December 8, 2020

What is 3-way matching in AP and why do you need to implement it?

By SanyaOlu Ameye

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. 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. According to an ACFE report, companies lose up to 5% of their annual revenue on fraudulent or unauthorized spends.

  • In the event that they do, you have a successful three way match, which can be carried forward to your accounts payable for fulfillment.
  • A systematic 3-way matching system aids businesses in maintaining accurate and comprehensive records.
  • It identifies illegitimate invoices and enables your accountants to prevent overpayment for purchases that were not authorized for the specified amount.
  • They quickly flag errors and potential cases of fraud so that AP teams can take immediate action.

Join our community of finance, operations, and procurement experts and stay up to date on the latest purchasing & payments content. If your company’s balance sheet is not portraying an accurate picture, you’re shooting in the dark. And that same year, one what is variance analysis 2021 definition examples andadvantages Lithuanian fraudster pled guilty to using invoice fraud to bilk Google and Facebook together for a combined total of over $100 million. Your payment efforts will be a common target for criminals and other ne’er-do-wells looking to make a quick buck.

Find the Right Automation Solution for You

If other problems arise, an automated solution offers immediate visibility into the process, allowing your team to quickly pinpoint the cause of the problem. All of these improvements make 3-way matching an essential piece of your invoicing process and your AP automation system as a whole. An automated 3-way matching solution virtually eliminates human touch points such as manual data entry, paper receipts, and physical signatures for approval. A company might choose to use this method since it’s less time-intensive than a three-way match.

Orders and payments are essential daily activities in every business that significantly impact other operations. With a large volume of purchases and payments, companies must carefully review all the data to avoid anomalies that may cost them a lot of money and affect the ultimate income. This includes tracking key performance metrics, such as the percentage of invoices that are accurately matched to purchase orders and delivery receipts. The team responsible for managing the 3-way matching process are payable staff, purchasing staff, and any other relevant personnel. With the three-way matching system in place, companies can confidently issue accurate payments and maintain positive relationships with vendors. 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.

Three-way matching adds the receiving report or receipt of goods as a further verification method. Admittedly, these issues may not be nefarious and merely the result of sloppy processes, but that sloppiness begs the question of where else the supplier could be cutting corners. Ideally, any vendor you work with should value your working relationship and your business enough to mitigate and minimize any invoice or shipping issues proactively. Proper documentation is a relative term, particularly across industries and geographies.

It should be made clear to the vendor that the PO number must be referenced on the packing slip when the items are shipped. Most vendors will not fulfill an order for an organization without a purchase order number. In order to simplify the three-way matching process, you might consider excluding smaller value invoices and recurring invoices from the three-way matching process. Recurring payments can be verified at setup, leaving zero room for fraud. Similarly, it’s counterintuitive for fraudsters to try defrauding an organization of small-dollar micro transactions. The supplier’s invoice is essentially a request to pay money owed to the supplier.

The three way matching process

By acquiring, requiring, and matching these documents, a foolproof and secure payment process can be ensured. The 3-way match accounting entries need to be in sync for successful 3-way matching. If any of the 3 documents fail to match, the invoice payment is put on hold until the discrepancy is resolved. The 3-way match process in accounts payable can be used in SAP, ERP, and Odoo implementations. The 3-way match of purchase orders in SAP enables efficient data processing and invoice verification.

This package of information is presented in a single dashboard on the recipient’s laptop or mobile device. No matter the size or scope of your business, 3-way matching in accounts payable is an effective, efficient mechanism to help avoid wasting money. And automation enhances the potency of this advantage while liberating your critical staff to focus on more strategic measures. In addition, with more frequent errors occurring throughout the matching process, you’ll likely be escalating a higher percentage of your invoices for further review, extending payment timelines.

The Difference Between 2-Way Vs. 3-Way Matching

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. From there, the order is then verified, via the invoice, to ensure that the product received matches what the buyer is charged.

Automated systems lead to a faster process, which means payments go out more quickly. As a result, you will be able to maintain fruitful and trustworthy relationships with your vendors and suppliers. While the purchasing department creates and issues POs, the receiving department creates the reports regarding what physically arrives at the warehouse. Without systems sharing data appropriately, departments may silo their efforts with poor communication that hinders operations. 2 and 3 way matching in accounts payable is the matching of a purchase order to an invoice, or matching a purchase order to an invoice and a goods receipt.

How does three-way invoice matching benefit your business?

Additionally, the documents could be misplaced, lost, or damaged due to poor handling or storage issues. 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. Barbara is a former CFO for fast-growing tech companies with Deloitte audit experience. She is also a financial writer for other successful B2B businesses, including SaaS and financial companies.

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. 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. 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.

With 3-way matching, you’ll be much more likely to notice those erroneous invoices or payment requests that spontaneously list a different bank account. Two-way matching is the process of matching two documents the invoice and the purchase order. Expanding business operations brings several organizational changes that alter the company’s landscape. These changes can affect the way finance, HR, procurement, and other business functions operate.

Unavailability of the right document for matching leads to payment delays and other process bottlenecks, which in turn affect business performance and productivity. A 3-way match in accounts payable (AP) highlights the discrepancies or inconsistencies between any of the above-mentioned documents. When discrepancies are discovered in three-way invoice matching, the payment will be withheld until the discrepancy is resolved. If your three-way matching process in accounts payable isn’t 100% automated, it can happen that figures that get entered into one of the documents may differ just a bit with other documents. And if you insist your figures must be identical every single time, this might hold up supplier payments and invoice settlements. The essence of three-way matching is to eliminate fraud, and to ensure all incoming invoices are properly vetted before making payments on them.

Now, while that is an ideal course to pursue, an organization’s accounts payable team might encounter hitches that hinder them from doing their best work and making sure every supplier gets paid on time. 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.

Learn How NetSuite Can Streamline Your Business

At Rillion, we provide accounts payable automation (AP Automation) to organizations in over 50 countries worldwide. Over 95% of Rillion customers feel that the platform fulfills expectations and consider Rillion to be a worthwhile investment, noting its ease of use and great support. To learn more about implementing automated three-way matching in your procurement process, schedule a demo of Order.co today.