Procurement

  • 6 min read

What is a Three-way Match & What is Its Importance?

Ritish Reddy

31st January, 2023

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The process of three-way matching is to verify an invoice before making the final payment. It helps companies save money, improve vendor relationships, get ready for audits, and lower the risk of fraud. Three-way matching empowers finance teams to verify and make payments. 

Three-way matching is a validation process involving different stakeholders in the supply chain, and it's a crucial step in the procurement process. It involves matching a vendor or supplier's invoice to your company's purchase order and the delivery receipt or receiving the report. 

In short, three-way matching is the final approver that decides if the transaction is correct and complete; hence, it is an essential part of how a business works. 

This article gives you a thorough overview of three-way matching, its benefits, and how it processes. So, let's dive into it.

What Is a Three-way Matching?

Three-way matching is the final step in the procurement process. It is the process of matching purchase orders (PO), receipt notes, and supplier invoices to stop fraud, save money, and keep records for the audit trail. 

Most of the time, three-way matching is done before payment to the supplier or vendor after delivery. The accounts payable (finance) department triangulates the invoice, purchase order, and receipts. Then, the accounts payable team uses a three-way match to approve the invoice for payment and make the payment according to the payment schedule.

This cross-checking procedure is crucial because it covers all the significant steps in the procurement process, from ordering goods/services to ensuring delivery. Also, it verifies that the right amount of the requested products are delivered in good condition. 

If the prices, quantities, and products in all three ways remain the same, then the finance team will approve the payment, and the transaction will happen smoothly.

On the contrary, if there isn't a three-way matching process, the accounts payable team has to get approval for every invoice, which would be a hectic task for every stakeholder involved. Hence, a three-way match simplifies the end-to-end procurement process.

Three-way matching aims to validate invoices' accuracy by comparing them to supporting documents. 

These supporting documents are the three essential components of the three-way match process:

1. Purchase Order - A purchase order (PO) is a formal authorization to purchase goods/services from the buyer's procurement department and is sent to the vendor. POs usually have the name of the buyer's company, the date, the description and amount of the goods or services, the price, the buyer's mailing address, information on how to pay, the address of the invoice, and the unique PO number.

2. Invoice - It lists how much the buyer owes the vendor, and payment details, such as a payment schedule and an invoice number. Invoices include the same information as the purchase order, an invoice number, vendor contact information, any credits or discounts for early payments, payment schedule, and total amount due.

3. Delivery receipt - As proof of delivery, vendors send an order receipt along with the delivery of goods/services. It lists everything that's in the shipment or order. Most order receipts have the same information as the invoice. Until any concerns are resolved—inaccurate amounts, improper prices, damaged goods, etc.—payment is not made. After validating the 3-way matching process, payment is made per the terms.

How Does Three-way Matching Benefit Your Business?

Businesses that use three-way matching can get a lot out of it. We've listed a few more reasons why your accounts payable team should adopt a three-way matching procedure.

• Eliminates any fraudulent activities: The accounts payable team can see its accuracy when an invoice is validated with a purchase order and a receiving report. This makes it easy to avoid fake or even accurate invoices with changed or modified numbers. 
  
  According to a report in 2022,  58% of AP departments have reported that they are being targeted by email scams involving bogus invoices or information about wire transfers. However, 3-way matching can reduce the risk of paying fraudulent invoices, as you match these invoices with the POs and receipts, and after ensuring everything, you release the payment. Hence, there is no chance of any fraudulent payments or activities.

• Prepares you for audit trials: Auditors are searching for financial irregularities. Gathering these documents before an audit and using the 3-way matching process demonstrates to auditors that your business is well-organized and responsible with finances.
  
  A company may see exactly what transactions have occurred with vendors and suppliers through three-way matching. It includes the tools and software provided and the payment released. 
  
  If litigation ever arises, or if you want to keep track of the money paid to a specific vendor, this is a great way to do it. Invoices can be traced back to their source, and their legality can be verified using three-way matching, helping organizations in business audits.

