3-Way Matching in Accounts Payable: A Comprehensive Guide

3-way matching is an important method to check validity and accuracy of vendor invoices. It is conducted by matching invoice details with corresponding purchase documents and receiving reports. Invoice fraud is a rampant problem for businesses today, and has resulted in companies losing over $2 billion. Fraudsters can send fake invoices which closely resemble legitimate invoices and without strong checks like 3-way matching, these invoices will get paid, and you might end up losing money. 

3-way matching ensures that all invoices paid by you are valid by matching them against preset documents and flagging invoices that have discrepancies against the order. It also helps in verifying the quantity of goods received against the quantity of the order placed, ensuring that your vendors can’t overcharge you. 

Understanding 3-way matching

What is 3-way matching?

3-way matching is used to check the validity of a vendor invoice by comparing it to corresponding documents generated by the procurement function, namely purchase order and the document generated at the time of delivery, namely the receiving report. 

A purchase order is generated by a customer and sent to a vendor stating the quantity and often the agreed-upon price for goods or services purchased. Upon receipt of goods by the customer, a receiving report is generated stating the quantity and quality of goods received by the customer. 

A 3-way match occurs when an invoice is matched with the details of both the purchase order and the receiving report. The 3 way match helps to ensure that the goods sent by the vendor are the same as those that were ordered and the quantity that is being paid for has actually been received. 

2-way vs. 3-way matching

A 2-way match is done to ensure that the details of an invoice correspond to the details on the  purchase order sent to the vendor. A 3-way match is a stronger check for invoice validation since it also verifies whether the goods received match the details mentioned in the invoice, by comparing the invoice with the purchase order and delivery receipt. 

For service-related purchases where a receiving report might not be essential, a 2-way match is preferred over a 3-way match. 

How does 3-way matching work

The entire 3-way matching process starts with the procurement process when a request for goods is sent to the vendor. 

1. First, a purchase order stating which goods are required and their respective quantities are sent to the vendor. The agreed-upon prices of the ordered goods might also be mentioned. 
2. The vendor processes delivery after receiving the purchase order. 
3. The goods are received by the customer. The received goods are then verified, and a receiving report stating the quantity and quality is generated. 
4. An invoice containing purchase details and payment terms is sent by the vendor. 
5. The accounts payable team matches the details in the invoice with those in the purchase order and receiving report. If the details match, the invoice is sent for approval for payment. 
6. If the details do not match, a separate process to investigate the discrepancy is triggered. An issue may also be raised with the vendor and a corrected invoice may be received from the vendor for further processing. 

Importance of 3-way matching

3-way matching is a secure method of preventing overpayments and, subsequently, monetary losses. 

Fraud prevention

Fraudsters often send fake invoices for payment to scam money out of companies. In the absence of 3-way matching, these invoices get paid, leading to monetary losses for the company. 

Checking the validity of invoices

A vendor might accidentally send an invoice for a purchase that has been canceled, not completed, or not been fully delivered. Without 3-way matching and other smart checks, companies might end up paying their vendors in full for goods half received.

Managing finances better

Accounting for purchase orders and receiving reports, in general, help companies manage their finances better by accounting for purchases before the bill is paid. 3-way matching ensures you’re paying for what you’ve already accounted for, avoiding any surprises. 

Benefits of 3-way matching

Save time on manual errors

An accountant may spend upto twenty minutes per invoice rectifying manual errors made in the process of accounting for invoices. This can lead to payment delays and fewer invoices being processed daily. A 3-way match ensures that manual errors or discrepancies are caught before the invoice is routed for approval, speeding up the invoice processing process. 

Control costs

It is no secret that 3-way matching can help prevent overpayments by matching invoice quantity with that ordered and received. But with the help of 3-way matching, you can also prevent duplicate payments and overpayment due to manual errors and gain better negotiating power over vendors by capturing invoice mistakes early. Invoice matching also prevents payouts against fraudulent invoices.  

Improve cash flows

A lot of the time, errors in invoices are noticed after the payment has been made. This can be rectified by creating a credit note in the name of the vendor to be adjusted against the next payment. This negatively impacts cash flow of your company and requires constant follow-ups with your vendor to accept settlement by a credit note. With 3-way matching, mistakes can be captured and adjusted before the payment is made, reducing this hassle. 

Adequate records for simplified audits

Judiciously matching invoices with their purchase orders and receiving reports generates a strong paper trail for all cash flow out of your company. A reliable accounts payable audit trail ensures you have not been subjected to any internal fraud and are not losing money without your knowledge. It also ensures your accounting practices are compliant with the industry standards and aids in better external audits. 

How to implement 3-way matching

3-way matching can be implemented either by setting up a team to manually match invoices to purchase orders and receiving reports or by implementing automation into your company. 

Distribution of roles

The most straightforward method of implementing 3-way matching is to assign 3-way matching duties to employees within your team or hire additional accounts payable staff. The number of employees required for this process can be determined based on the volume of invoices received monthly and payment terms. Assigning roles ensures accountability among your employees and can ensure the timely processing of invoices.

Implement automation

Some AP automation vendors provide a 3-way matching module within their tool. This lets you digitize the accounts payable process, speeding up invoice processing times and reducing errors. With accounts payable automation in place, employees can merely scan the invoice or upload the invoice into the tool. The invoice fields are then automatically extracted using optical character recognition technology. Softwares like ClearTech also promise 100% accurate invoice digitization with a combination of OCR technology and tech-enabled human-led managed services. A 3-way match can then be automatically performed on the extracted data, and any invoice with discrepancies beyond the acceptable threshold will be flagged and raised to the vendor. Performing a 3-way match can also prove to be more economical since the ROI of accounts payable automation is typically higher. 

Conclusion

In a 3-way match, an invoice is compared with the purchase order and receiving report and is only processed when the details are correct, or discrepancies are within a set threshold. A 2-way match is done by comparing the details of an invoice with its corresponding purchase order. A 2-way match is performed in case of service-related purchases. 3-way match in accounts payable helps ensure the validity of invoices and safeguards you against invoice fraud. You can also avoid duplicate payments and manual errors. 3-way matching enables you to create a paper trail, helping in better audits and compliance. Utilizing AP automation software can ease the manual burden on your accountants and perform an accurate match with a good return on investment.