What Is Three-Way Matching & Why Is It Important? (2024)

In the world of accounts payable (AP), one of the most challenging jobs is managing theonslaught of supplier invoices that arrive each month. This includes verifying that theinvoices are real — small businesses experience billing fraud twice as often as theirlargercounterparts, according to an Association of Certified Fraud Examiners (ACFE) report —andthen paying the ones that are. One technique AP teams use to make sure invoices arelegitimate is called three-way matching. In addition to picking up on criminal activities,three-way matching can benefit an organization in other ways, especially when the process isautomated.

What Is Three-Way Matching?

Three-way matching is an AP invoice process thatdetermines whether a supplier invoice should be paid. Simply put, three-way matching entailscross-referencing the invoice with its corresponding purchase order (PO) and deliveryreceipt to make sure all pertinent details, such as the quoted order amount and the numberof items ordered, match. Doing this can help companies root out fake or unauthorizedtransactions, which can cost a company an estimated 5% of its annual revenue, according tothe ACFE report.

Two-way vs. Three-way Matching

Two-way matching compares an invoice only to its PO. As its name implies, three-way matchinginvolves a third step: verification that the purchased product was actually delivered,courtesy of an order receipt or packaging slip.

Key Takeaways

• Three-way matching is an AP process used to verify a supplier invoice by checking itagainst its corresponding purchase order and order receipt.
• It reduces the chances of fraudulent invoices going undetected and, worse, being paid.
• Companies can set thresholds to determine which invoices require three-way matching.
• An automated system can handle the approval process, saving AP staff time and effortleft best to investigating unmatched details.

Three-Way Matching Explained

Three-way matching is an important account control that companies use to make sureinvoices are paid only when they are properly validated against two other documents: theirPOs (issued by someone authorized to do so) and goods received notes, or receipts, that thepurchase was delivered to its destination. A PO also lists the quantity of items or servicesto be purchased and the agreed cost. The delivery receipt verifies that the delivery wasmade. Three-way matching confirms that the details match each other across all threedocuments.

These few extra steps can go a long way toward catching the costly problem of invoice fraud.To be sure, invoice fraud can happen to the biggest of organizations: Just a few years ago,for example, Google and Facebook both issued multimillion-dollar payments for fake invoicessent by a cybercriminal in Lithuania. (They recovered their money.) Smaller businesses,however, would be less likely to withstand such a scam.

Video: Three-Way Matching

How Does Three-Way Matching Work?

Three-way matching is a payment verification technique that compares the details associatedwith a particular purchase across a trio of related documents. Once the information isvalidated, payment can be sent. If one or more details fail to match, another AP process is triggered to investigatethe discrepancies.

Three-Way Matching Components

Simply put, three-way matching requires the details of three pieces of documentation tomatch. These are the individual documents:

• Purchase order, which authorizes a purchase to be made. It lists thetypes, quantities and prices of an order, as agreed to by the buyer and supplier. The POhas a unique number that is used for reference and tracking purposes.
• Delivery receipt, or a receiving report, which confirms that thepurchase was delivered, either in part or in full.
• Supplier’s invoice, which lists how much the buyer owes thesupplier, payment details — such as a payment schedule — and an invoicenumber.

Three-Way Matching Process

Three-way matching is a straightforward process — that is, an AP clerk compares thethreecomponents, listed above. But given the high-volume of purchases at many companies, it canbe quite time-consuming, particularly when handled manually. Among the points an AP clerkmust check:

1. PO verification: Was the purchase order filled out completely, notingthe amount to be paid, the name and address of the vendor and any other requiredinternal information? If necessary, are the correct general-ledger (G/L)codes listed?
2. Delivery information: Does the quantity ordered on the PO match thequantity delivered, as reported by the receiving or inventory department?
3. Supplier’s invoice: Is the supplier seeking payment for theamount authorized on the PO? Further, does the quantity received match the quantitypurchased? In other words, if only part of an order was received, is the supplierseeking full or partial payment?

What does the three-way matching process look like in practice? Let’s use the exampleof a construction company that is building 20 homes for a new community. The company issuesa PO to a siding supplier for 12,000 square feet of vinyl siding, at $10 per square foot, tobe used throughout the development. Two weeks later, the supplier delivers the siding andsends its invoice to the construction company. The construction company then uses thethree-way matching process to verify that the supplier’s invoice amount for $120,000matches the PO and that the delivery receipt confirms siding was delivered. If only half ofthe order was delivered, the company may pay part of the invoice or withhold payment untilthe entire order is fulfilled. If the purchase order, invoice and delivery informationmatch, the company can pay the invoice.

