The last thing you want is to pay an inaccurate or fraudulent invoice. This can happen if a vendor sends an invoice with the incorrect amount or if fraudsters target your company with an elaborate billing scheme.
There’s no telling how much these billing errors and instances of fraud can cost your company if they continue to go unnoticed. So how can you safeguard your accounts payable processes?
One way to counter these issues is with 3-way matching — a system of verifying invoices to ensure their legitimacy before issuing payment.
In this article, we’ll explain what a 3-way match is in accounts payable, how it works, and how it benefits your company. We’ll also look at how you can automate these steps with an accounting automation solution like DocuPhase.
Click the links below to jump ahead:
- What Is 3-Way Matching in Accounts Payable?
- How Does 3-Way Matching Work?
- What Are the Benefits of 3-Way Matching?
- Drawbacks of Manual 3-Way Invoice Matching
- Automating the 3-Way Matching Process
What Is 3-Way Matching in Accounts Payable?
3-way matching is the process of matching a vendor invoice against a purchase order (PO) and a goods receipt note — a document that confirms the delivery of goods. It enables you to verify the legitimacy of an invoice before issuing payment.
Performing a 3-way match ensures that the amount you’re paying is correct and matches with the goods or services that your company received.
If the details don’t match or if there are any discrepancies, you can put a hold on the payment until the issue is resolved. This prevents your company from paying duplicate, inflated, or fraudulent invoices.
Accounts payable teams don’t always need to reference physical documents. They can refer to the company’s enterprise resource planning (ERP) system and check that the receiving team has marked the order as delivered.
How Does 3-Way Matching Work?
There are three documents that you need in order to perform a 3-way match: an invoice, a purchase order, and a goods receipt note.
Let’s take a closer look at each.
A vendor invoice is a document that lists the amount your company owes for products or services rendered. It includes the same information contained in the purchase order.
Invoices typically include the following details:
- Goods or services provided
- Unit prices of individual items
- Quantity ordered
- Total amount owed
Invoices may also include other applicable details like service charges or discounts. When your company receives an invoice, it’s a formal request to pay money.
When an employee or department needs to make a purchase, they will create a purchase requisition and forward the request to the purchasing department.
The purchasing team will then turn the request into a purchase order, which is a document that your company sends to a vendor or supplier to authorize the purchase of goods or services.
Purchase orders include details like:
- Order numbers
- Product or service descriptions
- Quantity of the goods or services
- Mailing addresses
- Payment terms
A purchase order becomes legally binding once the seller accepts it.
Goods Receipt Note
A goods receipt note, also known as a delivery note, is a document that a receiving officer creates after opening and inspecting shipments. It acknowledges and confirms the delivery of goods.
These documents describe the contents of the goods delivered, including the product number, description, and unit quantity. A receiving officer will mark that the delivery has been received in a company ERP.
With these three documents, the accounts payable team can perform a 3-way match to verify an invoice. It involves checking order details from the invoice and comparing it against a corresponding purchase order and goods receipt note.
If the order details match (order numbers, unit quantities, total costs, etc.), then the invoice can be forwarded to the accounting department to issue payment.
However, if there are any discrepancies like mismatched quantities, incorrect amounts, or duplicate items, then the payment is put on hold. Once any discrepancies are resolved, the invoice is sent through the approval process again.
What Are the Benefits of 3-Way Matching?
Performing a 3-way match is a tedious and time-consuming process, especially if you have a ton of invoices to check. However, it’s a crucial best practice for any business.
Reduces Instances of AP Fraud
Accounts payable processes are vulnerable to fraud. In 2020, nearly 75% of organizations were victims of payment fraud.
One example includes fraudsters posing as vendors and sending fake invoices. Another includes an employee colluding with a vendor to inflate prices (known as kickback schemes) and splitting the difference.
A 3-way matching process can help prevent instances of payment fraud by ensuring that only invoices for goods and services that were actually received are paid.
Saves Your Company Time and Money
Paying for duplicate or fraudulent invoices can cause cash flow problems. A 3-way match ensures that your company only pays what it owes — no more, no less.
That’s not all.
Your accounts payable team is undoubtedly busy, so they don’t want to spend more time on a task than they need to. Without 3-way matching, your AP team may end up wasting time processing an invoice and getting the necessary approvals only to realize it’s a duplicate.
