When small businesses are starting out, essential processes and related workflows undergo a slow evolution. With a small workforce, most early efforts involve staff members handling paperwork and entering information manually. This slow pace often applies to processes such as three-way matching in accounts payable departments.
As the business grows, these processes develop quickly in scope and complexity—suddenly, the old ways of doing things might not be as effective as they were before. Understanding the manual invoice-matching procedures that your teams must execute and how they work is essential to identifying the best way to approach your company’s challenges.
What is three-way matching, why is it important and how can you set up your AP department for better results? In this quick look at the three-way matching process, we’ll cover topics that include:
- 3-Way Match Accounting
- Automating the 3-Way Match for Better AP
- What Is the Difference Between 2-, 3- and 4-Way Matching?
- The 3-Way Match Process in Kofax AP Automation Solutions
- The Final Word on Invoice Matching
3-Way Match Accounting
In brief, three-way match accounting is a way to handle payments promised to suppliers while protecting the business from the risk of spending (or losing) money unnecessarily. Proper matching builds confidence in the organization’s supply procedures while minimizing impacts on cashflow outside of the funds authorized for purchasing.
Three-way matching occurs when you receive an invoice for products purchased by the business. There are three components to consider:
- The original purchase order
- The receiving report generated by the warehousing or logistics team
- The invoice, as supplied by the vendor
Consider all the information that these documents share that must be 100% accurate:
- The purchase order contains the quantity of items requested by the business and the contractually agreed-upon price that the business will pay.
- The receiving report denotes the quantity (and sometimes quality) of the items delivered by the vendor.
- The invoice contains the quantity that the vendor claims to have sent and the costs that they say you owe.
Consider how easily one of these factors can become misaligned. Your business could receive only half of its intended order, or a quarter of the items could arrive damaged or the supplier’s price per unit on an invoice might not align with the original price that they quoted on the purchase order. Without double-checking that everything is in order, your business could over- or underpay or miss a payment deadline.
Three-way match accounting is the best way to mitigate those concerns. The process involves comparing all these documents for accuracy and consistency. AP only releases matched invoices for payment authorization and works on resolutions for any deviations.
Which department performs the 3-way match?
As a best practice, the accounts payable department is responsible for handling the three-way match process. In some businesses, purchasing and accounts payable are under one roof. However, because AP is often separated from the team responsible for raising purchase orders, these teams are in a position to coordinate between the areas of the business.
While the purchasing department creates and issues POs, the receiving department creates the reports regarding what physically arrives at the warehouse. Without systems sharing data appropriately, departments may silo their efforts with poor communication that hinders operations.
Which document typically triggers the 3-way match?
How does an AP team know that it’s time to start the three-way invoice matching process? Usually, it is the receipt of the supplier’s or the service vendor’s invoice that triggers the matching process, either through manual workflows or automated three-way matching software. An AP team will need to retrieve the purchase order and receiving report and cross-check the quantities, price and other information across all three documents.
Automating the 3-Way Match for Better AP
The three-way matching process is critical for keeping a business’s finances healthy. That fact is true not only because it ensures a consistent supply of vital goods and services that meet the company’s needs but also because it protects against overpayment. In some cases, an effective three-way match can even expose potential fraud, as not all vendors operate above board.
For as useful as the matching process can be, it is a labor-intensive effort that is susceptible to human error—especially if your AP team must handle a significant number of invoices regularly. The care and attention that the process demands can mean that the entire department slows down when processing and matching invoices. As a result, you could lose early payment discounts or incur late fees due to missed invoices.
Automation is the answer. By streamlining the process and transferring the bulk of the work to intelligent software that interfaces with other business systems, your AP teams can complete their duties faster, make payments on time and prevent fraudulent invoices and double payments. With Kofax AP Automation solutions, you can not only fully automate the invoice capture process but also create custom validation rules and make matches smoothly up to a four-way match.
Learn about the different types of matching, why more matches are often better, and how Kofax AP Automation solutions can take this tedious task and turn it into a driver of value for your business.
What Is the Difference Between 2, 3 and 4- Way Matching?