Who Are the Stakeholders in Three-Way Matching?

Depending on the size and scope of the purchasing organization, numerous decision-makers fromdifferent departments may be involved in the three-way matching process. These departmentmay include:

• Purchasing/procurement: This department’s stakeholder isresponsible for sourcing and buying goods and services on the company’s behalf,whether they’re raw materials for construction or manufacturing projects, officesupplies or cloud-based software licenses.
• Receiving/inventory: Employees who work at the company’sreceiving dock, where orders are delivered, are responsible for tracking the receipt ofa purchase and ensuring that it is stored and inventoried (if appropriate) until needed.
• Finance: The AP team is responsible for paying supplier invoices, butonly after matching them against their purchase orders and delivery receipts.
• Supplier/vendor: The vendor’s role is to fulfill the PO,verifying that the correct quantity is delivered at the agreed-on price and at thequality expected.

Benefits of Three-Way Matching for Businesses

There are many benefits for businesses that use three-way matching. Bestpractices give the ability to:

• Trigger the payment process: For many companies, receipt of an invoiceputs the payment process, and three-way matching, in motion. At that point the companywill already have the PO and proof that an order was received.
• Catch fraud: Three-way matching serves as a form of checks and balancesto make sure an invoice is legitimate. By comparing the three distinct documents —PO,invoice and delivery information — a company can be confident about issuing apayment.
• Save money: In keeping with the previous point, catching fraudulentinvoices translates to real dollars saved by not paying a phony supplier. Three-waymatching can also help catch discrepancies that might lead to overpayment. When theprocess is automated, a company may also be able to take advantage of discounts offeredfor timely payment.
• Improve business relationships: A trusted bond is formed over time whena supplier consistently sends accurate invoices, which leads to a company’sability to pay the supplier faster. A solid supplier relationship may also result inbetter pricing and credit terms.
• Be prepared for audit: The documentation that three-way matchingprocess requires also helps a company prepare for internal and external audits.

Disadvantages of Three-Way Matching for Businesses

Despite its many advantages, three-way matching is not without severalchallenges — which mainly rear their heads when the process is handledmanually. Keydisadvantages:

• Typically labor-intensive: Three-way matching takes time and a bit oflegwork, especially when discrepancies arise. This may result in payment delays that, inturn, rack up late charges and possible ill will with suppliers. Staff would be occupiedwith the manual matching process rather than activities that add value.
• Hard to handle high volume: Hand in hand with the previous point, APdepartments often contend with high volumes of invoices, all of which take time to matchand could slow down the payment process. As the saying goes, time is money.
• Can be complex: Although three-way matching is, at its core, a simpleprocess, many variables must be managed, which may lead to complications when makingcomparisons.
• May not work for services purchases: It’s one thing to accountfor the delivery of a product. But services tend to be delivered in an ongoing manner,so three-way matching is not always feasible in these cases.
• Fraud still a factor: While three-way matching can help increase thedetection of fraudulent invoices, it can’t be expected to entirely eliminatefraud.
• Errors take time to reconcile: When discrepancies occur, they can betricky to resolve, especially when stakeholders are working from different locations.
• Room for error: From misplacing paperwork, to misreading figures, tomisinterpreting agreement terms, any process handled manually is open to human error.

Three-Way Matching Example

Let’s look at a hypothetical example of three-way matching — that of a boutiquehotelchain whose marketing department has prepared a new full-color brochure and needs 100,000copies. Now, it needs to hire a printer, aka the vendor or supplier. After collecting andcomparing bids, a printer is selected and the order is placed. At this point, the marketingmanager issues a purchase order, which lists the printer’s name, the number ofbrochures to be delivered, how much the order will cost ($300,000) and expected deliverydate, along with any internal accounting expense or project codes and other relatedinformation.

The printer, which gladly accepted this lucrative assignment, receives the hotel’s POalong with the digital files needed for printing the brochures. It completes the job in theagreed time frame and delivers the brochures to the receiving address. The printer alsosends the hotel its invoice for $300,000. When this invoice is received, the hotel’sAP team sets about to verify its authenticity by using three-way matching.

