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Invoice fraud is a global problem that costs companies hundreds of rupees every year. That is why The accounts payable department uses 3-way matching to control spending and reduce fraud. So, what is a three-way match, and why is it such an essential part of the accounts payable process?
What is Three-Way Matching?
A three-way match is verifying the purchase order, invoices, and delivery notes to ensure that they are identical before authorizing payment on the invoice. Assuming they agree, the invoice from the supplier will be paid. A 3-way match is used to determine whether or not to pay an invoice in part.
Invoices may be validated using a three-way invoice approval process by comparing them to supporting documentation to ensure that:
- The goods/services for which repayment is being asked have been requested and accepted by the firm.
An invoice’s legitimacy may be established relatively quickly by checking whether the company requested and got the items or services for which payment is being demanded.
The purpose here is to check that the purchase order, order amount, total amount, PO number, and other relevant financial facts are consistent throughout all three documents, like vendor invoices and delivery receipts. Invoices may be paid more quickly because the 3-way matching process alerts finance teams to any discrepancies, mistakes, or signs of fraud.
A properly checked supplier’s invoice will have precise numerical matches between the purchase order and the receipt. An invoice is held and routed for proper review if the matching tolerances are not met.
How Does Three-Way Matching Work?
The way that three documents match works are by having accounts payable evaluate the prices, quantities, and conditions to make sure that what is purchased – through the purchase order and then matches the products received – via the receipt of the goods note/packing slip and then lastly, which matches what they are being paid for. This ensures a perfect match between all three pieces of information (via the invoice).
That’s the simplified version of 3 way matching process. Businesses must undergo this procedure if they make significant purchases or purchase from newer suppliers. However, companies may decide not to employ a 3-way matching process whenever they make modest or recurrent transactions.
Many small businesses perform the manual matching process.
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Components of 3-Way Matching
While performing the payment process activity, let’s look at the three important papers that accounts payable teams utilize to ensure that there has been a 3-way match and whether invoice payments shall be made.
Whenever the buyer has to ask the seller for payment for a purchase, they must first send the supplier invoice. Invoices include the same information as the purchase order, as well as a unique invoice number, information on how to get in touch with the vendor, a payment schedule, the total amount that is owed, and any credits or discounts that are applicable for prompt payment along with the vendor contact details.
If any problems are discovered, such as erroneous amounts, incorrect pricing, broken items, or other problems, payment is withheld until the problem is fixed. Following the completion of the three-way matching process, the invoice is checked for accuracy, and then the accounts payable team disburses the money.
A purchase order, abbreviated as “PO,” is an official confirmation of an authorized purchase that is sent from a buyer’s buying department to a vendor’s purchasing department.
The name of the buyer’s firm, the date, the description, the quantity of the products or services being purchased, the price, the buyer’s postal address, payment information like full or partial payment, and the buyer’s invoice address are often included in purchase orders.
Order Receipts/Packing Slips
Vendors often provide the order receipt as a payment and delivery confirmation, with the actual products sent out as a corresponding purchase order. It describes in detail everything that is included in the shipment or order. The details of the transactions and the payment method are repeated on the order receipt as they are on the invoice.
Three-Way Matching Process
Invoices, purchase orders, and receipts may all be checked against one another to reveal discrepancies or other problems. Problems may arise from inaccurate payment information, improper pricing, defective items, etc.
Every document used in the 3-way matching process goes through the following tests regularly:
- Was the PO adequately filled out?
- Are any specifics missing, such as cost, quantity, or vendor info?
- Does the order receipt that was included with the confirmed shipment match the amount that was ordered?
- Do you consider this a partial or complete satisfaction of the order?
- Do the vendor invoice price and amount correspond to what was approved in the PO?
- To what extent does the vendor need to be paid?
- Are the terms of payment made transparent?
- Do the financing conditions seem to be laid out in detail?
If inconsistencies are identified during the 3-way matching process, the invoice is retained and payment is withheld. The bill should be paid after the issue has been resolved.
Having a three-way match processing in place significantly reduces the likelihood of missing a fraudulent invoice or payment.
Difference Between 2-Way, 3-Way, and 4-Way Matching
Most companies operate using a 2-way matching system. Invoice and Purchase Order (PO) is the only required paperwork. In the meanwhile, the 4-way match provides one additional checkpoint.
The quality check is completed after shipment. Before receiving the products or services, every piece of paperwork is examined and double-checked.
The four-way match takes the longest but is the most thorough of the procedures. Only when stringent compliance or verification is required should it be done.
The 3-way match procedure is the superior internal control option compared to the 2-way and 4-way match procedures.
The main goal of 3-way matching is to eliminate the possibility of an inaccurate or fraudulent invoice or payment being processed inside an organization. Businesses may use the 3-way match to fix billing and order discrepancies before making payments to prevent AP-related issues.
Benefits of Three-Way Matching for Businesses
The three primary advantages of three-way matching involve removing inconsistencies from the buying process.
