What is 3-Way Matching?

3-Way Matching – A Simple Guide

3-way matching is a process in which purchase orders are matched with goods received notes and the invoice sent by the supplier. The purpose of 3-way matching is to mitigate the potential for fraud, maintain accurate reports, and introduce efficiencies in the invoice approval process.

3-way matching is carried out before payments are made to suppliers. It is a system for vetting invoices to reduce any instances of invoice fraud. When a purchase order is made, it is not immediately approved. Instead, companies that use 3-way matching first match it to a goods received note.

This indicates that goods were received by the business and an invoice was sent by the supplier. The amounts are tallied to determine whether the invoice should be cleared in its entirety, or if a partial payment must be made.

Why is 3-Way Matching Important? 

The purpose of 3-way matching is to check relevant documents and compare with the invoice to determine whether:

Think of it as an internal control designed to mitigate the risk of invoice fraud by relying on cross-verification of 3 main components:

1. The purchase order (PO)

2. The suppliers invoice

3. The goods received note (GRN)

Let’s look at each in more detail.

1. The Purchase Order (PO)

The purchase order is simply a request made by an individual, or a department of an organization, highlighting their requirements, the quantity, and the details of what they need and why. The procurement department  verifies the purchase order and sends it to the supplier. They detail their requirements, the quantity and quality of goods required, and the amount they intend to pay for it. 

2. Supplier’s Invoice

The supplier’s invoice details the goods and services supplied, the quantity, and the date of delivery. The supplier’s invoice is usually generated when goods are dispatched from the supplier, and it’s simply a request by the supplier to receive payment for their services.

3. The Goods Received Note (GRN)

The Goods Received Note is issued by the warehouse manager or receiving officer. It indicates that the goods sent by the supplier have been received by the officer, and includes the delivery condition, the quantity of goods received, the date, and other relevant details. 

The Goods Received Note is then submitted to the accounts department for cross-verification and recording. These three documents allow executives in the AP department to verify each invoice before payment is issued. 

Benefits of 3-Way Matching

3-way matching is integrated in modern AP automation tools, and ERP integrations are also available.

Some of the major benefits that it offers are:

1. Reduced Fraud Risk 

By cross-checking POs with GRNs and supplier invoices, accounts payable staff can immediately identify whether the invoice accurately represents the goods or services delivered. This drastically reduces the potential for approving fraudulent invoices. 

2. Improved Profitability

3-way matching helps businesses cut down on unnecessary manual non-value touchpoints, which helps businesses cut down on overtime pay, and negate the need to increase headcount or hire temporary resources. 

3. Increased Employee Satisfaction

3-way matching frees AP teams from menial tasks and allows them to focus more on important things, ultimately improving employee satisfaction. Manual 3-way matching is often time-consuming and repetitive, putting a significant burden on AP teams. This could increase the risk of losing talented staff to competitors that invest in AP automation tools. 

4. Maintain an Audit Trail

3-way matching allows businesses to maintain an accurate audit trail. They are able to maintain a verifiable record of all supplies, invoices, and goods received, so they can easily understand their relationship with a particular supplier. This also protects organizations in case of litigation. 

Similarly, when faced with an audit, the organization will have a full paper trail for verifying all legitimate expenses made by the company. 

Improve Your AP Department’s Performance

Advanced automation tools like SofCo’s AP automation software allow businesses to mitigate the potential for human error and reduce invoice fraud. 3-way matching is built into the software, automatically recording all vendor data. It also integrates directly with ERPs, allowing decision makers to get real-time data and make informed decisions.