Finance glossary

What is three-way matching?

Bristol James
6 Min

Efficient invoice management is essential for businesses to keep accurate financial records, prevent fraud, and control costs, and the three-way matching process plays a vital role in achieving these goals. It provides a systematic framework to verify and approve payments that enhances overall financial integrity and efficiency.

In essence, three-way matching is an accounting process used to verify the accuracy of transactions by comparing three key documents: the purchase order, the receiving report, and the supplier’s invoice. This comparison ensures that a company only pays for goods and services that were properly ordered and received.

Understanding the Three-Way Matching Process

Three-way matching is a fundamental accounting process that involves comparing three primary documents to ensure the accuracy and legitimacy of a transaction:

  1. Purchase order (PO). The purchase order is a document issued by the buyer to the supplier, detailing the items or services requested, quantities, agreed-upon prices, and delivery dates. It serves as the initial agreement between the buyer and the supplier.
  2. Receiving report (Receipt). The buyer’s receiving department creates the receiving report when the goods or services are delivered. This document confirms that the items listed in the purchase order were received in the correct quantities and conditions.
  3. Supplier’s invoice. The supplier’s invoice is a bill sent by the supplier to the buyer, requesting payment for the goods or services provided. It includes details such as the items supplied, quantities, prices, and payment terms.

The process begins when the buyer issues a purchase order to the supplier, specifying what the buyer wants to purchase, including detailed descriptions, quantities, prices, and delivery terms. When the goods or services are delivered, the receiving department inspects the delivery to ensure it matches the purchase order. Then, it creates a receiving report that documents the items received, their condition, and any discrepancies from the purchase order.

The supplier sends an invoice to the buyer, detailing the goods or services provided and the amount due. The invoice references the purchase order number and outlines the payment terms. 

Then, the accounts payable department performs the three-way match by comparing the purchase order, receiving report, and supplier’s invoice. This involves invoice verification, making sure the quantities and prices on the invoice match those on the purchase order and that the items listed in the receiving report correspond to those in the purchase order and invoice.

If any discrepancies are found during the comparison, the accounts payable team must resolve them before processing the payment. This may involve getting in touch with the supplier to address incorrect quantities, pricing errors, or damaged goods. Once the three-way match is successfully completed, and any discrepancies are resolved, the invoice is approved for payment.

Benefits of Implementing Three-Way Matching

Three-way matching offers key benefits that can significantly boost an organization’s financial management and operational efficiency:

  • Accuracy in invoice processing. Three-way matching ensures that only accurate and legitimate transactions are processed. By cross-referencing the purchase order, receiving report, and supplier’s invoice, the process verifies that the details match across all three documents. This helps reduce errors by automatically matching quantities, prices, and item descriptions, minimizing manual errors in invoice processing.
  • Prevention of errors and fraud. Three-way matching acts as a safeguard against fraudulent activities and discrepancies. The system detects discrepancies by identifying and flagging issues such as overbilling, incorrect quantities, or unauthorized purchases. It also prevents fraudulent payments by verifying that all transactions are legitimate, reducing the risk of paying for goods or services that were not ordered or received.
  • Cost savings and improved cash flow. Three-way matching helps avoid overpayments by ensuring that payments are made only for the correct amounts, saving money. Also, accurate and timely payment processing can help businesses negotiate better payment terms and discounts with suppliers. By streamlining the invoice approval process, three-way matching optimizes cash flow, ensuring that funds are available when needed for other operational expenses. It also reduces administrative costs by minimizing the time and resources spent on resolving discrepancies and handling payment disputes.

Implementing three-way matching can make the invoice processing system more accurate, secure, and cost-effective. It not only enhances the financial health of an organization but also strengthens its relationships with suppliers through timely and accurate payments.

Steps to Mastering the Three-Way Matching Process

Mastering the three-way matching process is essential for maintaining efficient and accurate invoice management. Here are the critical steps to ensure a smooth and effective three-way matching system:

  • Establish clear policies and procedures

For a successful three-way matching process, you need well-defined policies and procedures. Start by outlining the specific steps involved in the three-way matching process, including the creation and approval of purchase orders, the receipt of goods or services, and the invoice verification process. Clearly define roles and responsibilities to ensure that every team member understands their part in the process.

