companies use to perform it. After all, 3-way matching can be done by hand using paper documents, although the rate of error is higher for businesses that rely on manual processes. Corcentric provides a comprehensive system that ensures the accuracy of 3-way match automation by integrating processes and minimizing necessary human interaction.

With Corcentric, companies can use an integrated system for creating purchase orders, receiving e-invoices, and comparing the information to the receipt of goods. The system standardizes the generation and processing of information, making it easier to identify and match relevant details. Businesses can automate the process to send approval to the ERP system to generate a payment. The entire system is automated, designed to require human intervention only when a mismatch occurs outside the tolerance level. Consistent use of the system improves the efficiency of the invoice process, without increasing the workload of the team managing it.

Download the white paper Why Automating the 3-Way Match Matters.