If you want to streamline your procurement and accounts payable processes, implementing three-way matching may be the solution you need. But what exactly is 3-way matching and why is it important?
In this article, we’ll delve into the concept of 3-way matching, its key elements and why it’s crucial across industries such as finance, legal and digital identity verification. So if you want to understand the importance of three-way matching and the benefits it can bring to your organisation, read on. Read more Month-end closing tips and checklist.
❓What is Three-Way Matching❓
Three-Way Matching, is a process that aims to compare three key documents to ensure costs are in line with orders. As part of this process, the vendor invoice, the purchase order and the packaging slip are analysed and compared against each other. In this way, 3-way matching helps to prevent fraudulent payments or fake invoices and human error, and increases the efficiency and accuracy of the payable process. It is important to understand why this process is important and what benefits can be achieved by implementing it. Later in this article, we will discuss why three-way matching is important and the specific benefits it brings to the business.
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💥 2-way vs 3-way matching 💥
The two-way matching process is a method in which the Vendor’s invoice is compared only with the purchase order (PO). The main purpose of this process is to check that the invoice value agrees with the price and quantity of the goods or services ordered. Compared to three-way matching, only two documents are involved in this process: the Supplier invoice and the purchase order.
The three way matching process, on the other hand, is a more comprehensive method in which the Supplier’s invoice is compared with two documents: the purchase order and the packing slips. This allows confirmation of whether the delivered goods or services have indeed been received and agree with the purchase order. The process is more verifiable in nature and minimises the risk of mis-invoicing or fraud.
The advantages of 2-way matching are the simplicity and speed of the process, as it only requires the comparison of two documents. On the other hand, three-way matching provides greater accuracy and control as it takes into account one more document that confirms delivery note of the order.
Nevertheless, both processes have their drawbacks. In the case of 2-way match, there is a risk of not taking into account facts that could be detected by an acceptance note in three-way matching. On the other hand, 3-way matching is more complicated and time-consuming, especially with a high volume of invoices.
The 2-way match process is more suitable for simple transactions, while the three-party process is more efficient if a delivery receipt is important. The choice between the two methods should depend on the individual needs and priorities of the invoice clearance team.
❔What 3-way matching looks like❔
The 3-way matching process is a method in which a Supplier’s invoice is compared with two documents: a purchase order and a receiving note. This process is a key step in the accounting and purchasing departments, as it confirms that the goods or services have been delivered correctly and that the prices and quantities match the purchase order.
The main components in three-way match process are:
1️⃣ Vendor invoice: This is an official document issued by the Supplier with details of the products or services, prices, quantities and payment terms. The invoice is delivered to the accounts payable team for further verification.
2️⃣ Purchase order: This is a document generated by the purchasing department that contains details of the products or services ordered, such as name, price, quantity, Supplier details and delivery date.
3️⃣ Goods receipt: This is a document confirming the actual receipt and acceptance of goods or services delivered. It contains details such as the date of receipt, the signature of the acceptor and the status of the delivery.
In the three-way matching process, the Supplier invoice is carefully compared with the purchase order and the receipt note.
The key elements of the comparison are:
- Do the delivered products or services agree with the purchase order in terms of quality, quantity and price?
- Does the goods receipt and compliance of the delivered goods or services?
If there are any discrepancies, these are identified and resolved. An employee from the purchasing or payable department may contact the Supplier for clarification or correction. It is important that a solution is reached before payment is made to avoid errors or contentious situations.
✅ Benefits of Three-Way Matching ✅
The benefits of implementing three-way matching in accounts receivable processes are:
✔️ Prevention of fraudulent invoices: Comparing a Supplier’s invoice with a purchase order and a receipt note helps detect any discrepancies, such as falsified prices, unauthorised goods or services, or double payments. Through this process, companies can minimise the risk of financial losses resulting from fraud.
✔️ Reduction of human error: By comparing the invoice, order and receipt note, the system automatically identifies any discrepancies, such as discrepancies in amount, quantities or payment dates. This saves companies time and ensures greater efficiency in the accounts receivable process.
✔️ Ensuring accurate payments: The system automatically identifies any discrepancies and errors, allowing them to be corrected before payment is made. This means that companies only pay for what they actually ordered and received. In this way, they avoid unnecessary costs associated with erroneous payments.
✔️ Improving internal control: The implementation of 3-way matching in accounts receivable processes enables companies to better control their financial operations. The system automatically generates an audit trail that allows every step of the payment process to be tracked. This increases transparency and fairness in the process and allows companies to more easily adapt and modernise their financial rules.
⚠️ Challenges of implementing 3-way matching ⚠️
Three-way matching is an extremely effective tool in the accounts receivable process, but its implementation can present some challenges for organisations. Here are some of the most common issues that can arise when implementing this process:
👉 Lack of accurate data: Missing or incomplete information in documents such as the Supplier invoice, purchase order and receiving note. When one of these documents is missing or incomplete, 3-way match is impossible, leading to delays in the billing process and generating errors.
👉 Complexity of the process: In practice, 3-way matching can be complex, especially for companies with a high volume of invoices and orders. It can take a lot of time and energy to manually process each invoice and make reconciliations, with the possibility of errors.
👉 Lack of cooperation between departments: There is often a lack of cooperation and transparency between the departments, which leads to problems in the accounts receivable process. For example, a lack of communication between the purchasing department and the accounting department can result in discrepancies between orders and Supplier invoices.
👉 Intricacy and volatility of regulations: Companies need to keep abreast of these regulations in order to avoid missing payment deadlines or paying in contravention of current regulations. However, tracking and interpreting changes in regulations can be complex and time-consuming.
👉 Lack of automation: Manual matching process of invoices, purchase orders and packing slips is labour-intensive and error-prone. Failure to automate this process can lead to late payments, billing errors and excessive strain on human resources.
📈 Making the most of Three-Way Matching 📈
In order to maximise the benefits of three-way matching in accounts receivable billing, there are several best practices to consider. Following these practices is key to optimising the 3-way matching process.
➡️ Establish appropriate communication and cooperation between the departments responsible for purchasing, warehousing and accounting. Regular meetings, documentation of processes and division of responsibilities help avoid inconsistencies and ensure a smooth 3-way matching process.
➡️ Educating employees on the principles of three-way matching and the importance of accurate data is another key practice. Training and workshops help to raise staff awareness and minimise the risk of errors.
➡️ Invest in systems and software that enable automatic comparison of invoices, purchase orders and receipt notes: This makes the 3-way matching process more efficient, eliminating human error and inconsistencies.
➡️ Keeping abreast of changes in the regulations governing the settlement of receivables: This avoids breaches of the rules and pays in accordance with current regulations.
Following these best practices is essential to maximise the benefits of three-way matching and optimise your organisation’s accounts receivable settlement process.
Conclusion
Implementing three-way matching is essential to ensure correct and timely payments. It eliminates the risk of false invoices and minimises human error, resulting in more accurate and efficient payments.
While there may be challenges to introducing this process, such as the need to ensure adequate communication between departments and to comply with regulations, there are strategies that can help optimise the effectiveness of three-way matching.
Implementing appropriate systems and software, holding regular meetings, documenting processes and educating staff are key steps to take. It is also important to keep abreast of changes in billing laws and regulations.
Three-way matching is paramount to maintaining data integrity and ensuring the smoothness of the billing process, as well as minimising the risks associated with false invoices and human error. When implemented properly, it can help ensure accurate and timely payments in your business.