3 Way Matching in Accounts Payable – What it is and Why Should You Automate the Process?
Key takeaways
- Managing the onslaught of vendor invoices is undoubtedly the most challenging accounts payable tasks.
- A recent press release by the Association of Certified Fraud Examiners reveals that organizations across the globe lose an estimated 5% of their annual revenues to fraud.
- The 3-way matching in accounts payable is an effective way to prevent fraud in the accounts and procurement functions.
- Vendor invoices that are routed through 3-way matching simplify the auditing process.
- Manual 3-way matching processes are ridden by errors, duplication, or fraudulent practices.
- Automation of the 3-way matching process accelerates payments and lowers the risk of human errors.
- A no code AI-powered workflow solution like Cflow can help build a solid 3-way matching process that cements vendor relationships.
A Forbes survey of 2750 businesses revealed more than 34,000 cases of invoice fraud were encountered in the span of a year. These figures reveal that the B2B sphere is prone to sending cash into the wrong hands.
The root cause?
When organizations do not have adequate processes to properly vet and set up vendors on their system, they end up approving invoices without any verification or questioning. This is where the 3-way matching in accounts payable can turn the tables around.
What is 3-way matching?
What is the importance of three way matching in the accounts payable function? How to streamline the 3 way match process? Explore the 3 way match in accounts payable in detail through this blog.
What is 3-Way Matching in Accounts Payable?
The 3 way matching in accounts payable, or simply three way matching is the process of matching purchase orders (POs), goods receipts (GRN), and the supplier’s invoice, to eliminate fraud.
The accounts payable department is responsible for verifying all invoices that are received to ensure that only legitimate invoices are paid out. What is 3 way matching in accounts payable? This is a verification process that ensures that all details on relevant documents match accurately.
Vendor fraud is a growing problem in the United States. Nearly half of U.S. Businesses have already been hit by 7+ invoice fraud cases in 2024, as per a Creditsafe Study.
In order that invoices sail through the 3 way match, they must satisfy the matching tolerances. Invoices that don’t satisfy matching conditions are mostly placed on hold and subject to further verification. Invoice payments are not released until the hold is released or resolved.
Holding an invoice acts as a fail-safe step that prevents the payment of unverified or unmatched invoices. The 3 way matching in accounts payable can help AP teams decide whether only a portion of the invoice should be paid or whether it must be paid in full.
The last thing a business owner would want is false or erroneous invoices being paid. 3 way match accounting can assist in protecting the accounts payable function from getting entangled in fraudulent or incorrectly submitted invoices.
A number of business owners are turning to 3 way match in accounts payable for mitigating the risk and rein in organizational spend. Making 3 way matching in accounts payable a mandate is a fail proof method against over payment for products and services.
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When to Use a 3-Way Match in Accounts Payable?
A 2024 study by Ardent Partners revealed that 37% of companies experienced more B2B fraud attacks than in the previous year.
The 3 way matching process is definitely a labor- and data-intensive process that requires suppliers and buyers to allocate resources exclusively for the matching process. The process also requires a detailed review of documents by stakeholders from the procurement and accounts payable departments.
Upon receiving the goods from suppliers, the procurement team verifies the quality of the goods and issues the goods received note. The supplier then raises an invoice for the goods delivered. This is where 3-way matching is carried out to ensure that purchase order, goods received note, and invoice details are in sync.
There is also a 2 way matching process followed by teams. This process verifies the invoice against the purchase order. The 3-way matching in accounts payable takes the verification further by including the goods receipt note in the matching process. When accounts teams see a rise in the number of mismatches or erroneous invoices, implementing the 3-way matching is a good way to prevent fraud or overcharging.
When businesses want a clear and accurate auditing process, it is recommended that they incorporate three way matching in accounts payable. This way, all the receipts and vendor invoices are maintained in a centralized console for anytime reference. The 3 way match in accounts payable must be utilized as often as possible to steer clear of invoice fraud.
How Does the 3-Way Matching Work?
The 3 main players in the 3-way matching in accounts payable are purchase orders, goods received notes, and supplier invoices. The 3-way matching process involves cross verification of documents to authenticate the invoice before payout.
The 3 way match in accounts payable is carried out by placing all three documents side by side to confirm that the invoice accurately reflects the goods supplied or services rendered to a business.
To understand how the 3-way matching process works, the role played by the components in the 3-way matching process need to be clearly understood.
