As an AP professional, the last thing you want to do is pay a fraudulent or inaccurate invoice. Today, an increasing number of businesses are using 3-way matching processing to mitigate this risk and reign in company spending.
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What is 3-Way Matching in Accounts Payable?
AP 3-way matching is the process of taking an invoice for the purchase of goods or services and matching it with the corresponding purchase order (PO) and receiving information (order receipt). This is done to ensure that the details on each document agree with each other.
To be successfully verified, the invoices must satisfy matching tolerances. If they don’t, a hold is placed on the invoice and payments cannot be rendered until the hold is released or resolved. A held invoice operates as a sort of fail-safe that prevents the payment of an unmatched and unverified order.
How Does 3-Way Matching Work?
There are three documents that are integral for managing payments through accounts payable:
- Invoice: An invoice constitutes a request for payment from the vendor to the buyer. Invoices include necessary information to facilitate the sale, including a unique invoice number, vendor contact details, applicable credits or discounts, and the total amount due.
- Order Receipt: As a proof of payment, order receipts are included with delivered goods to detail which goods have been included in the shipment as well as the payment method.
- Purchase Order: The official confirmation receipt of the order sent to the vendor from the buyer. This document is used to authorize the purchase. It includes a PO number, payment information and descriptions of the goods or services sold as well as the quantity.
To ensure that every order is complete, 3-way matching highlights discrepancies or inconsistencies between any of these critical documents.
In the event that issues or errors are detected, such as an incorrect price or a damaged product, payment will be withheld pending reconciliation of the issue.
An Example of a 3-Way Match
The AP department at Computer Co. receives a $4,500 invoice from a vendor for 1,500 circuit boards. They check the PO and ensure it has been approved before paying the invoice. They verify that the quantity and details match those specified on the invoice — in this case, that the order is for 1,500 circuit boards at a rate of $3 each, totaling $4,500 altogether.
Next, they check the PO and invoice against the order receipt (or receiving report). The receiving department has a packing slip that specifies the cost and quantity of the items ordered. The numbers on the packing slip should match those detailed on the invoice and the PO.
Since everything matches, the AP department pays the invoice. If there was a discrepancy, they would put a hold on the invoice, effectively stalling payment until the issue is rectified.
The Difference Between a 2-Way and 3-Way Matching
The difference between 2-way matching vs. 3-way matching is that 2-way matching only involves the invoice and PO. 3-way matching is more accurate because it also checks the order receipt.
Business Benefits of 3-Way Matching in Procurement
There are several key reasons why business owners are moving to adopt 3-way match in AP.
- Improved supplier relationships: 3-way match reduces payment discrepancies, disputes and delays, promoting trust and cooperation between buyers and suppliers. Vendors appreciate timely, error-free payments, leading to smoother, more productive partnerships.
- Boosted profit: A 3-way match process can positively impact a business’ bottom line. Verified data can protect your business against overpaying, making duplicate payments or fulfilling fraudulent invoices.
- Audit preparation: Having better data can be useful for auditors looking to pinpoint financial inconsistencies. Finance departments that use 3-way match ensure POs, invoices and order receipts are consistent.
3-Way Matching Automation
Manual matching is a time and labor-intensive endeavor. When trying to scale for growth, manual AP processes can be a major deterrent. By migrating to automated matching processes, you can streamline your accounts payable procedures and handle an increased workload without missing a step.
Nothing can take the wind out of your sails like manually matching printed POs with invoices and packing slips. Investigating every invoice can be daunting, and unless systems are highly organized, it can take hours to track down the correct documents.
Plus, if you run into any errors during the matching process, you will have to backtrack and start from scratch. By ditching the manual matching and approval workflow, you can rid your AP team of the extra work.
In the event of an audit, you can rest assured knowing that all of your approved files and documents are organized and secured in one centralized, accessible location. For companies attempting to scale operations, automating accounts payable is a necessary step in enabling future growth.
The Drawbacks of Manual Matching
Savvy finance departments know there are plenty of vulnerabilities that come with manual invoice matching and processing. From lost invoices to late payments and less-than-stellar payables visibility, manual 3-way invoice matching can put any finance department in jeopardy.
Managing stacks of paperwork and invoices is an arduous task that is bound to incur its share of difficulties. Human error and inefficiencies can be avoided simply by migrating to automated 3-way match best practices.
Upon migration, automated invoice management will improve existing delays, bottlenecks and processing costs that plague manual matching.
Automating Your 3-Way Matching Process
By leveraging automated 3-way match, accounting departments can streamline payment processes, mitigate the risk of human error and exchange business documents digitally.
With an automated AP system, data critical for business, such as invoices, purchase orders and purchase receipts are organized and standardized electronically without the need to tackle mountains of paperwork.
Every business can benefit from speeding up payments and reducing the threat of human error. By integrating an automated 3-way match process into your AP workflow, you can better position your business to meet early payment terms and potentially earn payment term reductions or discounts while also minimizing losses.
Learn more about AvidXchange’s AP automation software by clicking below to see a quick demo.