Three-way matching definition
/What is Three-Way Matching?
Three-way matching is a payment verification technique for ensuring that a supplier invoice is valid, and so can be paid. When the payables department receives an invoice from a supplier, it matches the following information:
The information on the supplier invoice to a copy of the related purchase order that has been forwarded to it by the purchasing department. The purchase order states the quantity and price at which the company agrees to buy the goods or services stated on the supplier's invoice.
The supplier invoice to receiving documentation forwarded to the accounting department by the receiving department, to ensure that the goods have been received, that they are in the correct quantity, and that they are in good condition.
Thus, the "three-way match" concept refers to matching three documents - the invoice, the purchase order, and the receiving report - to ensure that a payment should be made. The procedure is used to ensure that only authorized purchases are reimbursed, thereby preventing losses due to fraud and carelessness.
If this three-way match reveals that the supplier invoice is in good order, then the accounts payable staff processes the invoice for payment. If not, the staff contacts the supplier regarding any issues it found, which may result in the issuance of a revised invoice or perhaps a credit memo by the supplier.
Two-Way Matching
A business might elect to only conduct a two-way match, which compares the authorizing purchase order to the supplier invoice, to ensure that the billed price is correct. This approach does not compare the receiving documentation to the supplier invoice, so there is a risk that the company will pay an invoice for an incorrectly-billed quantity. Its main advantage is somewhat faster processing speed than a three-way match, since the payables staff does not have to cross-reference any receiving reports.
Four-Way Matching
A business might elect to go beyond a three-way match and also verify whether the goods received were of an appropriate quality level. This might require additional documentation by the quality inspection team, which must be sent to the payables staff for inclusion in its analysis. This approach is most useful for high-value items that are subject to quality failures. The main downside of this approach is increased paperwork, which can extend the time required to issue payments to suppliers.
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Disadvantages of Three-Way Matching
There are several disadvantages associated with using the three-way matching concept, which are as follows:
Process is quite rigid. Three-way matching is a labor-intensive and multi-step process that can result in a number of obligations not being paid on time. Payment delays arise because the accounting staff is searching for missing information. These delays can annoy suppliers, as well as prevent the business from taking any early payment discounts.
Requires senior staff. It requires some time to become efficient at three-way matching, so it may be assigned to the more senior payables clerks - which takes them away from other tasks.
Too expensive. Given the amount of labor involved to complete three-way matching, a business may find that it is investing too much money in its accounts payable staff. This can create an unacceptably high administrative expense burden for the business. It is especially expensive for low-value purchases, where the matching labor may cost more than the bill being paid.
Three-Way Matching Best Practices
You can make three-way matching more efficient by excluding small-dollar and recurring invoices from the matching requirement. Another efficiency measure is to allow the accounts payable staff to approve invoices if the prices and units listed in the supplier invoice are within a few percent of the amounts designated in the purchase order. Yet another option is to avoid the process entirely by shifting more purchases to company procurement cards - for which there are no purchase orders.
Automated Three-Way Matching
There are automated three-way matching solutions available that require the use of fully integrated enterprise resource planning systems. When operated properly, these systems can eliminate much of the manual labor associated with the matching process. However, even these solutions will kick out some transactions for which the automated solution fails, requiring manual investigation of discrepancies. These automated systems are so expensive that they are not a viable solution for smaller businesses.
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