•  Aids your business in the right direction: Three-way matching helps to keep your business in the right direction by avoiding unnecessary expenses, which helps your business in the long run. Maximizing ROI is easier when you aren't losing money on fake claims.
  
  Purchase orders, invoices, and receipts are essential to the accounts payable process, and a proper vendor knows this. However, frequently incorrect receipts and invoices trigger a larger problem for your company and suggest it's time to start looking for another vendor for your requirements.
  
  Businesses can avoid overpaying, paying for duplicate items, and paying for things they have yet to receive by ensuring data is the same on purchase orders, receipts, and invoices. 

How Does Three-way Matching Work?

The three-way match process starts with the supplier's invoice. It contains detailed information like how many licenses are purchased and the vendor's contact details.

When the AP(Accounts payable) department gets the invoice from the supplier, they look for the following : 

• Does the receipt and purchase order price match the price on the invoice?

• Did we get the number of items/licenses that were mentioned in the bill?

Let's take a closer look at how the three-way matching process works in the real world.

For instance, let's say that the IT team needs 200 new licenses of collaboration software. After an internal requisition order is sent to the purchasing department, it is approved, and a purchase order is made.

The PO is sent to the supplier or vendor once it has been internally approved. First, the supplier looks at the purchase order details to see if it can fulfill the order at the price mentioned and according to the terms and conditions. If this is the case, the supplier accepts the PO, informs the buyer, and starts to prepare the order.

The supplier then approves and provides the 200 licenses to the organization within the time frame. Finally, the buyer fills out a receiving report and sends it to the supplier to ensure the services are delivered.

After getting an invoice from the vendor, the buyer goes through the three-way matching process to ensure the order is correctly filled. If the same information is on the invoice, the PO, and the receiving report, this is called a "three-way match."

The three-way matching process lets the AP (finance) team know if a supplier's invoice is good to pay or needs more approval from stakeholders or the procurement department.

Stakeholders involved in Three-way Matching

The organization procuring software involves multiple decision-makers and stakeholders depending on the requirements. Some of these stakeholders are:

Procurement department:  The individual responsible for this department is in charge of finding and buying assets and tools for the organization, whether they're devices, office supplies, or licenses for on-premise or SaaS-based software.  

Finance department: The accounts payable (AP) team is responsible for paying supplier invoices. However, this can only occur if the invoices are verified with the corresponding purchase orders and delivery receipts.

Receiving and inventory: Employees who work at the receiving dock (where orders are delivered) of the company are responsible for tracking the purchase receipt. They ensure that orders are delivered, stored, and inventoried until it is required. This responsibility extends to them even after the purchase has been made.

Vendors: The vendor's role is to fill the PO by ensuring that the right amount is delivered at the agreed-upon price and at the expected quality. After accepting the PO, they inform the buyer and generate the invoice for the provided services.

Use Zluri to Enhance Your Procurement & Finance Processes 

Zluri offers SaaS buying services and is a key part of your procurement team. Our SaaS procurement services save you time and money. We handle the negotiations on your behalf, saving you the time that your team would have spent on them. We help you get a better deal and get you the SaaS app you need at a discount.

We have information about one billion different SaaS transactions, so we can determine how much a client spends on an app. Also, we know exactly how much it will cost to buy separate licenses for SaaS applications. Further, Zluri gives you strategic tools and benchmark data to make procurement easy and save you up to 50% on your SaaS costs. 

Since employees can use corporate credit cards and buy any software, the finance teams need to learn about 70% of the IT resources. Zluri lets you see what's going on with these apps and fixes the accounting problems that come with them, easing the finance team's pain.

About the author

Ritish Reddy

Ritish is one of the co-founders of Zluri, the SaaS management tool for IT teams. He leads the Marketing and Partnerships as part of his role. Before Zluri, he was part of the founding team at KNOLSKAPE and Co-Founder at Cranium media. Ritish is an MBA graduate and is passionate about building, and scaling businesses ground up. He is an avid reader and loves exploring book stores and libraries in different parts of the world. He loves painting with his 4-year-old daughter.