3-way matching guide: How to increase AP accuracy

Imagine discovering that up to 2% of your business’s payments are duplicates, incorrect amounts, or other errors—a common issue for many companies. Accounts payable (AP) departments use three-way matching to verify the legitimacy and accuracy of invoices, preventing unauthorized payments. This process involves cross-checking the purchase order (PO), goods received note (GRN), and vendor invoice to ensure everything matches before approving payment. 

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While three-way matching is crucial for identifying and stopping errors, understanding how it works is key to ensuring your business's financial integrity. Let’s delve into the details of this essential process.

What is 3-way matching in accounts payable?

Three-way matching is a crucial internal control process in AP that involves comparing purchase orders (POs), goods receipt notes, and supplier invoices. The primary goals are to eliminate fraud, save money, and maintain comprehensive records for auditing purposes. This process is typically completed before payment is issued to the supplier after delivery.

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Benefits of 3-way matching include:

• Preventing costly errors: By catching discrepancies between the purchase order, goods receipt, and invoice early, 3-way matching ensures your business only pays for what it ordered and received.
• Safeguarding against fraud: Built-in checks help identify unauthorized or duplicate invoices, protecting your financial integrity.
• Improving vendor relationships: Accurate and timely payments build supplier trust, strengthening long-term partnerships.

Why is 3-way matching important?

Three-way matching ensures accurate and authorized transactions, especially with significant assets like inventory. It helps prevent overpayment, fraud, and errors by verifying that goods or services ordered, received, and invoiced match before payment is made.

Understanding the 3-way matching process in AP

As mentioned, three-way matching cross-verifies three primary documents before payment to ensure accuracy. In detail, the three individual components are: 

• Purchase order (PO): This describes what’s being bought, including quantity and price. It is approved and sent to the seller.
• Goods received note (GRN): A GRN, often used alongside the supplier’s packing slip, confirms that the delivery matches the PO and provides proof for 3-way matching.‍
• Supplier or vendor invoice: Lists delivered items and costs, checked against the PO and GRN. Once the invoice approval process is complete, the payment is made.

Step by step breakdown

To better understand how the three-way matching process works in practice, let's break down the steps involved from start to finish:

1. Purchase order is created: The process begins when a need for goods or services is raised. The procurement team approves the purchase and sends the supplier a PO, including a unique PO number detailing quantities, agreed pricing, and delivery terms.
2. Goods are received and inspected: The supplier prepares and delivers the order. Upon receipt, verify the accuracy of the paperwork and address any discrepancies before finalizing the receipt and GRN.
3. Invoicing: During the billing cycle, the supplier sends an invoice detailing the delivered items, payment terms, pricing, and additional fees. This invoice acts as the third document in the 3-way matching process.
4. 3-way matching and verification: The AP team cross-checks the PO, GRN, and invoice to verify that quantities, prices, and terms align perfectly, flagging inconsistencies as part of the broader PO matching process to maintain accuracy.
5. Authorization: If all details match, the AP team authorizes payment. Payments are approved only after all documents align and mismatches are resolved. Only then can the invoice be posted.

What else to consider when performing a 3-way match

3-way matching helps to ensure more precise matching, but there are still a few considerations to keep in mind to make sure issues are avoided:

• Setting standards for discrepancies: To prevent minor discrepancies from stalling payments, set clear guidelines on what variances in price or quantity are tolerated.
• Partial deliveries: For large orders, partial shipments are expected. Set up a process to track and match deliveries against the PO and invoice to prevent duplicate payments or missed items.‍
• Automation: Automating the 3-way matching process can significantly reduce manual errors and improve accuracy and efficiency for your team—a topic we'll explore further.

Other types of matching

With the basics of 3-way matching and automation covered, many businesses still wonder which invoice matching process is right for them. Here's a breakdown:

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2-way matching

In two-way matching, the invoice is matched against the purchase order to ensure that the invoiced amount, quantity, and pricing align with what was ordered.

• Components involved: Purchase Order (PO) and Supplier Invoice
• Use case: This is simpler and faster than three-way matching and is often used when goods receipt is not critical, such as in service-based transactions where no physical goods are received.

4-way matching

This method includes an additional step where the goods or services received are inspected or tested before approving the invoice for payment. The inspection report is then matched with the other documents.

• Components involved: Purchase Order (PO), Goods Receipt, Supplier Invoice, and Inspection/Acceptance Report
• Use case: Often used in industries with strict quality control requirements, such as manufacturing or construction, where ensuring the quality and specifications of goods or services is critical before payment is made.

Invoice matching

The invoice is matched directly against the contract or agreement terms, bypassing the PO or goods receipt altogether.

• Components involved: Supplier Invoice and Contract/Agreement
• Use case: This is typically used in long-term service contracts or subscription-based services where the terms are clearly outlined in the agreement, and no separate purchase order is required for each transaction.

