What Is 3-Way Matching and How Does It Work?

Imagine a fast-growing tech startup that has just begun to equip its new office. Eager to advance their projects, they order a suite of high-end laptops. In their haste and excitement, the startup pays the invoice immediately upon receipt. However, a few weeks later, a startling discovery is made: the number of laptops received is less than what was billed, and some machines don't match the specifications of the original order. This oversight leads to a costly realization — they've overpaid and can't easily prove the discrepancy.

Unfortunately, this situation isn't an isolated incident. The absence of a matching process can lead to more than just overpayments. It opens the door to potential fraud, complications during audits, and issues with regulatory compliance. In this newsletter, we're going to guide you through the basics of 3-way matching. We'll delve into how it differs from 2-way and 4-way matching processes, and illustrate how effective reconciliation is not just a best practice, but a critical safeguard for your business's financial integrity.

Understanding 3-Way Matching

In accounting and procurement, 3-way matching refers to the comparison of three key financial documents: purchase order (PO), receipt, and supplier invoice. The objective is to detect any discrepancies or errors between the documents before processing payments. The whole reconciliation process serves as a safeguard for organizations, protecting them from overpayments or from disbursing funds for goods or services that were either not received or not ordered in the first place.

The journey of 3-way matching starts when the ordered goods are delivered, and the supplier issues an accompanying invoice. At this point, the accounts payable team starts checking the invoice against the purchase order and receipt to make sure everything matches up. This process involves a few key steps to ensure that what was ordered, received, and billed all line up correctly:

1. Quantity matching: The first step is to compare the quantities of the items listed in the purchase order, receipt, and invoice. The quantities should match across all three documents. 
2. Price matching: The next step is to compare the prices mentioned in the PO with those listed in the invoice. The prices should match or be within an acceptable tolerance level. 
3. Invoice details verification: In this step, the details on the invoice are compared to the information provided in the PO and the receipt. This includes verifying the vendor name, invoice number, invoice date, and payment terms. It is essential to ensure that the invoice aligns with the purchase order and that all relevant details are accurate.

2-Way and 4-Way Matching

3-way matching is generally considered the ideal method for internal control. However, the options do not end there. Organizations may also use 2-way matching or 4-way matching depending on the level of control and accuracy they need. Two-way matching, as the name suggests, involves comparing only two documents: the purchase order and the vendor invoice. This type of matching is often used in cases with recurring payments, when order receipts aren’t issued, or when there is a high degree of trust between the buyer and supplier.

Four-way matching goes beyond the three-way matching process by adding an additional step of comparing the relevant purchase requisition. This method is particularly suitable for organizations with strict procurement controls or in situations when there is a need to track the entire procurement process, from requisition to payment.

When selecting a matching method, organizations should consider various factors such as the complexity of their procurement processes, the value and importance of the goods or services being procured, and their level of risk tolerance.

Benefits of 3-Way Matching

Accurate Payments

The primary benefit of 3-way matching is that it helps ensure payments made to suppliers are accurate. By cross-referencing the details between documents, businesses can confirm that they are paying only for the goods or services actually ordered and received. This reduces the likelihood of overpayments or paying for items that were never delivered.

Fraud Prevention

3-way matching is an effective tool in the fight against fraud. By requiring confirmation that the goods or services were both ordered and delivered before an invoice is paid, the process closes a common loophole in which fraudulent actors can exploit false invoices. The step also tightens financial controls and adds a layer of security to the transaction process.

Improved Vendor Relationships

Efficient 3-way matching facilitates timely and accurate payments, which in turn contribute to building strong relationships with vendors. Suppliers are more likely to trust and prioritize clients who have a proven track record of fair and prompt payments. As a result, they may offer more favorable terms or priority service in the future.

Compliance

Implementing 3-way matching helps in maintaining compliance with internal controls and external regulations. It provides a clear audit trail for financial transactions, making it easier to track and trace the entire procurement process. This can be beneficial during internal or external audits.

How To Streamline the Reconciliation Process

Three-way matching undoubtedly offers significant benefits to a company's procurement process, but it does come with its share of challenges, particularly when performed manually. One of the most prominent challenges is the considerable time and effort it demands. It is especially noticeable during peak seasons or periods of high procurement activity. The accounts payable department may get too overwhelmed by the amount of work, which may potentially be a reason for errors or discrepancies during the matching process. Additionally, without a centralized and efficient document management system, finding and retrieving purchase orders, receipts, and invoices can be a tedious process.

Thankfully, these issues are easily mitigated with a trusted procurement system. To spare the AP department from the cumbersome task of manually cross-referencing information, solutions such as Precoro provide a highly efficient and automated approach. This includes features like real-time document comparison, seamless discrepancy tracking, and easy order revision capabilities. To ensure that only correct invoices are being paid, Precoro allows users to set up tolerance limits for each vendor. When the variance between the PO total and the invoice total exceeds the predefined tolerance rate, the PO initiator receives an email notification regarding required approval changes. 

Additionally, with Precoro's OCR capabilities, companies can digitize data from both invoice images and PDF attachments. Once the processed documents are reviewed and accepted, they can be sent through pre-established approval workflows and seamlessly integrated into accounting or ERP systems like QuickBooks Online, Xero, or NetSuite.

Educational Materials

To learn more about 3-way matching, hit the link to our blog post.

For the ultimate guide on month-end close, check out this resource. 

If you want to learn about the GAAP principles for AP, click here.

To learn about how automated invoice processing works with OCR, follow the link to our blog.

For a complete guide on invoice management, check out this material.

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