Purchase order –
The purchase department receives a purchase requisition from individuals or from a department with details on what, how much, and by when they need. The purchase order is then prepared with details taken from the purchase requisition, and additional details like the supplier name etc. This is the official confirmation receipt of the order sent by the buyer to the vendor. Once the vendor accepts the purchase order, it becomes a legally binding document. The details contained in the purchase order are: PO number, payment information, and descriptions of the goods and services sold.
Goods Received Note –
Once the goods or services are delivered, they are inspected by the buyer. The goods received note includes details of the delivered goods that have been included in the shipment as well as the payment method. This document specifies that a receiving officer has accepted the goods delivered by the supplier and records the quantity, delivery condition, and any other applications to be noted. The receipt is forwarded to the accounts department for cross verification against the supplier’s invoice. The cross verification is essential to determine the legitimacy of the invoice before making the payment.
Supplier invoice –
The supplier or vendor invoice is a request from the vendor to the buyer. This document contains information that facilitates the sale. The goods or services offered are clearly outlined in the invoice, the quantity delivered, the unit price of each supplied product, and other applicable details are clearly mentioned in the invoice. The supplier’s invoice is basically a request from the vendor to the buyer for payment due for the delivered goods.
To understand how the 3-way matching in accounts payable works, let us consider the following example. The interior design team at a construction company requests for 1000 square feet of living room tiles, 1000 square feet of bedroom tiles, and 200 square feet of kitchen tiles.
Additionally, 200 units of tile binding adhesive. The purchase requisition with details of the items and their number, along with the date by which the order is required is sent to the purchase department.
The purchase department issues a purchase order to a tile manufacturer. The rates negotiated with the vendor are: Living room tiles at $10 per square foot; Bedroom tiles at $7 per square foot; and kitchen tiles at $8 per square foot.
The binding adhesive priced at $10 per unit. The construction company issues a PO with complete details on the quantity, price, and expected date of delivery to the vendor. The vendor delivers the goods within the deadline mentioned in the purchase order.
The purchase department inspects the delivered goods and verifies the quality and quantity against the PO. Once the order inspection is done, the goods received note is generated and passed to the accounts department.
The vendor then raises an invoice for the goods delivered containing complete details on the units delivered and the payment due. In a scenario where only a part of the order is delivered, the invoice is raised accordingly.
The accounts payable department then verifies the PO, goods received note, and invoice details thoroughly. This cross-verification of 3 documents is nothing but the 3-way matching in accounts payable.
Only those invoices that clear the 3 way match are cleared for payment. If there is any discrepancy with the data in the invoice, it is reputed to the vendor for clarification or corrections. All invoices, whether they are submitted the first time or re-submitted after corrections will have to go through the 3-way matching process.
Stakeholders in 3-Way Matching
We just saw the documents verified in the 3-way match. Let us now look at the role-play. Who are the stakeholders in the three way matching process? The purchasing department, the inventory department, the finance department, and the vendor are the key stakeholders in the 3-way matching process.
Purchasing or procurement department
The purchasing or procurement department is responsible for sourcing and purchasing the goods and services requested by internal departments. The goods could be raw materials or office supplies, or even software licences. The purchase requisition and purchase order are usually prepared by this department.
Inventory department
This department is concerned with receipt and inspection of goods delivered by the vendor. Employees that work at the company’s receiving dock are responsible for tracking the receipt of a purchase and ensuring that the received goods are inspected completely. The goods received note is generated by this department.
Vendor
The role of a vendor is crucial in the procurement function. They are responsible for fulfilling the goods outlined in the contract (purchase order) and maintaining the quality expected by the buyer. The vendor must ensure that the correct quantity is delivered at the agreed-on price and at the quality expected. The supplier’s invoice is generated by the vendor after delivering the goods.
Finance
The decision on paying the supplier is taken by the accounts payable department. All the documents in the 3 way match – PO, GRN, and Invoice, are cross-verified by the accounts payable department.
2-Way Matching Versus 3-Way Matching
What is 2 way and 3-way matching in accounts payable? What is the difference between the two processes? When should you follow the 2 way match and when should you follow the 3 way match?
| Attribute | 2 way match | 3 way match |
|---|---|---|
| Definition | The process that compares the purchase order and supplier invoice before the final payout | The process that compares the supplier invoice, purchase order, and goods received note |
| Documents verified | Purchase order and Invoice | PO, invoice, and goods received note |
| Stakeholders | Accounts payable, vendor, purchase department | Accounts payable, vendor, purchase department, and inventory department |
| Focus | To ensure that what was ordered matches what is billed | To ensure that what was billed matches with what was received, and what was ordered |
| Suitability | Best suited for purchase of intangible assets | Best suited for physical goods |
| Risk factor | Higher risk as verification is only with 2 documents | Lower risk as 3 documents are cross verified |
| Complexity | Low complexity and quicker process | Higher complexity and a lengthy process |
3-Way Matching Versus 4-Way Matching
The 4-way matching process is a step further of the 3-way process, in which the inspection report is also included for cross verification. Here is a comparison of 3 way matching and 4 way matching.