Receipts matching

This involves matching the goods receipt directly to the purchase order to ensure that the goods received match what was ordered, without immediately considering the supplier's invoice.

• Components involved: Goods Receipt and Purchase Order (PO)
• Use case: This might be used in scenarios where the focus is on inventory control, and invoice processing happens separately or later.

Self-billing matching

In self-billing scenarios, the buyer generates the invoice on behalf of the supplier based on the goods receipt and the agreed-upon purchase order. Matching in this case ensures that the self-billed invoice aligns with the goods received and the purchase order.

• Components involved: Internal Billing and Goods Receipt
• Use case: Common in industries like automotive manufacturing, where the buyer has greater control over the billing process.

Budget matching

This involves matching the purchase order against the allocated budget to ensure that expenditures stay within the approved budget before further processing, including invoice matching.

• Components involved: Purchase Order and Budget Allocation‍
• Use case: Useful in public sector organizations or any scenario where strict budgetary control is required.

Examples of 3-way matching in action

Suppose a nonprofit manager needed to purchase $10,000 worth of bus passes for an upcoming event.

1. Request submission: The manager submits a request for the bus passes to the purchasing department, outlining the quantity and total cost needed for the event.
2. Procurement process: The procurement team reviews the request, assesses the prices offered by various vendors, and identifies the best value. They then generate a Purchase Order (PO) and forward it to the finance team for approval.
3. PO approval and transmission: After receiving approval from the finance team, the PO is transmitted to the selected supplier to initiate the order.
4. Goods receipt: Once the bus passes are delivered, the receiving department verifies that the quantity and details of the passes match those specified in the PO. They then record the goods receipt, confirming that the passes have been received.
5. Invoice validation: The supplier sends an invoice to the accounts payable (AP) team. The AP team validates the invoice by matching it against the PO and the goods receipt, ensuring that all three documents align.
6. Payment disbursement: After confirming that the PO, goods receipt, and invoice match, the AP team approves the invoice and processes the payment to the supplier.

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The AP team can approve the payment since the PO, goods receipt, and invoice match perfectly. If any discrepancies appeared—like receiving fewer kits than ordered or encountering a price mismatch—the team would flag the invoice for review and hold payment until the issue is resolved.

How to optimize 3-way matching in accounts payable for improved efficiency

Implementing an efficient three-way matching process offers significant benefits: it reduces the risk of fraud, ensures transactional accuracy, maintains comprehensive audit records, and fosters strong supplier relationships. However, to fully realize these advantages, it's essential to optimize your matching process. Here are key strategies to improve efficiency and effectiveness:

1. Focus on high-value invoices: Streamline your three-way matching by concentrating on high-value and one-time invoices. Consider excluding low-value or recurring payments, which can be verified upon setup, reducing the risk of fraud and freeing up resources.
2. Standardize the process: Avoid unnecessary delays by allowing slight discrepancies within an acceptable margin of error. This approach ensures smooth processing without compromising accuracy.
3. Implement automation: Automate your three-way matching process to reduce manual errors, speed up processing, and lower costs. Automated systems like Ramp can store POs, collect reports, and automatically compare these documents with incoming invoices, enhancing efficiency and accuracy.
4. Manage discrepancies efficiently: Establish clear protocols for handling partial shipments, backorders, and discrepancies. A robust resolution process ensures timely and accurate financial operations, reducing delays and preventing recurring issues.

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By implementing these strategies, you can maximize the benefits of three-way matching, ensuring your accounts payable operations are both efficient and secure.

Automation's role in 3-way matching

Automated three-way matching eliminates the headaches of a manual matching process and provides additional benefits for your AP team. Here’s how accounts payable automation works and why it can help grow businesses:

1. Digitizes and centralizes documents: Automation software integrates with your ERP or AP software to pull POs, goods receipts, and invoices into one platform. Tools like Optical Character Recognition (OCR) digitize paper invoices, making sure every detail is noticed.
2. Automatic matching: The system automatically cross-checks documents, applying pre-set rules to identify discrepancies quickly.
3. Streamlines workflows and exception handling: Flagged mismatches are routed to the right person through automated workflows, cutting out manual back-and-forth. Pre-defined rules can even resolve common issues like partial shipments automatically.
4. Provides actionable insights: Dashboards and reporting tools offer more visibility into your accounts payable process, helping you track trends, spot bottlenecks, and ensure compliance.

Optimize your 3-way matching process with Ramp

Automation doesn’t just make 3-way matching faster—it makes it more efficient and reliable. By digitizing documents, automating workflows, and providing visibility, your AP team can focus on strategic tasks while reducing errors, improving accuracy, and strengthening supplier relationships.

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With automated systems like Ramp’s accounts payable software, you can implement a seamless, automated solution tailored to your needs.

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Interested? Try Ramp today.