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In the world of accounts payable (AP), one of the most challenging jobs is managing the onslaught of supplier invoices that arrive. They must be verified and paid on time each month. The AP department is responsible for verifying the invoices are real, which is incredibly important since organizations lose an estimated 5% of their annual revenues to fraud.
One technique AP teams use to ensure invoices three-way matching process works systematically, are as follows:
- During procurement, the buyer places the order with the supplier.
- A corresponding PO is sent to the supplier based on the order placed.
- The accounts payable 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.
What is a 3-Way Match?
In accounting, one of the most common types of invoice matching is called the 3-way match. Three-way match is the process of comparing the purchase order, invoice, and goods receipt to make sure they match, prior to approving the invoice. This ensures that the customer’s order, the supplier’s delivery, and the goods receipt note (GRN) all reflect the same information. The process legitimizes the invoice and makes it ready for payment.
If everything matches, the supplier’s invoice will be approved for payment. A 3-way match also helps decide if an invoice should be paid partly or in full.
When to Use a Three-Way Match
Three-way matching may be labor-intensive and time-consuming because both the supplier and the buyer will allocate resources to accomplish the task. 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 suppliers and buyers. By acquiring, requiring, and matching the three documents, businesses can ensure a foolproof and secure payment process.
The invoice matching process makes auditing simple. That’s because 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 tax process.
Thus, a three-way match should be utilized as often as possible (for a business of any size) when the necessary paperwork and resources are available.
How the 3 Way Matching Process Works
The three-way matching process works systematically, and as follows:
1. The buyer places the order with the supplier. A corresponding PO is sent to the supplier based on the order placed.
2. An accounts payable (AP) department creates an invoice based on the PO.
3. The buyer receives an invoice from the supplier based on the PO.
4. Invoice details will be checked if contents match the PO. Checking will be done through an invoice approval process.
5. The buyer acknowledges a receiving report issued by the supplier as proof of payment and order completion.
6. If all the details in the three documents match, the invoice is approved, and payment is released.
An Example of Three-Way Matching
To get a more detailed explanation of how the process works, here is an example using an advertising agency and laptops:
- 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. 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 whether the items listed in the invoice match 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 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, like contents, date of order and delivery, and delivery address. When a laptop is missing or damaged during the delivery, the receiving department can refer to the packing slip for solutions.
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’s 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 invoice management, is a must!
Benefits of 3-Way Matching
The main benefits of the three-way matching process focus on eliminating any discrepancies in purchasing. They are:
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 invoices and overpaid transactions. With the three-way match, overpaying and other potential payment problems are immediately flagged by the payable department, even before delivery.
Solid Supplier-Buyer Relationship
A three-way match strengthens supplier relationships. Suppliers feel important and valued when necessary documents are fulfilled and submitted on time. 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 less of a hassle. It’s easier for auditors to check the data presented.
2-Way vs 3-Way vs 4-Way Matching
By default, 2-way matching is what businesses usually practice. The process only requires two documents, the invoice and purchase order. Meanwhile, the 4-way match adds another layer 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 meticulous of 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 organizations avoid AP issues by resolving any possible mismatches on bills and orders before payments are processed.
When should you use two-way matching instead?
Although three-way matching is the go-to industry standard, two-way matching can be the best choice for your business in certain circumstances. Two-way matching should be used when:
- You do business with service-based suppliers that do not make GRNs. If your verification process requires a GRN (like in three-way matching) and your supplier doesn’t typically use one, then your invoice will sit unpaid until someone has to manually intervene.
- You use direct shipping where products are sent straight from the supplier. Direct shipping can save your business lots of time, but that could be compromised if your invoice gets tied up in extra verification. Since direct shipping is generally lower risk, this is a good time to use two-way matching.
- You need to lower business costs. Opt for two-way matching because it requires fewer resources and costs than three or four-way matching. are legitimate is called three-way matching. In addition to picking up on criminal activities, 3-way matching works for an organization in other ways, especially when the functionality is automated.
If the company is still stuck in traditional payment workflows, a large number of transactions involving clients and suppliers will be challenging. One effective way to improve payment processes and supplier relationships is to adapt the three-way matching process to your supply chain.
What is Invoice Matching?
