What Is Three-Way Matching in Accounting?
When business owners expand their ventures and investments, changes in the company landscape start to become visible. Changes, such as hiring new staff or gaining new suppliers, can affect the business’ overall process in terms of financial gains and losses.
If the company is still stuck in traditional payment processes, a large number of transactions involving clients and suppliers can be challenging to handle. One effective way to improve payment processes is to adapt the three-way matching process.
What Is 3-Way Matching?
A three-way match is the process of matching the invoice, purchase order, and receiving report to validate the details of a purchase before making a payment. The purpose of this process is to reduce the risk of fraud and financial loss by preventing the reimbursement of unauthorized purchases.
The vendor invoice is a document stating the amount of the services or goods that the buyer owes the supplier. It is a document that shows the invoice number, supplier name and information, payment discounts, and payment schedule.
The purchase order (PO) is a document listing the types, quantities, and prices of products and services agreed upon by the supplier and buyer. It is also called the order confirmation receipt.
The specific products, quantities, and prices of each item ordered are called line items. Line items may also include additional information, such as comments or charges.
A unique code generated in the PO is called PO number. It is used as a tracking or reference number that is uniform with the invoice.
Meanwhile, the receiving report is a document stating that the buyer received the goods or services from the supplier. Once acknowledged, this document is also considered as payment confirmation.
Why Should You Use a Three-Way Match
Three-way matching may be labor-intensive and time-consuming because both the supplier and the buyer will allocate time and resources to accomplish the necessary paperwork. The process also requires both parties to check and send documents back and forth to each other.
Still, the three-way match process is an effective business practice for both suppliers and buyers. By acquiring, requiring, and matching the three documents, businesses can ensure a fool-proof and secure payment process.
The matching process makes auditing simple. The order receipts and vendor invoices are two standard documents needed for audits. Requiring these two documents before the completion of a transaction contributes to a straightforward process.
Benefits of a Three-Way Match
The three main benefits of the three-way matching process focus on eliminating any discrepancies in the purchasing process.
Time and Money Saver
One benefit of a three-way match is to help the company save time and money. Consistency and accuracy of data are essential in any payment process. Any wrong information and duplication can lead to fraudulent vendor’s invoices and overpaid transactions. With the three-way match, overpaying and other potential payment problems are immediately flagged down even before delivery.
Good Supplier-Buyer Relationship
A three-way match also strengthens supplier relations. When necessary documents are fulfilled and submitted on time, suppliers feel important and valued. As a result, they consider the company as a reputable and trustworthy business partner.
Auditing Made Easy
A three-way match can also make auditing and bookkeeping easier. If documents are complete and error-free, compiling them becomes hassle-free. Also, auditors will not have a hard time checking the data presented.
How a Three-Way Matching Process Works
The three-way matching process works systematically, and as follows:
- The buyer places the order with the supplier. A corresponding PO is sent to the supplier based on the order placed.
- An accounts payable (AP) department creates an invoice based on the PO.
- The buyer receives an invoice from the supplier based on the PO.
- Invoice details will be checked if contents match the PO. Checking will be done through an invoice approval process.
- The buyer acknowledges a receiving report issued by the supplier as proof of payment and order completion.
- If all the details in the three documents match, the invoice is approved, and payment is released.
How a Three-Way Match Works
To get a more detailed explanation of how the process works, here is an example:
An advertising agency needs 20 new laptops for their employees to use. Upon placing the orders, the PO is sent to the supplier.
After ordering the items from the supplier, the agency’s purchasing department receives a $10,000 invoice or billing information. The invoice is based on the PO sent by the purchaser to the supplier.
The agency’s accounting department then conducts an invoice approval process. During this process, the purchasing and accounting departments have to verify the items listed in the invoice if they match with the PO, including each line item and PO number.
Upon delivery of the laptops to the agency, the receiving department checks the PO and invoice with the receiving report or goods receipt. This receipt serves as a proof of payment and delivery of the items.
Another document that may be included in the delivery package is the packing slip. This document indicates the parcel’s details—contents, date of order and delivery, and delivery address. When a laptop is missing or is damaged during the delivery, the receiving department can refer to the packing slip for possible alterations.
Ultimately, all documents must have the same information. If the three essential documents—PO, invoice, and receiving report—coincide with the actual delivery, then it is a three-way match.
To enhance the three-way match processing, a payment service, like Tipalti, with end-to-end optimization, from order placement to payment release, is a must for a standardized procedure.
The Difference Among 2-Way, 3-Way, and 4-Way Matching
By default, a 2-way matching is what businesses usually have. The process only needs two documents, the invoice, and PO. Meanwhile, the 4-way match adds another layer in the process for inspection and verification purposes.
The inspection process is done after the delivery. All the documents are cross-checked and inspected before finally accepting the goods or services.
The 4-way match is the most time consuming but most meticulous among all the processes. It should be done only when strict compliance or verification is needed.
Compared to the 2-way and 4-way match, the 3-way match process is the ideal choice of internal control.
The primary purpose of 3-way matching is to prevent any incorrect and fraudulent invoice or payment from happening in a company. The 3-way match helps companies avoid problems related to AP by resolving any possible mismatches on bills and orders before payments are processed.
The Drawbacks of Manual Matching Process
Most companies use manual matching processes to record financial transactions. Manual processing includes obtaining physical documents in forms of journals or ledgers.
Although physical records may be traditional and always accessible, there are far more disadvantages to it compared to automated solutions.
The average manual processing costs around $12-$30 per piece, which may blow up around five to six digits per month. Each paper used also cost a fortune if computed separately from the service. Considering alternative methods, like automated processing, can take a massive chunk of the budget allotted for manual handling.
Manual matching processing takes time to complete, even with two or three employees working together on it. Gathering people, such as suppliers and supervisors, to sign documents may take time. Physically comparing and inputting data may also cause delays.
As much as companies want to pay their suppliers on time, manual processing may cause delays because of the backlogs or misplaced documents. Delayed payments tarnish a company’s reputation and may affect future transactions.
Manual data processing and checking is laborious and may be prone to errors and misinterpretation since everything is done by hand. Physical copies may also be misplaced, lost, or damaged due to mishandling or storage problems.
Switching to an electronic payable software solution, like Tipalti, can eradicate the disadvantages of manual matching processes.
Why You Should Automate Your Matching Process
Automating the matching process can help save time, money, resources, and energy. Shifting to a digitized process ensures promptness in payments, accuracy in encoding data, and accessibility in various platforms.
AP automation, like what Tipalti offers, can reduce 80% of the accounting department’s workload without employing additional staff.
Automated matching processes also reduce the time spent on a task. It generates and sends invoices automatically without errors—no more backlogs and delayed payments.
The Automation Solution for Matching Process
An integrated AP automation is an innovative and efficient solution for companies that want to minimize workload and maximize employees’ productivity.
Tipalti is the automation solution for all the AP woes that companies with manual matching processes are experiencing. Invoices are sent and received through email or web portal, which makes processing payment almost effortless. Invoices can be sent in batches for a more organized business processing.
Tipalti’s processing does not end there. It also cycles around the full payment procedure and collates the matching documents for a more streamlined process.
Knowing what the company needs and how the company can improve, especially in the financial aspect, can be a starting point for an organization to grow and gain traction in the long run. AP innovations are vital elements for a sustainable and centralized global business solution, one payment at a time.