Business growth comes with expanding business operations. Expanding business operations brings several organizational changes that alter the company’s landscape. These changes can affect the way finance, HR, procurement, and other business functions operate. The last thing that business owners would want when their business grows is fraud or inaccuracies in business transactions. Show
In order to keep up with evolving business needs, business owners need to adopt modern methods like 3-way matches in order to safeguard their business from fraud and cheating. Using 3-way matching in accounts payable and accounting is an effective way to improve payment processes.
What is 3 Way matching?A Three-way match is the process of matching the purchase order (PO), invoice, and goods receipt (GRN) note to validate the supplier’s invoice before payment is made. What is a three-way match in accounting? A 3-way match in accounting helps determine if the invoice should be paid in full or part and reduces the risk by preventing reimbursement of unauthorized purchases. 2-way and 3-way matching of invoices are the most common matching methods in accounting. What is 2-way invoice matching? Comparing the invoice for the purchase of goods and services with the purchase order is a 2-way match in accounts payable. The accounts payable (AP) three-way match process involves processing an invoice by matching the data with a purchase order and with the goods received in the note. To understand the three-way match in accounting better, let us first understand what invoices, purchase orders, and goods receipt notes are. The purchase order is an official confirmation receipt of the order sent by the buyer to the vendor. The purchase order authorizes the purchase and includes information like PO number, payment information, and description of goods and their quantity. Order receipts are proof of payment that is included with delivered goods. They contain information on the goods included in the shipment and the payment method. An invoice is a paper or EDI form document that is sent from the vendor to the buyer. Information contained in invoices is unique invoice numbers, vendor contact details, applicable discounts or credits, and the total amount due. 3-way invoice matching is a must to ensure that every order is complete. A 3-way match in accounts payable (AP) highlights the discrepancies or inconsistencies between any of the above-mentioned documents. When discrepancies are discovered in three-way invoice matching, the payment will be withheld until the discrepancy is resolved. 3-way matching is an important part of the accounts payable process. How does 3-Way Matching Work?Before we go into the working of the 3-way matching process, let us first understand the procure to pay (p2p) process. The first step in the p2p process is placing the order with the supplier. The purchase order (PO) is the document containing complete information on the goods/services required along with pricing information. The approved PO is sent to the supplier for placing the order. The accounts payable department then creates an invoice based on the information on the purchase order. This invoice is then sent to the buyer from the supplier based on the information gathered from the purchase order. The invoice details would be validated against the details mentioned in the PO before approving the invoice. The supplier then sends a receiving report to the buyer once the order is completed. Let us understand the 3-way matching process with the following example. A vendor invoice for 5000 INR for 1000 integrated circuit boards is received by the buyer. The first step is to cross-check whether the PO was approved before fulfilling the invoice. The second step is matching invoices to purchase orders in terms of price and quantity. In this case, the purchase order for 1000 circuit boards at 5 INR each was raised, which totals 5000 INR. The third step would be to match the PO and invoice data with the goods received receipt data. The receiving department will have the receipt that specifies the cost and quantity of goods ordered. The numbers on the packing slip must match those detailed on the PO and invoice. The 3-way match accounting entries need to be in sync for a successful 3-way matching. If any of the 3 documents fail to match, the invoice payment is put on hold until the discrepancy is resolved. The 3-way match process in accounts payable can be used in SAP, ERP, and Odoo implementations. The 3-way match of purchase orders in SAP enables efficient data processing and invoice verification. Need for 3-way matchingAlthough the 3-way matching process is a labor-intensive and time-consuming process, it is an effective business practice for suppliers and buyers. By acquiring, requiring, and matching these documents, a foolproof and secure payment process can be ensured. The three-way match compares what has been ordered with what has been received. Businesses can track the origin of invoices and ensure their legitimacy to avoid fraud or duplication. The matching process also simplifies the auditing process. Vendor invoices and order receipts are needed during the auditing process. Comparing the data present in these two documents before the completion of the transaction ensures a straightforward process. The main benefits of using a 3-Way match in the p2p process are:Eliminates fraud and duplication:the three-way match process provides better internal control over the accounts payable and purchase process. Procurement and finance teams can prevent fraud and duplicate invoices through three-way matches before paying an invoice. Accurate purchase order matching and matching payments to invoices ensure that payment is made only to the goods or services received. Making procurement and invoice clearance decisions based on the 3-way matching procedure eliminates invoice discrepancy and accurate payments. Saves time:the 3-way PO, invoices, and GRN matching save the accounting team time by simplifying the invoice validation process. Potential payment discrepancies are immediately flagged down so that the team can investigate the cause and rectify it immediately. Timely validation and verification ensure on-time payment to suppliers. Helps maintain verified records of suppliers:Using the three-way match as a procedure to post procurement transactions enables the team to maintain a verified record of suppliers. It provides clear insights into supplies from vendors and money paid to suppliers. Improves supplier relationships:having a transparent invoice verification process promotes strong vendor relationships. Timely notification of issues during the 3-way match of sales, 3-way match of receiving, 3-way PO match, or 3-way invoice match, ensures that payment to suppliers is done on time. Increases revenue:the 3-way match increases revenue by protecting enterprises from unwanted, fraudulent financial transactions. The 3-way check helps businesses achieve cost savings and improve the transparency of procurement and accounts payable transactions. Enables accurate auditing:tracking cash flow accurately both inside and outside the business is indispensable for the audit process. The 3-way match process in accounts payable provides a clear audit trail for verifying the legitimacy of financial transactions in a business. Adopting the three-way matching concept in accounts payable ensures timely delivery to suppliers while protecting the business from the risk of losing money due to duplicate and fraudulent transactions. Without the necessary PO matching controls, the company would be purging money and not even realize it. Paying invoices without proper verification results in paying far more than the agreed price or paying for more than what you receive or paying multiple times for the same product. Difference between 2-Way, 3-Way, and 4-Way matchingMost businesses use two-way and three-way matching processes in accounts payable. What is a 2-way match? 