Three-way match accounting: mastering the invoicing process
As businesses expand their operations over time, they also need to upgrade their processes for scalable growth. Every aspect and expense of running a business - from hiring and training to purchasing and legal compliance - can heavily influence the financial standing of the company.
Effective and efficient finance teams are a critical component to business growth, and accounts payable departments often have to handle some of the most tedious yet sensitive processes in the company.
Three-way matching is a classic method accounting teams use to reduce financial losses by creating a more secure invoice payment process. This work can be done manually, which is often a tedious and laborious process, or streamlined using automation software.
In this article, we’ll break down three-way matching: what it is, how it works, and why automating this process brings major benefits for finance teams and their companies.
What is three-way match accounting?
When the accounts payable process is handled manually, it's notorious for taking up an inordinate amount of time. It almost always leads to human error and wasted effort, with multiple parties involved.
According to the London accountants at Accounts & Legal, maintaining traditional or outdated accounting systems in a growing company exponentially increases the risk of invoice fraud, delays and duplicate payments, cash flow problems, and strained relationships with vendors and employees.
Maintaining traditional or outdated accounting systems in a growing company exponentially increases the risk of invoice fraud, delays and duplicate payments, cash flow problems, and strained relationships with vendors and employees.
Three-way matching addresses many of these issues by matching invoices to supporting documentation (namely an existing purchase order and the receiving report), before issuing payment. It's the best way to ensure an invoice is valid.
In theory, this system prevents accounting teams from erroneously paying fraudulent or incorrect invoices, and improves internal accountability, organization, and visibility.
Like its name hints, a three-way match involves three different documents. They are separate - provided by either the buyer or seller - but the contents of each should be complementary, based on prior agreements made between both parties. These three documents are:
Purchase order (PO): a request sent from the buyer to the seller. It details what's expected to be delivered, along with details like purchase order number, quantity, and pricing.
Supplier invoice: sent by the seller to the buyer. It’s a detailed list of goods or services delivered by the vendor. It always includes an invoice number and the outstanding sum to be paid by the buyer, usually with an invoice date or payment deadline.
Receiving report: signed by the buyer after delivery to confirm the list of goods/services were delivered and well received. Copies of this document are often sent to different associated teams internally, as well as directly back to the supplier to confirm receipt.
How three-way matching works
A typical transaction between buyer and supplier plays out along these lines:
An employee needs to purchase something to be able to perform a specific task or execute their job. They create a purchase order for internal approval.
After prospecting, the employee chooses the best vendor for the project at hand.
A budget manager approves the purchase order request from the employee.
The purchase order is sent to the chosen supplier.
The supplier delivers the goods or services ordered. The buyer receives them and fills out a receiving report.
The vendor sends a supplier invoice to the buyer. The AP and accounting teams analyze and process the invoice by matching it to the corresponding documentation.
After the supplier invoice is verified and approved, payment is authorized to the vendor.
The invoice and purchase order are stored away for future reference and audits.
The three-way match comes into play when the buyer receives the supplier invoice. As the accounting team is processing the invoice, they will check it against both the purchase order (what was originally requested by the employee and approved by their manager) and the receiving report (which lists what was actually delivered).
The products, quantities, prices, and terms on all these documents should all line up and tell the same story. Any discrepancies across these three documents would need to be investigated and resolved before the invoice can be paid.
When three-way matching is performed manually, chasing down each document from different team members and cross-referencing each detail can take enormous amounts of time. But the process doesn't need to be labor-intensive to produce highly accurate results. That’s where invoice automation comes in.
Key benefits of three-way match automation
As companies work with more suppliers, the increase in transactions and documentation can bring about higher risk of mishandling or accounting errors.
Like with most other accounting processes, automating three-way matching saves time and money, while increasing accuracy. Automation software and spend management solutions can help companies streamline complex workflows within the finance team and beyond.
If an accounting team using three-way match automation is unsure of whether an invoice is legitimate, they can immediately access the original purchase order, the recent receiving report, and related details digitally. Cross-referencing all three documents and their contents suddenly becomes an easier task that doesn’t take days to follow through to the end.
Here are several concrete benefits that businesses experience when automating their three-way match process:
Centralized platform = single source of truth. Flexible accessibility from anywhere, anytime. Different teams use the same easy tool to perform their responsibility in the AP process. From team members to executives, every single role that needs to be involved in the purchasing process has automatic access to essential data and documentation.
Streamlined workflows. Purchasing and invoice approvals are done faster, with significantly less risk of errors. Purchase orders, vendor invoices, and delivery status are all automatically tracked in real-time – eliminating long email chains when documents are submitted internally and between buyer and seller.
Better business relationships. Buyer and seller are happiest when both parties feel mutually trusted and respected–not constantly following up on the status of late invoice payments. Automation ensures all steps are completed and required documents are promptly filled out and returned, before making payments on time.
No stress auditing. Auditing is no fun for any business, but automating the three-way match process will make life significantly easier when it comes around. Some of the biggest culprits–financial discrepancies and missing data–are essentially eliminated when you have an automated system that logs every step meticulously, without error. With a digitized paper trail, finance teams have every document and receipt on file, immediately accessible when needed.
Automate your three-way match process
The traditional three-way match is a tried-and-true, yet often arduous, method for accounts payable to reduce the risk of fraud from unauthorized payments. Automating this process lets finance teams quickly and accurately identify and flag suspicious transactions, as well as process and approve authorized payments–all in a fraction of the time it would take manually.
As finance teams reduce redundancies and inefficiencies in their day-to-day responsibilities, all employees involved are able to redirect their resources to more productive and strategic work in the company.
Centralizing your company’s spend management into one platform not only guarantees a more secure payment process, it helps streamline your entire invoice management and accounting system.
Ready to gain greater control and visibility over your company’s finances? We’re here to help you get started.