Although the three-way match is considered a best practice in most situations, there are other kinds of invoice matching that can occur in AP departments: the less rigorous two-way match and the stringent four-way match. What’s the difference between these options? The answer involves the types of documents that they include and, based on the business, the strictness of the rules that govern invoice validation.
2-Way Match Invoice Processing
In a two-way match, the only information that a team must consider is the purchase order and the invoice. More common for services provided, the two-way match requires trust in the vendor’s reliability: There must be a high likelihood that they will provide the purchased quantities just as your business requested. Two-way matching is often a simple manual process that smaller businesses use. Because there is no consideration of what was received, there are some risks to this type of matching.
3-Way Match Invoice Processing
The three-way match takes the information considered in a two-way match and adds the receiving report. With this type of processing, your team must exchange more information with the vendor to make an informed decision. By verifying what was received from the vendor, the buyer can either approve the invoice as submitted or negotiate discounts related to variances.
4-Way Matching in AP
A four-way match is a special type of invoice matching most often applicable to regulated industries and businesses with very high standards for accepting goods from a manufacturer or supplier. Along with matching the PO, receiving reports and invoices, you must match an inspection report. Inspectors consider the quality and quantity of goods received and may reject damaged, incorrect or faulty items. A four-way match ensures that a business can hold invoices for payment when a vendor does not meet the business’ standards for product quality.
The 3-Way Match Process in Kofax AP Automation Solutions
No matter which level of matching your business will implement, robust AP automation software and invoice processing tools will make your teams more efficient and accurate. With Kofax AP Automation, business users can tap into a rich, AI-assisted system capable of automatically scanning POs, reports and invoices for relevant information before evaluating the match according to the rules defined by your business.
How does it work? Built to be simple to set up and run, even for the largest multinational corporations, AP Essentials™ intuitive toolset can give your AP teams the breathing room that they need to focus on critical daily tasks rather than routine bookkeeping. Here’s a sample workflow.
Verify Invoices
With Kofax AP Automation solutions, AP Essentials and AP Agility , invoices scanned or electronically received by your system undergo AI-powered cognitive capture analysis to isolate and extract vital information, such as PO numbers, quantities and prices. After this process completes, you can verify the information on the invoice for accuracy.
If an item interpreted by AP Essentials or AP Agility is of uncertain accuracy, or if it falls outside of the rules defined by the AP administrator, the program flags the information for review. These rules can apply to two- and three-way matching. If an invoice does not match, users can quickly double-check the imported data against the original image or look deeper for the discrepancy.
Using the Magnifying Glass Tool
AP Essentials includes a convenient magnifying glass tool icon that automatically retrieves the purchase order associated with an invoice. With this tool, AP users can manually examine line items on both the invoice and PO plus other documents, such as receiving reports, as necessary. Users can then clear exceptions and send the invoice to the approval or payment workflow, or flag the exception for follow-up and further action.
Automatic Retry Days
In some cases, a supplier takes time to fully complete an order over multiple deliveries. At other times, logistics may be slow in reporting inventory levels. When the quantity of goods received fails to match with an invoice, you can configure Kofax AP Automation solutions to automatically re-check the numbers on an ongoing basis for a user-specified number of days. If the quantity updates to reflect the correct amount, the invoice will automatically validate, requiring no further action on your part—a major time-saver.
The Final Word on Invoice Matching
For any business that regularly engages in large numbers of purchase transactions, an effective accounts payable department is not optional—it’s a minimum requirement. With a matching process that functions according to strict validation rules set by your business, you can reduce your error rate to close to 0% while eliminating double payments, preventing fraud and keeping your vendors happy.
As your operations increase in complexity, scope and scale, intelligent AP automation is the key to the future of your AP department. With tools such as Kofax AP Automation that can integrate directly into your existing ERP or provide valuable standalone functionality, saving time and money is not only possible but easy.
Learn why tools such as AP Essentials and AP Agility are a smart investment for companies working at any scale and how you can set up an intelligent deployment for your business: Request a quote or more information.