In the world of accounts payable, there are a slew of steps and checks to ensure that a company pays its bills quickly and accurately. One lynchpin in that system is three-way matching.
This guide will walk you through exactly what three-way matching is, why it matters, how to improve it, and more.
What is 3-way Matching in Accounts Payable?
A three-way match is the process of cross-referencing and verifying your accounts payable expenses using a set of three different documents—the invoice, the purchase order, and the receipt—in order to avoid any erroneous charges.
Simply put, you check that the information on these documents matches up, ensuring that the amount you’re paying to the vendor is correct and lines up with the goods or services you actually received.
How Does 3-way Matching Work?
Let’s contextualize that definition with an example that demonstrates how three-way matching plays out, and how it intersects with some steps of the procure-to-pay process. In this example, let’s say you’re handling accounts for a hospital that’s ordering 1,000 surgical masks, priced at $3 each.
Purchase of goods or services
First, of course, comes the act of placing an order. In this case, it’s the 1,000 masks, which, together, will cost $3,000 dollars. The mask vendor will provide you with a purchase order that will confirm the quantity (1,000) and cost of the items or services ($3,000).
Based on the purchase order, the vendor will create an invoice for the items or services. Please note that POs are different from invoices. The invoice will include the quantity ordered (1,000) as well as the cost per unit ($3) with the total cost owed ($3,000, plus any taxes or service charges).
Receipt of payment for goods or services
After the vendor sends the invoice and your accounts payable department approves and pays it, the vendor will then send a receipt. The receipt will include details like what you ordered (1,000 surgical masks), the payment method, any discounts (let’s assume there are none here), and the total amount you paid for the order ($3,000, plus taxes and fees).
It’s worth noting that, depending on the size or idiosyncrasies of your business, this receipt process can be more complex and involve multiple parties. For instance, if a third party is actually storing the goods ordered, you’ll need confirmation from them that they received the order.
This is the step where the three-way match comes into play. Accounts payable team members will look at all of the documents above—purchase order, invoice, and receipt—and verify that the information across the three documents matches: number of units, cost per unit, total order cost, etc.
If the information matches, accounts payable staff approves the invoice and the accounting department sends payment. If the information doesn’t match, a member of the accounts payable team will need to follow up with the purchaser and the vendor to sort out the discrepancy.
Please note that non-PO invoices are different from PO invoices and they are not suitable for three-way matching.
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What is the Difference Between 3-way, 2-way, and 4-way Matching?
Though it’s a popular method, three-way matching isn’t the only way to cross-reference and check orders and invoices; there is also two-way and four-way matching. Let’s review both of these processes and how they differ from three-way matching.
For a company using two-way matching, the accounts payable employee will verify the information using just two documents: the invoice and the purchase order.
A company might choose to use this method since it’s less time-intensive than a three-way match. However, they could be paying too much or too little for the goods and services rendered, as they have no way to cross-check the receiving information. As a result, the company might also see more errors in order processing.
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In addition to cross-checking the invoice, purchase order, and receipt, four-way matching also checks information related to what are known as tolerances. Most often, tolerances relate to the quantity of goods a company will accept. (Though sometimes tolerances can involve quality of the product, too.)
Let’s stick with our mask example. If the hospital has a five percent tolerance, then they might accept 2,850 masks or 3,150 masks. This quantitative info (and qualitative, if it’s appropriate) would come from an inspection report.
Not all companies need or will use an inspection report, so this fourth step isn’t always possible. Plus, the additional step can add valuable person-hours to the process. However, some companies might choose this process just to be more thorough in their accounting.
Why Accounts Payable Should Use Three-way Matching
Even though there are many ways to check your accounts payable process, three-way matching is a best practice of all good accounts payable departments. Here are some reasons why three-way matching is the best way to check your payment process.
1. Establishes good relationships between suppliers and buyers
Trust between suppliers and buyers is one of the benchmarks of a successful business. If you’re keeping good records and subsequently paying invoices correctly and on time, it helps build loyalty between parties. Show that you value your relationship with them, and they’ll see you as a reputable partner.
2. Saves time and money
By keeping secure records and checking each payment, you’re making sure you’re not over- or underpaying invoices, missing discounts, or potentially subjecting the company to fraud. You’ll also avoid any potential payment problems that can create costly headaches and time sucks down the line.
3. Simplifies the auditing process
When it comes time for a business audit, having accurate records and information of all of your outgoing payments is essential for your company’s reporting. If you’ve done three-way matching throughout the year, you won’t have to do any of the extra work around the time of a company audit.
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Manual Matching: A Problematic Process
Many companies use a manual matching system to check payments. While this process works, it’s not efficient. Here are some reasons why manual matching can be a problematic process.
When done by hand, the matching process can be quite lengthy. People can only work so quickly, and taking the time to track down all the approved versions of the documents from suppliers creates a lot of back and forth.
Delays payment to suppliers
Since manual matching takes so much time, it can often delay payments to suppliers, which can hurt your relationship with vendors. As hard as your employees may try to get payments in on the due date, manual matching can just be too tedious.
With delayed payments come additional costs including late fees and penalties. You’re also paying more money for employees to work on processing and checking invoices, which can lead to higher personnel costs.
Manual matching allows human error to be introduced to the mix—from misreading an invoice to missing information on a document, you might not get the exact confirmation that you would from an automated process.
Why you Should Automate 3-way Matching
Since manual matching is so time-consuming, costly, and error-prone, it’s a good idea to automate your three-way matching system—and your accounts payable process overall. Automating helps save time, maintain positive relationships with vendors and suppliers, improve data accuracy, and save money. Here’s a little more information on why an automated process is best for your business:
By automating your three-way matching process, your company will need less manpower to maintain the process, freeing up your team to work on more complex tasks.
Ensures timely payment
Automated systems lead to a faster process, which means payments go out more quickly. As a result, you will be able to maintain fruitful and trustworthy relationships with your vendors and suppliers.
Improves data accuracy
An automated process eliminates opportunities for human error, and as a result, your data and records will be correct and consistent.
Since you won’t have to compensate a larger team to manually handle matching, you’ll be able to put that money toward other things in your budget. Plus, timely and accurate payments mean you won’t be charged any late fees or have to account for any time-consuming and costly errors.
Find the Right Automation Solution for You
By now, you realize that three-way matching is an efficient, thorough process that saves money and time, all while helping maintain positive relationships with vendors and suppliers. Plus, it helps ensure your company isn’t subject to fraud and is ready and organized for audits. By streamlining this process and automating other steps throughout your accounts payable process, you get the most out of your team.
However, finding the right accounts payable automation system can seem daunting. MHC offers best-in-class technology to manage your processes and make all documents—especially those necessary for three-way matching—easy to access. On top of this organization, MHC’s solution supports straight-through processing. That way, employees only look at problematic documents or high-value invoices, i.e., the ones that are most worthy of man-hours.
Want to learn more about how MHC can support your business? Contact us or request a personalized demo and see our platform in action today!