Accounts payable is the basis of financial operations in any organization. Ensuring your company only pays for what is legitimately received is a necessity. In an era where businesses handle hundreds or even thousands of transactions monthly, how can they protect themselves from overpayments, fraud, and costly mistakes?
That’s where 3-way matching comes in — a powerful process used by procurement and AP teams to ensure that payments are only made for the goods and services that match what was ordered and delivered. However, the traditional manual approach is riddled with inefficiencies and risks.
In this article, we’ll dive deep into what 3-way matching is, why it matters, and how automation revolutionizes this process, helping businesses safeguard their bottom line.
What Is 3-Way Matching?
Three-way matching is an accounting control measure used in accounts payable to verify and authorize payments. The process gets its name from the three documents it involves:
- The purchase order (PO) outlines what the company has ordered from a supplier.
- The goods receipt (or delivery note) confirms that the ordered items have been delivered.
- The invoice, or the supplier’s bill, requests payment for the delivered items.
The purpose of this matching process is to confirm that all three documents align. For example, if your company ordered 100 units of a product at $50 per unit (as per the PO), the delivery note should confirm that 100 units were received, and the invoice should reflect a charge of $5,000 (plus any applicable taxes or fees). Any discrepancy between these documents — an incorrect quantity, wrong price, or missing information — flags a potential problem that must be resolved before the payment is approved.
This control mechanism is particularly critical in industries with high transaction volumes, such as manufacturing, retail, and healthcare, where even small errors might add significant financial losses.
How 3-Way Matching Works: Key Components & Steps
Understanding the technical workflow of 3-way matching helps to appreciate its importance in preventing costly errors. Let’s break down the process step by step:
- Purchase Order Creation: The procurement team initiates the process by issuing a purchase order. This document specifies the items/services required, quantities, agreed-upon pricing, delivery terms, and more. The purchase order serves as the foundation for the entire transaction, clearly defining what the buyer expects from the supplier.
- Goods Receipt (Delivery Note): Once the goods are delivered or services are performed, the receiving department generates a delivery note. This document verifies what has been physically received and compares it with the PO. Any inconsistencies, such as partial deliveries or damaged goods, are flagged at this point.
- Supplier Invoice: The supplier submits an invoice requesting payment for the items. The accounts payable team compares this invoice against the PO and the goods receipt note.
If all three documents match, payment is approved. However, if discrepancies arise, such as pricing mismatches or incorrect quantities, further investigation is required before processing the payment.
The Importance of 3-Way Matching
The value of a solid 3-way matching process cannot be overstated, especially for companies handling lots of financial transactions. Let’s explore its key benefits:
Verifies Orders and Prevents Overpayments
A key objective of 3-way matching is to verify that the goods or services billed by the supplier have been delivered as per the original agreement. Without this system, companies risk overpaying for products they didn’t receive, for quantities higher than what was delivered, or at prices that weren’t agreed upon.
Increases Control and Financial Visibility
One of the most valuable aspects of 3-way matching is the control it provides over the payment process. By implementing stringent matching, companies gain transparency into their procurement and financial workflows, which is critical for both internal audits and external reporting.
Protects Against Fraud
Fraudulent billing is a serious concern for any business. A study by ACFE (Association of Certified Fraud Examiners) claims that organizations lose around 5% of their revenue to fraud each year.
Three-way matching significantly reduces this risk by ensuring that every invoice is matched against a corresponding PO and delivery receipt before payment is authorized. This triple-check system makes it much harder for fraudulent invoices to slip through.
Prevents Payment Mistakes
Human error is an inevitable risk in manual processes, and accounts payable is no exception. Even something as simple as misplacing a document can lead to missed or duplicate payments. By employing a thorough 3-way matching system, companies drastically reduce the chances of making costly mistakes, protecting their cash flow and supplier relationships.
Drawbacks of the Manual Matching Process
While 3-way matching is undeniably beneficial, companies still face challenges when executing this process manually.
Time-Consuming and Resource-Intensive
One of the biggest drawbacks of manual 3-way matching is how time-consuming it can be, especially for companies dealing with high transactional volumes. Matching hundreds of invoices, purchase orders, and delivery notes by hand can take days. The more time it takes to process payments, the more strained the AP department becomes, and the more resources are consumed.
Prone to Human Error
Manual data entry is tedious and prone to mistakes. Incorrect total dues or a misfiled delivery note lead to invoice exceptions, disrupting cash flow. The research by Ardent Partners shows that the average invoice exception rate is 20,7%. The larger the company, the higher the likelihood of such errors, as documents pile up.
Risk of Late Payments and Supplier Strain
When accounts payable managers are overwhelmed with manual matching tasks, payments can get delayed. Late payments bring the risk of losing early payment discounts, incurring late fees, or even straining their working relationships with key vendors.
Advantages of Three-Way Matching Automation
The manual process of 3-way matching is often inefficient and unsustainable in a fast-moving business environment. According to the Ardent Partners study, addressing the biggest hurdles in the accounts payable function "requires a proactive approach that leverages technology, process streamlining, and cross-functional collaboration".
Now let's explore the significant benefits businesses achieve by using specialized tools for order, delivery, and invoice matching.
1. Speed and Operational Efficiency
Automating 3-way matching eliminates the need for manual document comparison. Instead of days spent combing through the POs, goods receipts, and bills, specialized software enables processing in minutes. This improves overall operational efficiency and enables faster payment approvals. On average, small and medium-sized companies implementing AP automation reduce invoice processing times by 70-80%.
