3-way matching in accounts payable: How to increase 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?

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.

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

Three-way matching cross-verifies documents before payment to ensure accuracy. It involves:

• Purchase Order (PO): Details what’s being bought, quantity, and price. Approved and sent to the seller.
• Goods Received Note (GRN): Confirms delivery matches the PO.
• Vendor Invoice: Lists delivered items and costs, checked against the PO and GRN. Once approved, payment is made.

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

1. Initiation: The process begins when a demand is raised for a product. The procurement team approves the purchase, and a PO outlining the quantity, pricing, and delivery terms is sent to the supplier. Retain a copy for internal records.
2. Receipt: 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: The supplier sends an invoice during the billing cycle, detailing the delivered items, payment terms, pricing, and additional fees.
4. Verification: The AP team verifies pre-approval and ensures all relevant records are available. They perform a three-way match, checking the PO, receiving records, and invoice for discrepancies.
5. Authorization: If all details match, the AP team authorizes payment. If discrepancies are found, the invoice is reviewed, and issues are resolved before payment is finalized.

Other types of matching

Two-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.

Four-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.

Or, imagine a business needed to purchase $5,000 worth of office supplies for their new hires.

1. Request Submission: A program manager submits a request for the office supplies to the purchasing department, specifying the items and quantities needed for the outreach program.
2. Procurement Process: The procurement team reviews the request, compares prices from several office supply vendors, and selects the vendor offering the best value. They then generate a Purchase Order (PO) and send it to the finance team for approval.
3. PO Approval and Transmission: After the finance team reviews and approves the PO, it is transmitted to the chosen vendor to initiate the order.
4. Goods Receipt: Upon delivery of the office supplies, the receiving department checks the shipment to ensure that all items match the details on the PO. They then record the goods receipt, confirming that the items have been received.
5. Invoice Validation: The supplier sends an invoice to the accounts payable (AP) team. The AP team validates the invoice by comparing it with 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.

Optimizing your 3-way matching process

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.

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

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