| Attribute | 3 way matching | 4 way matching |
|---|---|---|
| Definition | The process in which the purchase order, goods received note, and supplier invoice are cross-verified | The process in which the purchase order, goods received note, inspection report, and supplier invoice are verified |
| Documents | Purchase order, goods received note, and supplier invoice | Purchase order, goods received note, inspection report, and supplier invoice |
| Focus | To ensure that the goods/services ordered, received, and billed match in quantity and price | To ensure that a quality check is added to quantity verification before payment |
| Suitability | When the main focus is on quantity and timeliness of delivery | When the focus is on the quality and quantity of goods delivered |
| Risk level | Moderate risk as it verified 3 important documents | Very low risk as it includes quality inspection |
| Complexity | Moderately complex as it cross-verifies 3 documents | Highly complex as it includes several layers of verification and inspection |
Why Do You Need 3-Way Matching in Accounts Payable
From the discussions in the above sections, it is clear that the 3-way matching in accounts payable is a moderately complex process that involves 3 departments for the verification and payout. Do you actually need the 3 way matching? Can you do without the process? What are the risks involved if you do not carry out 3-way matching before payout?
The main reason why you should perform 3 way matching in accounts payable is protection against fraud. Irrespective of the size of the business and scale of operations, invoice frauds can make a dent in the profitability of the business.
Especially when it comes to small businesses, the ACFE projects a larger percentage of losses compared to larger enterprises. Along with the digitization of key business operations comes the risk of cyber fraud. Not just with manual purchases, even online transactions can be thoroughly verified through 3 way matching. The 3 way match offers a practical shield against all types of financial fraud.
The 3 way matching process comes in handy for large purchases. The quantity and value of the goods in large purchases is thoroughly checked in 3-way matching. The maintenance of accurate inventory records is simplified through 3 way matching. Not just large purchases, but high value transactions can be thoroughly vetted by this process.
Building and maintaining strong vendor relationships can be effectively done when 3 way matching is followed by the purchase and accounts payable departments. 3-way matching ensures that initial transactions are accurate and reliable. This helps build a foundation of trust and integrity.
The 3-way matching process also helps organizations maintain compliance with regulatory policies. When purchases are made under specific contractual terms, following the three way matching process ensures that every component of the purchase is compliant with the contract terms.
When purchase departments handle complex or recurring orders, 3 way matching simplifies their work greatly. For recurring orders, 3 way matching ensures that consistency and accuracy is maintained throughout.
In case of complex orders that involve purchase of multiple items or services, following the 3 way matching in accounts payable reduces the risk of missing or mismatched items.
Challenges in Manual 3-Way Matching
Based on the discussions above, we can safely conclude that 3 way matching is a data- and labor-intensive process. Also, it plays an important role in the accounts payable function by preventing fraud or duplication. However, the benefits of 3 way matching are overridden when it is carried out manually. How?
For smaller and simpler business operations, matching the PO, GRN, and invoice data may seem easy. Imagine going through each line item in these documents for large-scale and complex transactions. Overwhelming right? Not just the humongous effort that it demands, the percentage of errors and inconsistencies in data matching is a major challenge in manual 3 way matching.
Building and maintaining strong vendor relationships becomes an issue with manual 3 way matching. Manual cross verification is time consuming, payments to vendors are delayed on many occasions due to the time taken for cross-verification of data across 3 documents.
Needless to say, the occurrence of fraud and duplication is way too high in manual 3 way matching. Another significant challenge posed by manual 3 way matching is employee burnout. The finance and procurement teams spend way too much time verifying documents manually, resulting in employee burnout.
Best Practices in Streamlining Three Way Matching
To take advantage of the scrutiny that 3 way matching brings into vendor payments, you need to streamline the entire process. Here are a few tips on how to streamline 3 way matching –
Setting value limits
Not all invoices need to be verified via 3-way matching. You can set value cut-offs to determine which invoice requires a full 3-way match. Since high-value purchases pose the greatest financial risk, setting value thresholds ensures detailed verification of invoices via 3 way matching.
Discrepancy tolerance
By creating acceptable variance limits for invoice amounts when they are compared against POs or GRNs, a lot of time can be saved. This way, minor discrepancies will not hold up payments.
