How to Implement Automated 3-Way Matching in Accounts Payable
In this guide, we'll outline precisely why automation is a strategic investment for a modern accounts payable department and how you can implement it effectively to ensure a tangible return.
Accounts payable teams are always expected to process invoices quickly, accurately, and securely, yet most accounts payable (AP) specialists continue to conduct manual 3-way matching. Sifting through countless reports and cross-referencing every invoice line item under pressure makes this approach prone to costly errors.
Forward-thinking finance units have begun to automate their 3-way matching processes to prevent potential losses and provide a lifeline to their overwhelmed accounts payable (AP) teams. However, many continue to risk fraud and error, believing that automation is prohibitively expensive, unaware that the ROI in efficiency far outweighs the spend leakages incurred in manual processes.
What is the 3-Way Matching Principle in Accounts Payable?
The 3-way matching principle requires AP specialists to compare three crucial documents before payment is approved for a supplier’s invoice:
- The purchase order (PO), which confirms what was ordered
- The receiving report or goods receipt note, which confirms what was received
- The suppliers’ invoice, which confirms what the supplier is billing
Only when all three documents match the item, quantity, and price does the system approve the payment.
Understanding the Basics of 3-Way Matching and Its Importance
A robust 3-way matching process is the foundation for effective accounts payable control. Consider it your primary defense against payment errors, as it helps catch discrepancies before they lead to financial losses.
Three-way matching forms the cornerstone of clean and accurate financial records, vital for transparent operations. It protects your company's bottom line by consistently blocking duplicate payments and enabling early detection of fraudulent invoices.
Beyond these operational advantages, this key finance process also significantly bolsters your company's credibility and compliance posture. When auditors review your financial controls, they look for strong practices like 3-way matching as proof of your company’s commitment to responsible financial stewardship.
What is an Example of a 3-Way Match?
Suppose your company receives an invoice for 100 laptops, but only 95 units are delivered. The 3-way match process would flag the discrepancy and trigger an investigation before payment is made. The 3-way match process also works when an invoice includes a higher price per unit than what was agreed upon in the purchase order.
What is the Difference Between 2-Way and 3-Way Matching in Accounts Payable?
There are two common approaches to verifying invoices, with invoice matching playing a key role. Two-way matching only verifies that the purchase order receipt and invoice match each other. This may be sufficient for recurring services or indirect spend where receiving reports may not exist.
Meanwhile, three-way matching adds the receiving report to confirm that the goods or services were actually delivered, based on the agreed-upon quality and quantity.
When to Use 3-Way Matching
Three-way matching is vital for inventory purchases, direct materials, and high-value procurement. For example, if a company has an invoice for 100 units but only received 95, the 3-way match would flag this discrepancy for investigation before payment.
Similarly, if an invoice includes a higher price per unit than what was agreed upon in the purchase order, the 3-way matching process helps identify this error, prompting a review and correction before payment.
Transitioning to Automated 3-Way Matching
Automating the 3-way matching process, along with payment automation, dramatically reduces invoice processing time and virtually eliminates human error, which is critical for AP teams handling high volumes of transactions.
An automated solution utilizes intelligent matching algorithms that swiftly compare the purchase order, goods receipt note, and supplier's invoice. Beyond efficiency, eliminating manual invoice matching processes significantly enhances compliance efforts and provides superior audit trails, all while streamlining workflow.
Here are some best practices in 3-way matching automation:
Start with a pilot program
Test the automated solution on a smaller scale before full implementation. You may want to integrate the system first with your largest supplier to test the waters and identify areas for improvement before rolling it out company-wide. This way, you have a chance to test the system and configure it where you deem fit.
Ensure your team is trained
Make sure you onboard your teams onto the new system before the actual implementation. For instance, you can first train your accounts payable team on how to use the automated software to scan and match documents. Allow them to experience the simplicity of an automated process compared to traditional methods. If available, ask your provider for help in onboarding your teams by providing live demos or recorded video tutorials.
Integrate your automated solution
Connect the automated system with your existing ERP systems to ensure a consistent flow of data. It is crucial for your existing accounting systems and 3-way matching solution to get consistent and updated data from the same database, as this reduces the risk of discrepancies.
Take the first step towards automation by evaluating your current accounts payable process and identifying areas where automation can make an immediate impact.
Implementing and Optimizing 3-Way Matching
Successfully automating 3-way matching isn’t just about adopting new software. Setting up precise parameters from the outset is crucial to guarantee your organization achieves its desired ROI.
Even the most advanced systems can fall short of expectations without a clear strategy. It's smart to enter the process with an understanding of potential challenges and how to address them before they arise. Data accuracy, for instance, can be an issue, particularly when information comes from multiple sources.
Here are some best practices to avoid these hurdles and optimize your automated matching:
Identifying Key Performance Indicators (KPIs)
After implementing an automated system, track metrics such as invoice processing time, which indicates the overall efficiency and speed of your AP workflow. A higher percentage of straight-through processed invoices indicates a more efficient AP process. Equally important is measuring the error rate and cost per invoice to measure improvements and identify areas for further optimization.
Automating Workflows for Exception Handling
Set up automated workflows so exceptions (price, quantity, or item discrepancies) are instantly routed to the right stakeholder (buyer, receiver, or supplier) for resolution. Always prioritize high-value or high-risk mismatches and document all communications for audit readiness.
Ensuring Compliance and Audit Readiness
Automated systems maintain detailed logs that show every match, approval, and exception decision, supporting compliance with internal controls and audit requirements. This transparency makes audit preparation easier and reduces the time spent gathering documentation.
3-Way Matching Do’s and Don’ts
Do's:
- Regularly review and update your system to adapt to new business needs.
- Maintain clear documentation of your processes for audit purposes.
- Use data analytics to continuously improve the matching accuracy.
Don'ts:
- Ignore minor discrepancies; they can accumulate and lead to significant issues.
- Neglect ongoing training; inform your team about system updates and best practices.
- Overlook the importance of vendor relationships; communicate changes clearly to your suppliers.
Automated 3-Way Matching Made Easy for Your Business
Modern invoice management platforms simplify the 3-way match by seamlessly integrating your existing procurement and financial systems. With a solution like Emburse, data extraction, matching, and validation occur with minimal human intervention, streamlining your entire workflow.
Emburse automates 3-way matching in accounts payable, delivering dramatic efficiency gains, significantly reducing financial risk, and freeing your accounts payable team to focus on higher-value activities.
Our robust Analytics Solutions provide deep insights into your spending, while our AI Audit Solutions help detect and prevent fraud, ensuring cleaner financial records. With Emburse, businesses can enjoy faster invoice processing, far fewer errors, and much stronger internal controls—all translating to measurable ROI.
You can also explore our comprehensive Expense Management Solutions and Advanced Analytics Solutions to see how Emburse empowers your finance operations. Contact us to learn more about Emburse's AP automation solution and how it can be tailored to your needs.