What is 3-way matching in Accounts Payable? Cut errors, boost efficiency

Are you struggling with missing invoices, discrepancies handling, and mismatched data? 

In the world of finance, precision is an absolute necessity, and a lack of it can be costly. One potential vulnerability lies in traditional invoice processing, which is prone to error. A game-changing capability to counter this threat within Accounts Payable (AP) is “3-way matching”, the subject of our blog.  

What is 3-way matching in Accounts Payable, and how is it transformative? And what problems are likely to arise if you don’t adopt this key tool to optimize your AP processes? 

Our answers to these questions should make clear that 3-way matching is indispensable to the accurate and secure running of your AP operations. This is why we give you actionable insight into how you can implement a robust 3-way matching process in invoice handling processes, making them seamless, accurate, and secure.

What is 3-way matching and why is it so important?

As the name suggests, 3-way matching in Accounts payable is a financial operation that looks for consistency across three pillar components of the invoice handling process. These are: 

• The Purchase Order (PO): This document initiates the entire process. It is issued by the buyer to the supplier, specifying the goods or services ordered. The PO includes details such as the description of the items ordered or services requested, quantities, prices, and others. 

• The Goods Receipt Note (GRN): This document confirms the physical arrival of the ordered goods or completion of the services. It is created upon delivery of the order, or completion of the service(s), and verifies if these align in every particular with what was specified in the PO. The date of delivery is also part of a GRN. 

• The invoice: This document is issued by the supplier and sent to the buyer, requesting payment for the delivered goods or services. It should include information on the products or services such as quantity or price, taxes and discounts, supplier and buyer information, and Purchase Order number.

Now that we have defined the three components, we can describe what 3-way matching in Accounts payable is

It is a financial process that consists of comparing these documents, line by line, to ensure every detail aligns before approving the invoice for payment. It verifies that the goods or services outlined on the invoice correspond with what has been requested on the PO and that the GRN confirms the complete and accurate delivery of the goods/ services for which you are being charged. 3-way matching also ensures that the prices, discounts, and taxes on the invoice accord with what you and the vendor have agreed. After the invoice is matched, it is routed for approval or exception handling if necessary. A 3-way matching process contributes to maintaining adequate records for the audit trail. 

If there are any discrepancies between the three documents, the company must investigate this before paying the invoice. Some common discrepancies that can occur in 3-way matching include: 

• Quantity: The quantity of goods received does not match the quantity ordered. 

• Price: The price of the goods charged does not match the agreed price. 

• Description: The description of the goods received does not match the description on the purchase order or invoice.

If a discrepancy is found, the company must investigate it to determine the cause and then activate the necessary steps to resolve it. The person responsible may need to reach out to the supplier if the price on the invoice is wrong or contact internal stakeholders if the price listed in the ERP master data is no longer current.  In some cases, the supplier may need to issue a credit note to adjust the amount of the invoice. To help your AP team handle discrepancies efficiently you can leverage AP Automation software. For example, Cevinio provides solutions to streamline different business processes via workflows.

How 3-way matching in Accounts Payable ensures accuracy and accountability

3-way matching in AP processes is highly effective because it probes for errors in a number of ways:  

• Verification across multiple documents. By comparing three independent documents (PO, GRN, invoice), it eliminates reliance on any single source of information. This cross-checks details such as quantity, price, and product description, catching discrepancies that might not be evident in just one document.

• Detection of missing invoices. Checking and analyzing the GRIR (Goods Received-Invoice Received) balance in the ERP system enables you to spot that there are GRNs created in the ERP system for Purchase Orders for which the corresponding Invoices Reference Numbers (IRNs) have not been posted. This tells you that invoices are missing for goods or services that have already been supplied. The reasons why this might happen could be delayed invoicing from the supplier, lost or misplaced invoices, or human error.

• Reduction of human error. Manual data entry and verification are notoriously prone to mistakes. 3-way matching might involve automation or semi-automation, minimizing human involvement and reducing the risk of errors creeping in. Mismatched data can lead to overpayments, duplicate payments, or missed early payment discounts.

• Early detection of fraud. Inconsistencies between documents can be red flags for fraudulent activity. Matching helps identify invoices with inflated prices, unauthorized purchases, or duplicate payments, allowing for timely intervention and investigation. Fake or inflated invoices can slip through unnoticed without this verification step.

• Improve compliance by enforcing a no-PO no-PAY policy. 3-way matching becomes an integral part of compliance checks by ensuring payment is withheld for unapproved purchases. The absence of a PO in the match highlights a potential violation of your no-PO no-PAY policy, requiring investigation and approval before payment. When relying on AP tools solutions for invoice matching, you can streamline not only the process by also the issue resolution. Cevinio technology contributes to a highly efficient AP process with its business process workflows which also cover the handling of this scenario. Our solution would automatically alert the person in charge of creating that particular Purchase Order, so that a PO may now be created, and the invoice continue the approval process.

• Improved internal controls. 3-way matching serves as an effective internal control mechanism. It demonstrates a commitment to financial transparency and adherence to proper purchasing and payment procedures. By strengthening your financial controls you demonstrate sound accounting practices.

• Transparent ownership. Each document in the matching process has a specific owner, creating a clear chain of accountability. This guarantees that all stakeholders adhere to their roles and duties, fostering a culture of responsible spending and financial management.

• Strengthened supplier relationships. By ensuring accurate and timely payments based on verified information, 3-way matching enhances trust and transparency with suppliers. This can lead to improved negotiations and potentially better pricing and service terms. AP Automation tools such as Cevinio’s can help you go a step further by providing tools for PO-flip, automatic rejection reasons, and a supplier portal.
• Enhanced data quality. Regular matching helps identify and rectify inconsistent or outdated data across different systems, leading to cleaner and more accurate financial records. This benefits future transactions and analysis while simplifying the accounting and compliance processes. As a data-driven solution, Cevinio encourages and supports the maintenance of correct master data by enabling the solution to connect easily with ERP systems.

Overall, the 3-way matching AP process serves as a multi-layered safeguard for accuracy and accountability in financial transactions. Its impact goes beyond simply preventing errors and fraud; it contributes to building a more efficient, transparent, and responsible financial ecosystem within your organization.

Recap: How Cevinio automates 3-way matching

Cevinio’s AI-powered AP Invoice Automation software simplifies the 3-way matching process by:

• Automatically extracting data from invoices using advanced OCR

• Validating invoice info against ERP master data, POs, and GRNs

• Flagging mismatches for exception handling and routing them to the right person

• Seamlessly supporting multi-ERP systems and multiple invoice formats (PDF, XML, e-invoice portals)

This enables touchless invoice processing, reduces cycle times, and empowers finance teams to shift from manual work to driving cost savings, compliance, and business insights.

Mastering 3-way matching in accounts payable

In conclusion, 3-way matching is a crucial process for ensuring accuracy, accountability, and efficiency in Accounts Payable operations. By cross-verifying purchase orders, goods receipts, and invoices, organizations can prevent costly errors, detect fraud, and enhance their financial controls. This method not only safeguards your company’s finances but also strengthens supplier relationships and internal transparency.

If you’re looking to learn more about the challenges that might arise when implementing 3-way matching and the solutions to overcome them, explore our blog where we dive deeper into these complexities and provide actionable insights.

Want to take your AP operations to the next level with seamless 3-way matching solutions? Contact our sales team today to explore how we can help optimize your financial processes!