Workflow automation
The most effective way to get rid of redundancies in 3 way matching is to automate the workflow. When repetitive steps are automated, the 3 way matching is carried out more efficiently and swiftly.
Vendor rating scales
Creating and maintaining a vendor rating system that awards ratings to vendors based on their track record on invoice accuracy, allows for easy and effective verification of their transactions. Operating based on the vendor rating system, ensures that reliable vendors are rewarded with faster payments.
Starting early
Starting the invoice-PO verification process as soon as you receive the invoice as opposed to waiting for all documentation to be processed, is a great way to ensure timely payments. Timely payments in turn cement strong vendor relationships.
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Automating the 3-Way Matching Process
Given the importance of 3 way matching and the inherent challenges in manual matching, it becomes imperative to streamline the process. The obvious choice for streamlining the 3 way matching process is to automate the workflow. When 3 way matching is automated, repetitive, data-intensive cross verification steps are taken care of by the automation software.
Workflow automation with an AI-powered workflow solution like Cflow can streamline the 3 way matching process in accounts payable.
When you automate the 3 way matching process, verification of data across the 3 documents happens automatically. A significant amount of time is saved and procurement/finance teams are relieved of the manual verification. The incidence of errors is nil when you automate the workflow. Automated workflows also issue alerts and notifications to stakeholders to let them know of any pending approvals/reviews.
For successful automation of the 3 way matching process, getting the buy-in from the team is also important. You need to update the team on the new solution and train them on its usage.
Benefits of Automating 3-Way Matching
A 2024 report by the Association for Certified Fraud Examiners (ACFE) reveals that businesses using automated tools for fraud detection report 50% fewer fraud cases.
Effective fraud detection is not the only benefit of automating the 3 way matching process. Here are the key benefits of automating the 3-way matching process.
Eliminate manual burden
Manually matching invoices with POs and GRNs runs into several hours, especially for large volume transactions. Automation brings the time taken down to minutes by automating the repetitive tasks. The accounts payable team is freed from the manual burden of matching data.
Minimize human errors
Going through each line item during 3 way matching is a recipe for errors and mismatches. With automation, data verification happens in real-time, and matched invoices are automatically routed to the concerned individuals, often without human intervention.
Gain deeper visibility and control
Manual matching is carried out using spreadsheets, emails, and paper documents. This makes tracking difficult for the AP team. Automation provides deeper visibility and transparency into the status of requests and invoice payments. The centralized dashboards in automation solutions enable AP teams to monitor every match and exception during 3 way matching.
Cflow – Your Automation Partner for 3-Way Matching
With over 10 successful procurement and accounts payable related automations, Cflow is definitely the best choice for automating the 3 way matching in accounts payable. With Cflow, you get clean and convenient AI-powered no code automation that can be customized as per your requirements.
The no code workflow builder in Cflow can be used even by citizen developers to create a workflow. Stakeholders, triggers, actions, and routing rules can be set in Cflow by using visual icons. Once the workflow is set, automated alerts and notifications are issued to appropriate stakeholders for review and approval of supplier invoices. You can even set approval limits and set workflows for multiple approval levels with Cflow.
OCR
AI-powered Optical Character Recognition (OCR) technology in Cflow transformed the way invoices are processed. Unlike traditional methods, AI-powered OCR technology is making significant strides in reducing invoice fraud. Not just the OCR feature, Cflow offers many such features that streamline the 3-way matching workflow.
Conclusion
Invoice fraud has become a matter of concern for B2B businesses. Even tech giants like Google and Facebook fell prey to fraudulent invoices. As per CNBC, Google and Facebook were forced to shell out $23 million and $100 million respectively to invoice fraud. The most reliable way to combat invoice fraud is to adopt 3 way matching in accounts payable. Progressive organizations are turning to automation of the 3 way match in accounts payable. Partner with a reliable AI-powered workflow solution like Cflow to build bullet-proof 3 way matching in accounts payable. Talk to an expert today.
FAQs
What are the best practices in 3 way matching?
Setting value thresholds, process automation, and setting discrepancy thresholds are the top best practices in 3 way matching.
Who are the decision makers in 3 Way matching?
Accounts payable team, procurement team, vendors, and inventory teams are the key decision makers in the three way matching process.
Which is the main document in 3 way matching?
All the 3 documents are important for 3 way matching – purchase orders, goods received note, and supplier invoices.
Is 3 way matching better than 4 way matching?
It depends on the purpose of matching. 3 way matching is more focused on the quantity,whereas 4 way matching focuses on quantity and quality of goods/serrvices.
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