What is an invoice? Nothing, if it doesn’t have documents to back up the transaction. Invoice matching is a payable process utilized by the payable team. It ensures there are no discrepancies between a purchase order (PO), an invoice, and other required documents. Matches can be made up to 4 ways, depending on the contract and processing standards.
The automated invoice process includes matching information like:
- Vendor code
- Supplier name
- Address and phone number
- Total amount of purchase on bottom line
- Corresponding Purchase order number
- Line items/product descriptions
- Custom fields
For finance teams, there are three tiers of invoice matching: 2-way matching, 3-way matching, and 4-way matching.
Which Documents are Needed for Three-Way Matching?
To perform three-way matching, you need a purchase order, a goods receipt note (GRN), and an invoice.
- The vendor invoice is a document listing the amount of services/goods that the buyer owes the supplier. It has an invoice number, supplier information, payment discounts, and payment schedule.
- The purchase order (PO) is a document listing the types, quantities, and prices of products/services agreed upon by the supplier and buyer. It is sometimes called the order confirmation receipt. It contains a unique code called a PO number and is used as a tracking number (which matches an invoice).
- The receiving report or goods receipt note (GRN) is a document stating that the buyer received the goods/services from the supplier. Once acknowledged, this document is also considered payment confirmation.
The specific products, quantities, and prices of each item on the invoice and purchase order are called line items. Line items may also include additional information, such as comments or charges.
Pitfalls of the Manual Matching Process
Most companies use a manual matching processes to record financial transactions. Manual processing includes obtaining physical documents in the form of journals or ledgers.
Although physical records may be traditional and accessible, there are far more disadvantages to them compared to automated solutions.
Manual processing for an invoice costs an average of $12-$30 per item, which can increase by five to six digits per month. Considering alternative methods, like automated processing, can save a large portion of the budget allotted for manual handling.
Manual matching takes time to complete, even with two or three employees working together. Gathering people, such as suppliers and supervisors, to sign documents takes time. Physically comparing and inputting data also causes delays.
As much as companies want to pay their suppliers promptly, manual processing may cause delays because of backlogs or misplaced documents. Late payments tarnish a company’s reputation and may affect future transactions.
Manual data processing and invoice matching is laborious and may be prone to errors and misinterpretation. Physical copies can be misplaced, lost, or damaged due to mishandling or storage problems.
Switching to an electronic payable software solution, like Tipalti, will eradicate the disadvantages of manual matching processes.
Should You Automate the 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.
What are some of the additional benefits of AP automation and automated three-way matching?
- No need for additional staff. Solutions like Tipalti can reduce 80% of the workload for the accounting department.
- 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).
- Take advantage of early payment discounts. Automation helps bills get paid quicker, which means you can save money through discounts; increasing profitability.
- Faster payment to vendors also drives satisfaction. It strengthens vendor relationships and nurtures future business opportunities.
- Automating the three-way matching process means less human error. Fewer mistakes mean less time spent correcting them.
- Never get caught in an audit unprepared. Automation ensures there is a definitive “paper trail” for everything you do.
Automation can have a huge impact on your organization.
In accounts payable, it means the difference between hours and days of extra work. What kind of business impact can it produce, and how can an organization effectively automate the entire bill-to-pay workflow?
Download our recent whitepaper, Accounts Payable: Embracing the Strategic Evolution, to find out!
Benefits of Automating the Matching Process
Today, the finance function has more responsibilities than ever. Especially when it comes to effective invoice matching.
In high-growth businesses, every operation (both front and back-office) is inexplicably tied to investment versus reward. To survive this uncharted road ahead, the modern finance team has to future-proof their organization with technology. In our e-book, The Ultimate Accounts Payable Survival Guide, we’ll help you navigate tasks like automating the invoice process and demonstrate how real-life survivalists scaled their businesses.
Integrated AP automation is an innovative and efficient solution for companies that want to minimize workload and maximize employee productivity. Tipalti is the automation solution for all the AP woes that companies face with manual matching. Invoices are immediately sent and received digitally, making payment almost effortless. And the processing genius doesn’t end there. Tipalti also cycles around the full payment procedure and collates the matching documents for an incredibly concise and streamlined process.
Understanding what your company needs and how you can improve, especially with invoice processing, can be a good starting point for gaining long-term traction. AP innovations are vital elements for a sustainable and centralized global business solution, one payment at a time.