With 3-way matching, your company can catch any mistakes or discrepancies early in the invoice approval process before they turn into bigger problems.
Improves Vendor Relationships
Having a process in place to promptly verify and pay invoices can strengthen relationships with your vendors. You may even be able to take advantage of early payment discounts.
However, if there are any exceptions or discrepancies, vendors will want to know about them as soon as possible. 3-way matching can help pinpoint issues early and ensure that payments are still made on time.
Enables More Accurate Auditing
Whether it’s from the government or other parties, you’ll need to provide accurate records if your company is ever audited. 3-way matching provides a clear audit trail that verifies the legitimacy of all financial transactions.
Drawbacks of Manual 3-Way Invoice Matching
Many companies still rely on manual processes to verify incoming invoices. While these methods can certainly work, they’re not very efficient.
Manually checking individual line items on an invoice against a purchase order and a goods receipt is a labor-intensive process. Just finding the required documents can easily take hours, if not longer.
Now imagine that you have to perform a 3-way match for dozens or even hundreds of invoices a month. While certainly possible, it can quickly turn into a massive time sink.
The longer it takes to approve and pay an invoice, the higher your processing costs. Manually performing 3-way matches can result in late payments, which can prevent your company from capturing early payment discounts and even incur penalties.
Prone to Errors
Mistakes can inevitably slip through when performing a 3-way match manually.
Someone from accounts payable may misinterpret values when comparing line items and move it to the next step in the approval process. Invoices can also get lost or misplaced. Fixing these errors (if someone catches them) will only cost your company more time and money.
These are just a few of the drawbacks of manually performing a 3-way match — all of which ultimately affect your bottom line. So how can you streamline these steps and make invoice approvals more efficient?
Automating the 3-Way Matching Process
While the 3-way matching process can reduce fraud and highlight discrepancies, performing the steps manually is inefficient and prone to errors. It also takes your AP team away from more productive work like sourcing new vendors and following up with existing ones.
Here’s how accounting automation software like DocuPhase can benefit your company.
Eliminate Data Entry
When your company receives an invoice, your AP team will need to enter the data into your ERP or accounting system. However, manual data entry is tedious and prone to errors.
DocuPhase utilizes advanced optical character recognition (OCR) technology that digitally captures data from your invoices in seconds. It uses machine learning and artificial intelligence, so it gets better the more you use it.
Speed Up Invoice Approvals
Are you tired of chasing down signatures?
With DocuPhase, you can build custom workflows that automatically route invoices to the right approvers. That means no more misplaced or lost invoices.
You can also add dynamic routing to your workflows with business rules based on values or whatever makes sense for your company.
Perform 3-Way Matching Automatically
Gathering the required documents and manually checking invoices against them just isn’t practical in the long run. Nor is it scalable.
DocuPhase can help your team save hundreds or even thousands of hours. Once the system captures an invoice, it performs a 3-way match automatically and flags any discrepancies for further review.
Sync With Your ERP
DocuPhase integrates with popular ERP systems like NetSuite, Business Central, Sage, and more, so your data is always up to date. Plus, your team won’t have to constantly switch between different apps.
If your company ever faces an audit, you’ll need to prepare your financial records. However, this isn’t easy if you’re manually processing your invoices.
DocuPhase automatically keeps detailed audit trails for all transactions, making audits faster and easier. What’s more, you can also grant limited access to auditors instead of giving them access to your entire ERP system.
Schedule B2B Payments
Finally, DocuPhase offers a modern payment automation solution that lets you accept and make a range of payment types. Your team can easily monitor cash flow from one platform. This is useful for tracking where your company is spending money.
Automate the 3-Way Match
Performing 3-way matches can safeguard your accounts payable processes and protect your company from fraud. However, performing these checks manually is a time-consuming and labor-intensive process. It’s also more susceptible to errors.
When you’re processing invoices on a large scale, relying on manual methods can slow down the entire invoice approval process. This can mean losing out on early payment discounts and even incurring late fees due to delayed payments.
Turning to automation can help.
With DocuPhase, you can enable automatic 3-way matching and free your accounts payable team for more valuable work. You can also use the platform to streamline your entire pay-to-procure process and go completely paperless.