2-way matching in the accounts payable process verifies that the information on the purchase order and invoice match. 2-way invoice matching is also known as PO matching. Any discrepancy in the information results in the invoice being withheld until the mismatch is resolved or rectified. 2-way, 3-way, and 4-way invoice matching processes require 3 documents, the invoice, the purchase order, and the receipt of the goods. In 3-way matching, in addition to verifying PO and invoice information, the goods received information is also verified and matched against the invoice and PO. The 3-way match is an ideal choice of internal control. The 4-way matching adds another verification layer to the 3-way check by checking the quantity accepted. The number of goods ordered, billed, received, and accepted must be in sync to clear the 4-way matching process. 2-way vs 3-way vs 4-way invoice matching2-way invoice matching3-way invoice matching4-way invoice matchingThis matching process compares the information on the PO with that contained in the invoice.The information contained in the PO, invoice, and goods received note is required to be in sync.In addition to comparing goods ordered, billed, and received, this process compares the goods accepted as well.The quantity billed should be less than or equal to the quantity orderedThe quantity billed must be less than or equal to the quantity received.The quantity billed must be less than or equal to the quantity accepted.Takes less time to cross-checkCross-checks 3 documents, hence, takes more time than 2-way matchingTakes the longest time, since additional information is verifiedWorks best for verifying regular business transactionsWorks best for one-time purchasesWorks best for non-recurring purchases.Least labor-intensive processMore labor-intensive processMost time-consuming and labor-intensive processSuitable for verifying low-value transactionsSuitable for verifying high-value transactionsSuitable for high-value transactions that require strict compliance or verificationWhen it comes to 2-way vs 3-way invoice matching, 3-way is a better option because it ensures that you are paying only for the goods you ordered and received. Drawbacks of the manual 3-Way Matching ProcessThe drawbacks of relying on manual business processes are well known. Manual processes are plagued by data inconsistencies and inaccuracies, tedious and cumbersome tasks, increased costs, delayed approvals, and payments, and decreased operational efficiency. Financial departments in any business are well aware of the vulnerabilities associated with manual 3-way invoice matching and processing. From misplaced invoices to late payments to low visibility into the status of invoices – manual invoice matching puts the financial department in jeopardy. Traditionally, the accountant is in charge of matching the invoice, PO, and GRN data. All the relevant paper documents need to be gathered in order to manually verify the goods and price information contained in them. Storing paper documents can be challenging in terms of space and safety. It is challenging to search through stacks of documents to locate those relevant to the current transaction. Unavailability of the right document for matching leads to payment delays and other process bottlenecks, which in turn affect business performance and productivity. The main disadvantages of manual 3-way invoice matching are:Increased costs:manual processing costs range from $12 to $30 apiece. When calculated for several goods on a monthly basis, manual processing costs may run into six figures. Misplaced paper documents, incorrect information, and human oversight further increase the cost of manual invoice matching. Time-consuming:manual verification of information on various documents is a time-consuming process. In some cases, even gathering the required documents also takes a long time. Physically entering data for approvals also takes a lot of time. Affects supplier relationship:manual processing causes delays and backlogs due to misplaced or missing information. Process bottlenecks result in delayed payments to suppliers, which in turn tarnishes the reputation of the company and weakens supplier relationships. Human error and bias:Since manual processes are run by people, the chances of misplacing or damaging documents, data oversight, and misinterpretation are very high. Document archival:storage and retrieval of documents in manually managed invoice processing is a challenge. Paper documents require huge storage areas that need to be kept safe from damage due to human handling and nature’s forces. When documents are not organized properly, retrieval for reference becomes a headache. Need for Automating 3-Way matchingThe 3-way matching process requires accurate verification and matching of information in the invoice, purchase order, and goods received in the note. Gathering all these documents and verifying the data is a time-consuming process when done manually. As mentioned before, manual data verification is prone to errors and discrepancies. Automating the invoice matching process helps save time, resources, and money. Digitizing the matching process ensures accurate and consistent data verification and matching. The matching process can be mapped through a detailed 3-way match flow chart, which is the basis for effective automation. Automated 3-way invoice matching ensures prompt payments, accurate encoding of data, and easy accessibility in ERP and SAP platforms. As much as 80% of the accounts payable workload can be reduced by automating the invoice matching process. The time spent on matching invoices against PO and GRN data can be reduced drastically through automation. The accuracy and consistency of invoice-PO matching are greatly improved through automation. There will be no delays or bottlenecks in the invoice payments when the 3-way matching process is automated.