It helps in creating a Strong Bond Between Vendors and Customers
Relationships with suppliers are also bolstered through a three-way match. When all paperwork is completed and sent on time, the supplier feels they matter and is appreciated.
Because of this, people see the firm favorably and consider it a reliable and trustworthy collaborator. It helps to minimize fraudulent invoices for both parties.
It simplifies the Auditing Process
Having a three-way matching process also helps with accounting and auditing. To make compilation easier, ensure all papers are comprehensive and typos-free. Furthermore, the supplied data and supplier’s invoice may be easily verified by auditors.
Considerable savings in Cost and Time
The businesses may save both time and money by using a three-way match. When making a payment, all your information must be correct and consistent. Overpayments and fraudulent invoices are two potential outcomes of data entry errors and data duplication. Thanks to the triangular comparison, any overpayments or other payment issues may be caught before shipment.
Disadvantages of Three-Way Matching for Businesses
The vast majority of businesses record their financial transactions using manual matching methods. Acquiring tangible records in the form of journals or ledgers is part of what’s involved in manual processing.
Compared to automated methods, using physical records has a far more significant number of drawbacks, even though they are more historically accurate and may be accessed at any time.
It creates chances of late payments
Even though businesses aim to make prompt payments to their suppliers, manual processing might result in delays due to the accumulation of backlogs or the loss of documents. A company’s image suffers when payments are late, which may impact future business dealings.
Sometimes it is a bit time-consuming
Even with two or three individuals working together to finish the task, manual matching processing takes significant time. Gathering individuals, such as suppliers and supervisors, may take some time to sign the paperwork. There is a possibility that manually comparing and entering data would create further delays.
It sometimes costs high for small businesses
The typical cost of manual processing is from $12 to $30 per item, which may quickly add up to five or six figures over a month.
If each piece of paper used was calculated independently from the cost of the service, it would amount to a fortune. When looking at other ways, such as automated processing, it is possible to use up a significant portion of the money that was set aside for human treatment.
Chances of human errors
Because everything is done by hand, processing and validating data manually is time-consuming and poses the risk of making mistakes and leading to misunderstandings. It is also possible for physical copies to be misplaced, lost, or destroyed due to improper handling or storage issues.
Example of Three-Way Matching
Consider the following three-way matching scenario: a small educational institute team has just finished creating a beautiful new brochure and needs 500,000 copies. The next step is to find a vendor who can print this and deliver copies on time.
Once all offers have been collected and compared, the winning printer will be chosen, and an order will be made with them. The institute owner then prepares a purchase order including the printer’s name, the number of brochures to be printed and delivered, the total cost of the order ($300,000), the estimated date of delivery, and any relevant internal accounting expenditure or project codes.
The printer, who accepted this lucrative job thanks to the Institute’s purchase order and digital data, will now work on producing the brochures. It does the task quickly and ships the brochures to the designated location.
In addition to billing the Institute $500,000, the printer also sends an invoice. Once the Institute’s AP department receives this invoice, they will use three-way matching to ensure its legitimacy.
To begin, the AP clerk looks up the purchase order to ensure that the marketing team has the proper approval to obtain 500,000 brochures. The counterman then verifies that the brochure printing costs are accurate. The clerk will also check to see whether the firm name on the invoice is the same as the one listed on the purchase order.
This is done to rule out the possibility that the invoice is a bogus attempt at being paid for a nonexistent order placed by a third party. The AP clerk checks the delivery note or records to see any problems. The printer sent 10 pallets of brochures, as they had expected. There are 50,000 brochures per pallet, the same as the number requested and shown on the supplier’s invoice.
The AP department may then use this information to verify the legitimacy of the invoice and speed up the payment procedure.
Why Should You Automate Your Matching Process?
When it comes to technology, there are several advantages to automating the three-way matching process. Take, for example, a system in which a database stores information on each purchase order and its subsequent delivery.
Upon receipt of the vendor’s invoice, all of the data required to do the three-way match manually is available. However, this three-way matching may be done automatically for most bills, provided suppliers deliver their invoices electronically straight into the same database.
The accounts payable department could view how many invoices they’ve processed from a particular vendor to help determine the vendor’s overall rating using such a system.
By automating the three-way matching process, businesses may save time and money, detect fraud, and free up accounts payable employees to work on more strategic initiatives. In addition to meeting payment deadlines, automation may help businesses take advantage of discounts for on-time payments and avoid late fines.
Why is Manual Matching Bad for Businesses?
Performing a manual three-way match has expenses beyond monetary ones. The AP department is under tremendous pressure when it has to hunt down details caused by inadequate or lost paperwork and when it has to deal with a growing backlog of bills. Another hidden trap is made out of people.
The multitudes of minute details that need to be monitored are ripe for the mistakes that only humans can make. As a result, there will be extra work for the AP team, and they may even have to include the warehouse and procurement managers in finding a solution.