Subscribe to our NewsletterSubscribe to our Newsletter

Hermes - AP Automation Streamlines Global Accounts Payable with International Update READ MORE

Upgrade your Accounts Payable Processes with Smart & Intelligent Automation  READ NOW

Blog - AI-enabled AP Automation boosts financial ratios for businesses.READ MORE

AI-enabled AP Automation boosts financial ratios for businesses. READ NOW

3-way matching in Accounts Payable Software

The Importance of 3-Way Matching In Accounts Payable

Mohan Krishna
Go-to expert on financial engineering, Compliance management, and financial solutions.
Inside the blog :

What is a three-way matching?

A 3-way matching is an internal control that allows AP departments to ensure that they are paying suppliers the proper amount for items received rather than underpaying or overpaying. They accomplish this by matching the Purchase Order, Receipt of Goods, and Invoice. When the quantities and line-item charges on these three papers match, payment will get disbursed with confidence.

When done correctly, three-way matching speeds the invoice approval workflow and payment process, reducing processing costs and time while allowing companies to gain early payment discounts and monies that go directly to your bottom line and enhance cash flow.

Advantages of using 3-way matching in Accounts Payable Software:

Avoid confusion: With three-way matching, you can maintain purchasing documents aligned and structured for recordkeeping or audit purposes and avoid documents falling through the gaps.

Ensure compliance: This process needs both the buyer and the supplier to follow procedures to ensure that the vendor has followed the purchase order requirements.

Minimize fraud: By denying payment for purchases that were not allowed or did not comply with vendor requirements, 3-way matching helps prevent or reduce fraud risk.

For example, if a forged invoice seeks payment for goods or services never requested, the system will immediately detect, and send an alert if the system cannot fetch the purchase order for that request.

What is the 3-way matching accounts payable process?

Three-way matching ensures that payment is complete and accurate by processing a vendor invoice three times. The purpose of three-way matching is to identify any inconsistencies in three critical documents in the purchasing process - purchase orders, order receipts/packing slips, and invoices - to prevent firms from overspending or paying for an item they did not receive.

Let us look at three essential documents for managing payments via accounts payable.

Purchase Order : The purchase order (PO) specifies the type of goods or items, the quantity desired, and the prices based on the terms the buyer and seller agreed on. This document will be assigned a specific PO number.

Invoice from the vendor: This document specifies the quantity and price of products or services for which the vendor or supplier requests payment. It is an official document based on the purchase order and includes a unique invoice number and a delivery date.

Notification of Receipt of goods: When the buyer receives the purchase, it is compared to the invoice and PO to ensure they agree. The buyer can then confirm that the transaction was received correctly (GRN) with the items received notice.

What Is the Process of a 3-way matching accounts payable process?

Even if you understand the above documents, it can be beneficial to walk through the process from beginning to end to appreciate how three-way matching benefits you as the buyer appropriately. The procedure is as follows:

• The purchase order is forwarded to the seller as soon as an order gets placed.

• Based on the PO, a vendor invoice will get generated.

• The invoice gets delivered to the buyer.

• The invoice information gets compared to the PO.

• The buyer receives the items.

• Goods received are confirmed with Goods Receivable Note (GRN) and forwarded to the AP team.

• Before issuing payment, AP compares all three papers (the PO, invoice, and GRN).

• The buyer receives what is known as a receiving report based on the GRN. It serves as proof of purchase and order fulfillment.

Once all of these procedures are complete, the order will get fulfilled. Goods get transferred to the respective businesses that requested those items. It is the most straightforward approach to checking the legitimacy of an invoice and verifying that only approved payments are issued. Accounts payable workers or the accounting department can quickly follow the above procedures each time an invoice from a supplier is received and needs to be matched to the GRN and order receipt if an efficient three-way matching process is in place.

What are the advantages of three-way matching automation?

Three-way matching is a good business practice but is time-consuming and labor-intensive. It's very challenging to go through mounds of papers to discover these three documents and add them after manual review. This manual process is not only inefficient but also prone to human error.

A 3-way matching accounts payable process identifies issues early on, preventing bottlenecks and slowing down the payment process. You will save money on processing and will also be able to spend more time on meaningful work.

According to Deloitte’s Global CPO survey, Chief Procurement Officers invest more in innovation and digital technology to transfer the focus of their teams to more strategic activities. Procurement teams should "make day-to-day execution ruthlessly efficient, lightning-quick, and transparent." In our humble opinion, automating the three-way matching process is a significant first step in making the procurement process more efficient.

Do you want to adopt an AP automated invoice processing solutions system that simplifies and optimizes your company's current process? Request a free demonstration today!

Hermes Account Payable Automation

Mohan Krishna

Go-to expert on financial engineering, Compliance management, and financial solutions.

Mr. Mohan is the Vice President of Finance at Calpion Inc. He brings over two decades of experience in financial solutions, compliance, taxation, and funding.

Read More

Switch to Hermes - AP Automation.
Get Your Customized Accounts Payable Invoice Automation Solution