Automating the 3-Way Matching processStreamlining the three-way matching process and automating the bulk of the matching tasks enables the AP teams to work faster, ensures that payments are done on time, and eliminates fraudulent or double payments. An automated three-way matching solution helps businesses –
Automating the 3-way match in the accounts payable process brings transparency and consistency to the accounts payable process. The supplier invoice is the document that triggers the matching process. Once the invoice is received, the purchase order and receiving report data are retrieved and cross-checked with the invoice data. All the information on all three documents needs to match for the invoice amount to be paid. By automating the matching process, the AP teams get more time for productive work, and invoice and payment processing can be done faster and more efficiently. An automated 3-way matching system works on the digital verification of documents. Digital data verification is much faster and more accurate compared to manual matching. The first step is gathering purchase orders, goods received notes, and invoice information. A unique code or number is assigned to each purchase. This number is uniform across all three documents pertaining to the purchase. Once the PO, GRN, and invoice are gathered, the information they contain is verified. The information on the number of goods, unit price, discounts/rebates, delivery date, etc. are matched across all three documents. The intent of the 3-way matching is to ensure that the goods ordered, goods received, goods billed, order price and the billed amount are consistent across the PO, GRN, and invoice. Given below is a sample of an automated 3-way matching workflow. Verify invoices:the invoices are scanned electronically to extract important purchase data like the PO number, quantities, and prices. The same information is extracted from the PO and GRN and verified against that obtained from the invoice. Any mismatch is flagged off to the AP team for further action. The verification process is done on each line item on all documents for accurate matching. Handling bulk orders:in some cases, an order is completed over multiple deliveries done on different dates. For orders having multiple delivery dates, it is not possible to match the goods received against the invoice. The automated matching system needs to be configured such that goods received are rechecked on an ongoing basis until the entire order is complete. Verification of the goods received against the goods ordered and billed should be done at the end of the order. The market is flooded with several workflow automation solutions for automating key business workflows. Businesses need to choose solutions that work best for their business needs. Cflow from Cavintek is a comprehensive workflow automation solution that provides fully customizable automated workflows for various business functions. The no-code BPM solution can be set up within minutes. Finance workflows like 3-way matching in accounting, invoice approvals, and expense reimbursements can be effectively automated with Cflow. Advantages of Automating 3-Way matchingAutomating the 3-way matching process provides several advantages to the business as given below:
ConclusionThe 3-way matching process is critical for keeping business finances healthy. Not only do businesses need a consistent supply of goods/services to keep the business running, but also need mechanisms to protect against overpayment and financial fraud. For 3-way matching to be effective, the accounts payable team needs to spend a substantial amount of time and effort in matching and processing invoices. Automating the 3-way matching in accounts payable relieves the team from labor-intensive verification and matching tasks and improves the accountability and accuracy of matching. Automate the 3-way matching workflow within minutes with Cflow. The visual form builder enables the accounts payable team to set up the 3-way match workflow easily without the need for coding. Take Cflow for a test drive by signing up for a free trial today What is the matching of the purchase order with the related receiving report and vendor invoice?A three-way matching is the process of matching purchase orders (PO), goods receipt note, and the supplier's invoice to eliminate fraud, save money, and maintain adequate records for the audit trail. Three-way matching is usually done before issuing payment to the supplier post delivery.
What function department matches the purchase order receiving report and supplier's invoice?The accounts payable department keeps copies of purchase orders and receiving reports, that will be compared to the related invoice, to be sure that the invoices represent goods that were ordered and received.
Should PO and invoice match?Touchless invoice processing is here to save the day. Matching (also known as PO matching) is used by finance departments to ensure proper oversight of a company's transactions. Without it, the IRS will consider your papertrail inefficient and may levy fines. It's that important.
What is purchase order and supplier invoice?A purchase order (PO) is issued by the buyer to the seller and outlines their expectations in terms of the product or service they plan to buy and the quantity. On the other hand, an invoice is issued by the seller to the buyer after the terms of a purchase order have been carried out.
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