First, an AP clerk calls up the purchase order to verify that the marketing department wasauthorized to purchase 100,000 brochures from that vendor. Then the clerk checks that theprice for printing the brochures match. The clerk will also verify that the name of theinvoicing company matches the name of the company on the purchase order. This is done tomake sure the invoice is not a rogue request from a third party trying to be paid for aphony order. Next, the AP rep looks at the delivery logs or memo. They see that 20 palletsof brochures were, in fact, delivered by the printer. Each pallet contains 5,000 brochures,so that matches both the PO quantity and the supplier invoice.

This data provides the AP group with all the correct matching details so they can streamline the APprocess, ensuring the invoice is legitimate and ready to be paid.

4 Ways to Make Three-Way Matching More Efficient

To get the most out of three-way matching, it’s important to use it as a policy. Hereare some tips about how a company can make three-way matching more efficient.

1. Value threshold: A company can stipulate that invoices and purchaseorders only over a certain dollar amount are subject to three-way matching. This makesgood sense, since unchecked high-value purchases can result in the biggest financialloss.
2. Discrepancy threshold: Another way to make three-way matching moreefficient is to authorize AP personnel to pay invoices that are within a specifiedpercentage of the purchase order amount. This will account for small discrepancies thatmight be due to a legitimate charge.
3. Vendor rating: Consider rating vendors based on the accuracy of theirinvoices. The ones that consistently send accurate invoices would be assigned a highrating, which would signal to AP that their future invoices may not need more thanperiodic spot-checking.
4. Process automation: With the right technology in place, a company canautomate the entire three-way matching process. In this case, only the discrepancies arebrought to AP’s attention.

Why Automate Three-Way Matching? What Are the Benefits?

Speaking of technology, automating the three-way matching process provides a company withnumerous benefits. Consider a system in which the details of the purchase order and orderdelivery are entered into a database. As soon as the vendor invoice is received, all of theinformation needed to manually conduct the three-way match are accessible. But if vendorssend their invoices electronically, directly into the same database, three-way matching canbe performed automatically for most invoices.

But the value of three-way matching goes deeper. Such a system would obviously contain vendorinformation, so the AP team could easily see how many invoices they’ve processed fromthe same vendor, which can inform the vendor’s rating.

Automating the three-way matching process can save companies time and money, catch fraud andenable AP staff to focus on higher-value projects. Additionally, automation can help anorganization capture discounts for timely payments and avoid late fees associated withmissing payment deadlines.

Why Is Manual Matching Bad for Businesses?

The costs of manual three-way matching involve more than actual dollars. For the APdepartment, there’s real stress in having to chase down details generated by poor ormisplaced documentation, as well as having to tackle a tall pile of invoices that growsbigger by the day. Human error is another “gotcha.” It’s not hard toimagine thefoibles of human error cropping up among the dozens of small details that need to betracked. Not only does that create more work for the AP team, but they might need to dragthe warehouse and procurement managers into the resolution.

Automate Three-Way Matching With Accounting Software

NetSuite Invoice Management simplifies the three-waymatching process, and thereby improves a business’s cash flow, by automating thematching of POs, item receipts and vendor invoices. Once a purchase order, order receipt andsupplier invoice are entered, the software can quickly determine whether the details align.If they do, an invoice can be scheduled for payment. When they don’t, the system willnotify AP, which can then investigate the discrepancies. This functionality is included aspart of NetSuite Procurement, which is available as anadd-on module to NetSuite ERP.

Conclusion

Companies that use three-way matching can be confident that they’re paying only forauthorized, legitimate invoices once a purchase has been delivered. Pertinent details,including supplier name, purchase quantity and cost of purchase, are matched across threerelated documents: a purchase order, delivery receipt and supplier invoice. While that maysound straightforward, the process can be quite time-consuming if handled manually —andeven more so when details don’t align, prompting further investigation. Three-waymatching is best handled through automation, freeing workers from a labor-intensive process,quickly catching red flags that may portend invoice fraud and leading to faster paymentsthat make for solid business relationships.

Three-Way Matching FAQs

What is 3-way matching and 2-way matching?

Three-way matching is an accounts payable process that checks that the details on a purchaseorder, the supplier’s invoice and the delivery receipt match before an invoice ispaid. Two-way matching checks only the details of the supplier’s invoice against thedetails of the purchase order.

What is three-way matching in accounts payable?

Three-way matching is an accounting process that compares what was ordered (the purchaseorder), what was delivered (receipt) and the supplier’s invoice to verify that aninvoice is legitimate and ready to be paid.

Which documents are required for 3-way matching?

Conducting a three-way match requires three documents: the purchase order, thesupplier’s invoice and the delivery memo.