Procurement

What is 3-way matching and why do you need to implement it?

08.07.2024

Last year, someone swindled Facebook and Google out of $123 million collectively. How he managed to achieve that is disturbing for companies of that size and sophistication.

The fraudster in question simply sent falsified invoices to Facebook and Google, requesting payment for services that were never delivered or even requested. Surprise! They paid up.

Now, while both Google and Facebook managed to get their money back, invoice fraud is quite serious across the world, costing businesses billions of dollars every year.

Perhaps, if Google and Facebook had some system for vetting their invoices before paying them out, they wouldn’t have fallen victims in the first place. Similarly, unless your business employs adequate protection to shield against invoice fraud, there’s no telling how much you stand to lose or might have already lost.

In this article, we explore 3-way matching, a verification technique you can use for managing your accounts payable to ensure to only make payments for goods delivered and services legitimately rendered to your business.

What is 3 way matching?

A 3 way matching is the process of matching purchase orders (PO), goods receipt note, and the supplier’s invoice to eliminate fraud, save money, and maintain adequate records for the audit trail. 3-way matching is usually done before issuing payment to the supplier post delivery.

Three-way matching focuses on verifying invoices by looking at relevant documents that prove that:

  • the business requested the goods/services the invoice is issued for, and that,
  • the business received the goods/services the invoice is issued for.

By verifying whether a business requested and as well, received the goods/services an invoice claims payment for, it can easily be determined whether an invoice is legitimate or fraudulent.

 
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Components of a three-way match


three way matching process

Three-way matching involves cross-verifying related documents to authenticate an invoice before paying it out. Three-way matching involves placing three documents side-by-side to confirm that an invoice represents good supplied or services rendered to a business. These documents include:

The supplier’s invoice

In the invoice, the supplier clearly outlines the goods or services offered, the quantity supplied (or the time duration, if applicable), the unit price of each supplied product, and any other applicable details. The supplier’s invoice is essentially a request to pay money owed to the supplier.

The purchase order

Whenever an individual or department requires anything for their work, they forward a request detailing what they need, the quantity, and why they need it. The purchasing department receives this and expands it to a purchase order for the supplier, outlining the product or service they need, the quantity and quality they desire, and how much they agree to pay.

Goods Receipts Note

The receiving order specifies that a receiving officer has accepted the goods delivered by the supplier, and records the quantity, the delivery condition, and any other points applicable to note. This document is forwarded to the accounts department once the receiving department has completed their due diligence and recording.

With these three documents in hand, the accounts payable personnel can crosscheck to determine whether a supplier’s invoice is legitimate, before making payment. This helps avoid fraud from unwarranted and falsified invoice generator.

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How can three-way matching benefit your business?

Three way matching helps businesses track the origin of invoices and confirm their legitimacy to avoid fraud. Here a breakdown of how three-way matching can benefit your business.

Eliminate fraud

Placed side-by-side with a purchase order and a receiving report, accounts payable staff can look at an invoice and instantly determine whether it accurately represents goods and services that have been rendered to the business or not.This way, it’s easy to avoid falling victim to fraudulent invoices or even authentic invoices with slightly modified figures. A great way to eliminate fraud is by automating your procurement process. Here’s a guide to know more.

Keep a verified record of supplies and their related expenses

Three-way matching provides transparency into a business’s relationship with vendors and suppliers so it’s easy to see their supplies to the business and the payments they’ve received for them. This is useful for tracking payments to a particular supplier as well as for litigation, should that come up.

Increase profits

Three-way matching helps protect business from unnecessary expenses which, in the long run, adds to your bottom line. It’s always easier turning a profit when you’re not losing money to fraudulent claims.

Maintain adequate records for audit purposes

A good audit trail that tracks the flow of cash in and out of a business is indispensable whenever you’re faced with an audit. Whether it’s from the government, investors, or other vested parties, three-way matching creates a robust paper trail that’s useful for verifying how much legitimate expenses a business has made.

How to make your three-way matching process more efficient?

The essence of three-way matching is to eliminate fraud, and to ensure all incoming invoices are properly vetted before making payments on them. Now, while that is an ideal course to pursue, an organization’s accounts payable team might encounter hitches that hinder them from doing their best work and making sure every supplier gets paid on time.

Here are three key tips to apply in order to simplify your three-way matching process so you can process accounts payable faster, without sacrificing security and transparency.

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Limit three-way matching to big-dollar, one-time invoices

In order to simplify the three-way matching process, you might consider excluding smaller value invoices and recurring invoices from the three-way matching process. Recurring payments can be verified at setup, leaving zero room for fraud. Similarly, it’s counterintuitive for fraudsters to try defrauding an organization of small-dollar micro transactions.

Create flexible settlement rules

If your three-way matching process in accounts payable isn’t 100% automated, it can happen that figures that get entered into one of the documents may differ just a bit with other documents. And if you insist your figures must be identical every single time, this might hold up supplier payments and invoice settlements.

A simple, yet secure fix?

Authorize accounts payable personnel to complete payments for invoices if the figures across the received invoice, purchase orders, and receiving report differ with a small margin of error. This way, when your documents (invoice, purchase order, ad receiving report) have matching details with just a little difference in the figures, your accounts payable team can proceed without escalating all the way through the entire organization.

Managing three-way matching manually can be tiring—use an automated system.

In order to avoid processing fraudulent invoices, your accounts payable team has to be extra careful. What that means is that you end up spending more time getting invoices fulfilled than you’re supposed to.

An automated three-way matching solution can help you:

  • store purchase orders once they’re created,
  • collect receiving reports from your team, and
  • automatically vet all these alongside invoices once they’re received.

Put all that together and you get a smarter three-way matching solution that eliminates error 100 percent at a fraction of the time and at even lesser cost.

Beyond the three-way match, Kissflow Procurement Cloud offers simple, yet powerful automations that puts your procurement on autopilot. With Kissflow, you can:

  • store purchase orders once they’re created,
  • collect receiving reports from your team, and
  • automatically vet all these alongside invoices once they’re received.

Put all together, and you get a procurement automation tool that simplifies the entire process so you can process invoices faster and safely. Take Kissflow Procurement Cloud for a spin right away.