  • Automate the process with technology

Using technology can significantly improve the efficiency and accuracy of three-way matching. Automation tools can streamline the comparison of purchase orders, receiving reports, and invoices, reducing the likelihood of manual errors and speeding up the approval process. 

Eftsure, for example, offers comprehensive payment fraud protection and automated matching capabilities. By integrating Eftsure or similar solutions into your accounting system, you can ensure that all documents are accurately matched and verified, reducing the risk of discrepancies, fraudulent activities and human error.

  • Train employees on the process

For the three-way matching process to be effective, employees must be thoroughly trained on its importance and execution. Conduct regular training sessions to familiarize your team with the established policies and procedures. Ensure they understand how to use any automation tools and the importance of accurate data entry. 

  • Regularly review and update procedures

The business environment and technology landscape are constantly evolving, so it’s crucial to regularly review and update your three-way matching procedures. Periodically assess the effectiveness of your current system and identify areas for improvement. Stay informed about new technologies and best practices that can further streamline the process.

These steps can help organizations master the three-way matching process, ensuring accurate and efficient invoice management. Clear policies, automation, employee training, and regular reviews are key components that contribute to a successful implementation, ultimately enhancing financial control and operational efficiency.

Best Practices for Efficient Invoice Management

Efficient invoice management is key for organizations to ensure financial accuracy and operational efficiency. Here are some best practices to help improve your invoice management process:

  1. Streamline the approval process. One of the most effective ways to enhance invoice management is by streamlining the approval process. This involves creating a clear workflow to review and approve invoices promptly. Implementing an automated system can significantly reduce the time spent on manual approvals and minimize the risk of errors. Additionally, setting approval thresholds can help prioritize high-value invoices, speeding up the payment process for critical transactions.
  1. Set up alerts and notifications for discrepancies. To maintain accuracy in invoice management, it’s essential to set up alerts and notifications for any discrepancies that arise during the matching process. Automated systems can flag mismatches between invoices, purchase orders, and receiving reports, allowing for quick resolution. This proactive approach ensures that discrepancies are identified and corrected before they escalate into more significant problems.
  1. Regularly reconcile invoices with purchase orders and receipts. Regular reconciliation of invoices with purchase orders and receipts is a fundamental practice for accurate invoice management. This involves routinely comparing invoices against corresponding purchase orders and receiving reports to ensure that all details match. Regular reconciliation helps identify and rectify discrepancies early, maintaining the integrity of your financial records. Establish a schedule for these reconciliations, whether weekly, bi-weekly, or monthly, to keep the process consistent and thorough.

Implementing these best practices for efficient invoice management can greatly benefit your organization. Streamlined approval processes reduce the time and effort required for manual tasks, allowing your team to focus on more strategic activities. Automation and real-time alerts minimize errors and discrepancies, enhancing financial accuracy and reducing the risk of fraud. Regular reconciliation ensures that your financial records are up-to-date and accurate, providing a clear picture of your company’s financial health.

Efficient invoice management also improves cash flow management, as invoices are processed and paid on time, avoiding late fees and taking advantage of early payment discounts. This results in cost savings and better financial planning. Furthermore, maintaining accurate and timely records strengthens relationships with vendors and suppliers, as they can trust that payments will be made reliably and promptly.

Summary

Efficient invoice management contributes to a more organized, transparent, and financially stable organization, and mastering the three-way matching process is key to achieve that. With three-way matching, businesses can ensure that only legitimate transactions are processed by comparing the purchase order, receiving report, and supplier’s invoice.

Other best practices for efficient invoice mastering include streamlining the approval process, setting up alerts for discrepancies, and regularly reconciling invoices with purchase orders and receipts. Along with three-way matching, these practices improve cash flow, reduce administrative costs, and strengthen vendor relationships.

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