2. Enhances Accuracy
Automation minimizes the chances of human error by relying on software to handle the matching process. Intelligent systems cross-check documents, flag discrepancies, and ensure that only accurate invoices are paid. This reduces the payment risks and eliminates the need for rework, saving valuable time and resources.
3. Lower Processing Costs
The cost of manually processing a supplier's invoice is significantly higher than when using automation. Research from the Institute of Finance & Management (IOFM) suggests that businesses typically spend $10-$15 per invoice in manual environments. In contrast, companies having procurement or accounts payable systems in place, report processing costs of less than $3 per invoice. The cost savings alone make automation an attractive solution for growing businesses.
4. Enhanced Reporting and Compliance
Automated systems provide detailed, real-time reports that allow businesses to track payment progress, monitor compliance, and identify bottlenecks. This is particularly helpful during audits, ensuring that every transaction is fully documented, with a clear trail from PO to payment.
How Team Procure Simplifies 3-Way Matching
Team Procure is a procurement platform designed to automate the entire procurement cycle, source reliable suppliers, and take full control of organizational spending.
With Team Procure, verifying purchase orders against goods receipts and invoices becomes seamless, thanks to its built-in verification mechanisms and real-time status updates. It takes a once cumbersome process and makes it efficient and error-proof.
Visual Indicators for Each Step
Our purchase order module makes the 3-way matching process simple and intuitive, providing full transparency into every transaction.
Each PO within the system is a dynamic interface, tracking the status of the ordered, received, and invoiced items in real-time. The statuses of line items are tracked in two distinct columns: Received and Billed. These columns provide instant updates on whether the items have been received or invoiced.
Color Coding for Quick Verification
#1 Red (Pending): When a purchase order is created but none of the items have been received or invoiced, the system marks them with a red status. This visual cue alerts the team that further action is needed to move the process forward.
#2 Yellow (Partial): When part of the order has been received or billed, the system updates the respective columns to yellow. This flag notifies users that the transaction is still in progress and the full quantity hasn’t been delivered/invoiced yet.
#3 Green (Complete): Once all items have been received and invoiced in full, the Delivered column updates with the received quantity. If the received quantity matches or exceeds the ordered amount, the column turns green, indicating that the necessary quantities have been fulfilled. Similarly, the Billed column turns green once the full quantity is billed, signaling that the transaction is complete.
This dynamic nature reduces the need for manual checks and provides instant visibility into the status of every transaction.
General Statuses for Purchase Orders
Team Procure offers general statuses for each purchase order, ensuring that the overall progress is visible at any moment:
- Open Status: When the purchase order is in process and items are pending receipt or invoicing, the PO remains open.
- Closed Status: Once all items are fully received, the system automatically closes the PO, indicating completion of the delivery process.
- Paid vs. Unpaid Status: In addition to delivery tracking, Team Procure monitors the payment status of each purchase order. When all items are invoiced and paid, the system marks the PO as paid. If any payments remain outstanding, the PO stays flagged as unpaid, allowing AP teams to focus on what needs to be processed.
This status tracking system allows procurement managers and accounts payable departments to collaborate and verify which orders are still in progress, have been paid, and which require immediate attention.
Customizable Overview of All Purchase Orders
Team Procure provides a customizable dashboard for order tracking, allowing users to tailor the display to show specific data such as statuses, vendors, total paid, and more.
Having a 360 view over all POs improves oversight and helps manage large volumes of transactions without losing sight of critical details. The ability to filter and sort data based on real-time statuses ensures that procurement teams are never left guessing about the current state of any purchase order.
Real-Time Updates at Line-Item Levels
One of the standout features of Team Procure is its ability to track items at the line-item level. Instead of waiting until an entire order is fulfilled, Team Procure provides instant updates on individual items within a PO.
For instance, if an order of 100 units is received in two batches of 50, the system automatically reflects this update, turning the corresponding columns yellow until the full quantity is delivered and billed. This granular level of tracking ensures that no detail is overlooked, and any outstanding actions are immediately clear.
Furthermore, the platform will automatically prepopulate bills for unreceived quantities (if needed), reducing manual input and error potential.
Ensuring Accuracy and Reducing Errors
With these built-in features, Team Procure improves the accuracy of 3-way matching in accounts payable. It helps procurement teams:
- Identify discrepancies between what was ordered, what was received, and what was billed.
- Follow up with vendors on missing or incorrect shipments/invoices.
- Avoid overpayments and delays by ensuring all item quantities match before invoices are approved for payment.
Team Procure's automation eliminates possible errors, significantly reduces the manual workload for accounts payable and procurement teams, and enhances operational efficiency.
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Conclusion
A strong 3-way matching process is essential for businesses looking to safeguard their payments and improve financial health. When companies verify orders, delivery notes, and invoices, they only pay for the items they receive. However, manual 3-way matching is time-consuming and can strain resources.
Automation tackles these challenges, enabling faster, more accurate processing and providing higher control over financial workflows. Team Procure simplifies the 3-way matching process by offering complete visibility and intuitive, color-coded status indicators at every step. Whether an item is fully or partially received or billed, Team Procure’s dynamic interface ensures nothing is overlooked. Features like line-item tracking, visual cues, and customizable overview enable purchasing departments to make informed decisions, while payment and invoice tracking helps AP teams avoid delays and errors.
Ready to transform your 3-way matching process? Book a demo today to discover how our platform can help your business seamlessly sync procurement operations with payments.
