What is 3-way match with example

According to an ACFE report, companies lose up to 5% of their annual revenue on fraudulent or unauthorised spends. That's why finance teams are increasingly adopting a 3 way match of vendor invoices as an essential step of their accounts payable process.

By 3 way matching supporting documents, companies can detect duplicate, erroneous, or fraudulent payments to vendors. This is vital for managing spend and cash outflow. Three way matching is best performed as an automated workflow powered by AP automation solutions such as Nanonets.

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What is a 3 way match?

All invoice payments involve some sort of verification or control. A 3 way match is an internal control process that cross-references a supplier's invoice against its corresponding purchase order (PO) and good received note (GRN).

The goal here is to ensure that financial details (order quantity, order amount, total amount, PO number etc.)  match across all 3 documents. 3 way matching helps approve invoice payments faster and also flag any inconsistencies, errors or potential fraud.

A successfully verified invoice must match the PO and receipt within acceptable tolerance levels. An invoice that fails matching tolerances is placed on hold and is sent for appropriate review.

Two-way versus three-way matching

Three way matching compares line item details and totals across purchase orders (PO), receipts for good, and vendor invoices sent to the customer.

A 2 way match, in comparison, only compares the PO with the invoice. The quantity billed (in the invoice) should match the quantity ordered (in the purchase order). And the invoice price should match the price quoted in the purchase order.

The 2 way matching process is the default approach to verify invoices across organisations. But companies are increasingly adopting three way matching to add an additional layer of verification and prevent overspending.

Looking to automate your manual 3 way match processes? Book a 30-min live demo to see how Nanonets can help your team implement end-to-end AP automation or automate a part of your AP workflow.

How does 3 way matching work?

The accounts payable 3 way match process is largely dependent on tracking details across three documents: purchase orders, order receipts and invoices. Let's quickly review the role each document plays:

• Purchase orders: A purchase order (PO) is an official authorization sent from the buyer to a vendor confirming a requested order. The PO comes with a unique trackable PO number and lists details of the order including description, amount and quantity.
• Order receipts: Order receipts or delivery receipts (also known as receiving reports) confirm the delivery of an order. An order receipt lists the details of the items in the shipment.
• Invoices: An invoice is the vendor's request for payment in return for the delivered goods/services. It lists vendor contact information, the total amount due and a unique invoice number. It also details the payment method, payment schedule and credit policies (if any).

Before processing vendor payments, AP teams go over these 3 documents to verify that the product/service received by the company matches the details of what was initially ordered.

The three way matching process

3 way matching of invoices helps highlight errors or inconsistencies in any of the 3 important documents mentioned above. Issues could include wrong payment details, incorrect prices, wrong or damaged products etc.

Here are some common checks carried out on each of the documents that are part of the 3 way matching process:

• Was the PO filled out correctly?
  • Is it missing any information such as the price, quantity or vendor contact details?
• Does the order receipt attached to the verified shipment mention the same quantity as in the PO?
  • Is it a partial or complete fulfilment of the order?
• Does the price and quantity on the invoice match the authorized figures in the PO?
  • Is the vendor seeking full or partial payment?
  • Are payment details clearly mentioned?
  • Are the credit terms clearly mentioned?

If errors are flagged in the 3 way matching process, the invoice is put on hold and payment is withheld. Once the issue is investigated and resolved, the invoice can be processed for payment.

The chances of missing a fraudulent invoice or payment are really low with a 3 way match process in place.

Looking to automate your manual 3 way match processes? Book a 30-min live demo to see how Nanonets can help your team implement end-to-end AP automation or automate a part of your AP workflow.

3 way matching - an example

To illustrate, suppose that a buyer, Buyer Inc., receives an invoice for $1500 from a vendor/supplier, Supplier Inc., for a hundred pen drives:

• The AP team first compares/matches the invoice with its PO to check if the description (pen drives), quantity (100), cost ($15 per piece), total price ($1500) and terms (payment terms) match those in the initially approved PO.
• Next, the invoice and PO details are compared/matched against those in the order receipt (receiving report). This receipt is prepared by the receiving department based on the packing slip that comes along with the delivery. The type and quantity of pen drives (100), the price ($15 per piece) and the total price ($1500) should match those detailed in the original PO and invoice.
  • The receiving department also checks damage and quality at this stage.

If the invoice, PO and order receipt match exactly (or within an acceptable tolerance level), then you a have a successful 3 way match. The invoice can now be paid by the AP team.

If the 3 documents don't match then the invoice is put on hold until the errors/issues are sorted.

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Benefits of 3 way matching

As mentioned earlier, more and more businesses are implementing 3 way matching in their accounts payable process. Here are some of the main reasons business owners and finance teams are adopting 3 way matching en masse:

• Improve vendor relationships: 3 way matching helps clear legitimate vendor payments in a timely fashion. This helps in establishing mutual trust and goodwill. Happy vendors prioritise your orders and also offer better pricing or credit terms.
• Improve bottomlines: the 3 way match process helps flag fraudulent invoices, duplicate payments and other discrepancies. Since only legitimate payments are allowed, this leads to large savings and optimal cashflow.
• Be audit-ready: 3 way matching neccesitates a proper system of storing and organising legitimate business documents. This organised data can be conveniently accessed during audits and internal checks - reducing time spent in such exercises.

Why automate three way matching?

Automating 3 way matching and the accounts payable approval workflow would help AP teams focus on higher value tasks and save them from a mountain of manual paper work.

Automating 3 way matching and accounts payable is extremely crucial for a growing business. Manual processes just can't be scaled effectively - imagine tracking each paper document manually in a large business!