The Power of 3-Way Matching: Why Automating This Essential Process Matters

In the world of finance and procurement, accuracy and accountability are paramount. Every organization strives to maintain a meticulous record of its financial transactions while safeguarding itself against errors and fraud. Three-way matching has long been an important control measure practiced by accountants to ensure that what was purchased, what was received, and what was paid are fully aligned.

In this blog, we’ll delve into the intricacies of three-way matching, exploring what it entails and, most importantly, why it holds such a pivotal role in modern accounting and procurement practices.

What is 3-Way Matching?

Three-way matching is a fundamental accounting and procurement control process that matches three critical documents related to a purchase:

1. The purchase order (PO)
2. The receipt of goods and services
3. The supplier’s invoice

When all three elements match perfectly, it validates that the organization has received the expected goods and services at the agreed-upon price. This practice prevents paying for something you didn’t order, paying more than you agreed to, paying for substandard goods and services, or even paying a fraudulent invoice.

When Should You Use a 3-Way Match?

Three-way match should be incorporated into accounts payable processes whenever you need to ensure the accuracy and validity of invoices—essentially, whenever possible. It’s particularly important for controlling spend and preventing unauthorized or fraudulent payments in cases where goods and services are received before payment is made.

How 3-Way Matching Works

The three-way matching process follows straightforward steps that involve matching three elements of a purchase. In many organizations, this is a manual process that requires assembling all necessary documentation and verifying that the details match. These documents are:

1. Purchase Orders: The process typically begins with the creation of a purchase order that contains the relevant details of a purchase request, such as quantities and price. The PO is sent to the vendor or supplier so that they can create an invoice which is sent back to the purchaser and begin fulfilling the order.
2. Goods Receipt Note: When the goods or services are received, a goods receipt note is created. This confirms the goods have arrived and verifies the quantity and condition. For services, the person ordering the services would verify that the services they received were in accordance with contract deliverables.
3. Supplier Invoice: The supplier sends an invoice for payment. It will contain the PO number so that it can be matched with the purchase order and receiving report to ensure everything matches the initial agreement.

If all three documents match, the invoice is approved for payment. The AP team can execute the payment with reduced risk of overpayment or unauthorized spend.

Benefits of Automating 3-Way Matching

There are many benefits to three-way matching. In accounts payable, the primary benefits are:

1. Catch Fraudulent Invoices: Three-way invoice matching acts as an internal control for fraud prevention by verifying that goods or services were actually received before paying an invoice. This prevents payment for unauthorized invoices, which is a rising problem.
2. Save Time and Money: Three-way matching helps cost savings and budget efficiency by ensuring organizations only pay for the exact quantity of goods and services they received and agreed upon. The improved accuracy also saves time since AP teams can process invoices faster with fewer time-consuming discrepancies to resolve.
3. Improved Vendor Relationships: Improved efficiency and accuracy leads to fewer late payments. The matching process helps resolve discrepancies promptly, reducing the likelihood of disputes with vendors. This, in turn, can lead to stronger supplier relations, potentially resulting in favorable terms, discounts, or priority access to goods and services.

The Downsides of Manual Invoice Matching

Manually matching the components in a three-way match carries several downsides that can put accuracy and efficiency at risk. Here are three key drawbacks:

1. Increased Chances of Human Error: Relying on human involvement to match invoices, POs, and receipts can raise the risk of data entry errors, misinterpretation, and accidental oversights. This can lead to overpayments, missed payments, and discrepancies that take time to fix.
2. Risks of Delayed Payments: Inefficient manual matching leads to payment delays, which strain supplier relationships and damage vendor relationships or disrupt supply chains. Late payments can even affect your credit rating.
3. More Time-Consuming: The most significant drawback of manual three-way matching is the amount of time spent doing tedious work when AP departments could be doing something that adds more value to the company.

The Advantages of Automated 3-Way Matching with Pairsoft

Pairsoft automates the three-way matching process to eliminate the downsides of invoice matching. Advanced OCR technology extracts important information from invoices and highlights areas that need attention. The result is faster bill creation, fewer errors, and speedier payments. To further streamline three-way matching, invoice processing can have set rules for exceptions, so you can bill for more than the received quantity or dollar amount.

Overcoming the Challenges of Paper-Based AP Processes

Using paper for business transactions might seem outdated, but it remains prevalent in many organizations, leading to numerous challenges. Holly Condon's article on Pairsoft's website highlights the top five issues with paper-based accounts payable processes:

1. Inefficient Processing: Paper-based processes require manual data entry and shuffling documents, reducing productivity.
2. Inaccurate Invoice Matching: Manually checking the accuracy of invoices can lead to errors and time-consuming cross-checking.
3. Inaccurate Exception Invoice Handling: Handling exceptions manually increases the workload and error risk.
4. Increased Travel: Physically transporting documents adds time and cost, particularly challenging during situations like the COVID-19 pandemic.
5. Reputational Damage: Errors and delays in payment processes can damage your business's reputation with vendors and clients.

By automating your AP processes with Pairsoft, you can overcome these challenges, improving efficiency, accuracy, and vendor relationships.

Encouragement to Read More: For a deeper dive into the challenges of paper-based AP processes and how automation can address them, check out Holly Condon's detailed article on how Pairsoft can transform your accounts payable workflow, making it more efficient and accurate.

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