July 15, 2024

Here’s Why The 3-Way Matching Process Is Good for Business

Here’s Why The 3-Way Matching Process Is Good for Business

You’re going through your accounts, and you find a vendor invoice for new stock you ordered. You briefly saw it being delivered earlier, so you go ahead and approve the payment. But, upon closer inspection, you discover they’ve sent you the wrong items. 

You’ve already paid for the product, and now you have to go through the hassle of returning it and getting the delivery replaced. You were trying to get ahead of your accounting and ended up tying funds to a product you didn’t order, need to return and wait for the product you originally ordered to arrive.

These kinds of errors can add up and end up having serious detrimental effects on your business. 

A way to combat mistakes like this is creating te robust accounts payable procedures that reduce the chances of both human error and exploitation (fraud). And in doing so ensuring transparency, accuracy, and efficiency.

What your business needs is a 3-way matching process. 

What is 3-way matching?

3-way matching is checking the:

1. Purchase order -what you ordered.

2. The vendor invoice – what the vendor says they supplied 

3. The goods received note – what you actually received. 

All three of these must match before you approve a payment for goods and services.

It sounds simple because it is, but matching these three documents proves the validity of an invoice and goes a long way to making sure you only pay for exactly what you ordered. 

3-way matching may seem time-consuming as it adds extra paperwork and often requires additional communication between both parties. However, effective 3-way matching means you know exactly when an invoice should be paid in part or in full. Plus, it maintains clear records for audit purposes, eliminates fraud, and prevents you from getting company cash tied up in incorrect invoices. 

Here’s a more detailed list of the 3 documents you need to match:

  • Purchase order (PO): Also known as the order confirmation receipt. The PO outlines the goods or services being asked of the vendor as well as the agreed-upon price. This could be the type of goods, quantity, or the specifics of the service needed. In addition, the document will contain a unique PO number for tracking and reference.
  • Vendor invoice: Provided by the supplier, the invoice is essentially a payment request. It details the goods or services provided, typically breaking it down into the quantity and unit prices along with any other applicable information. The vendor invoice contains a unique invoice number, the supplier’s details, and the agreed-upon payment amount and timeframe.
  • Goods received note: Generated by the recipient upon inspection of the order and comparison to both the PO and invoice. The document records everything delivered, detailing the good’s condition as well as any other applicable details. The goods received note is typically forwarded to the accounts department for approval and record keeping.

When all three of these documents match, everything is as expected, and you can approve the payment to the vendor.

Comparison to standard 2-way matching

The majority of businesses only take into account the PO and invoice. Referred to as 2-way matching, this fails to confirm the goods received are correct and weren’t damaged during shipping. 

The only difference when it comes to 3-way matching is the creation of the goods received note and formalizing the inspection process before releasing funds. This extra check improves internal controls and avoids issues related to premature or incorrect accounts payable.

Why use 3-way matching?

This extra check may seem redundant for some, adding paperwork and overcomplicating a straightforward process. But as businesses grow and start to make more purchases, this additional step safeguards against mistakes or outright fraud, ensuring invalid invoices don’t slip through the cracks.

The benefits of 3-way matching easily outweigh the extra paperwork:

  • Simplify your audit process: The additional information proves you received every purchase, creating a better audit trail and keeping track of all the money spent. This can come in handy when explaining your accounts to the government, investors, or company stakeholders.
  • Fraud prevention: In 2019, we saw that even the big boys at Google and Facebook can be tricked by fraudsters that fake invoices. The 3-way check adds an extra layer of security to your payments process, so you only approve genuine and accurate invoices for real goods and services received.
  • Better vendor relationships: Having accurate information related to all your purchases and their corresponding vendor helps show you the suppliers that accurately invoice your business and deliver what you asked for. With 3-way matching, it is clear who you should continue working with and when you need to look for alternatives.
  • Increase profits: 3-way matching protects your business from unnecessary accounts payable expenses, saving you money in the long run.

3-Way matching in action

So what does the 3-way matching process look like in action?

  1. You place an order and send a PO to the vendor.
  2. The vendor produces an invoice for the goods or services you requested.
  3. The invoice is checked against the PO (2-way matching).
  4. The vendor delivers the goods or services.
  5. You confirm receipt and produce a goods received note itemizing the delivery.
  6. The accounts payable team compare and ensure all three documents match before releasing payment (3-way matching).

It’s as simple as that. Generally, you will confirm delivery to the vendor through a receiving report based on the goods received note.

Implementing 3-way matching and removing payment uncertainty

3-way matching is a simple solution to remove any uncertainty in your accounts payable procedures. The extra step of inspecting your purchases and creating a goods received note makes all the difference to ensure you only pay for what you get.

Plus, you can make up any extra time spent implementing the 3-way matching process through automation. You can use automation to store necessary documentation (POs, invoices, etc.), share the goods received notes to relevant parties, and even compare the three key documents.

Avatar for Carmel Isaac

Carmel Isaac

Student. Coffee ninja. Devoted web advocate. Subtly charming writer. Travel fan. Hardcore bacon lover.

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