Three-way matching in accounts payable: What it is and why it matters

Three-way matching is a crucial way your company can reduce fraud and gain better control over spending. In this blog, you will learn: 

• What three-way matching is 
• Why three-way matching is important 
• The difference between three-way matching and two-way matching
• The benefits of three-way matching
• The common challenges in three-way matching
• Best practices for three-way matching

What is three-way matching? 

Three-way matching is an accounts payable (AP) term referring to the use of three different data sources to evaluate whether an invoice should be paid. It’s an extra layer of diligence that helps ensure the legitimacy of company money being spent. 

Why is three-way matching important?

Three-way matching is important because it validates an invoice before it gets paid, meaning there’s an added layer of visibility and control during the AP process. Without checking if an invoice matches the PO and the goods or services received, your company is liable to overpay, including paying for something it never received, which affects your bottom line. 

What documents are used in three-way matching?

Three-way matching involves comparing three sources of information: 

• The invoice: The bill sent by the vendor to request payment from the company. It states what they believe they delivered and what they're owed in return.
• The purchase order (PO): The document a company creates and sends to a vendor outlining what is being ordered, how much of it, at what price, and under what terms. It’s sent before anything else happens and represents the company’s formal, approved commitment to buy. 
• Goods receipt and/or receiving report: The items the company received from the vendor. They can be represented with a receipt, a packing slip, or a statement, which document what the vendor delivered. 

Three-way match vs two-way match: What’s the difference?

Two-way matching is a simple process comparing the invoice from the vendor with the PO from the company before confirming payment. Three-way matching takes things a step further by comparing both the invoice and the PO to the goods and services receipt to confirm that what was ordered was actually delivered. 

Two-way matching is commonly used for lower cost items or services where there is no delivery involved, such as subscriptions, utilities, or consulting fees. Three-way matching, on the other hand, is a good idea to use any time physical goods are involved or the purchase value is high to ensure the company doesn’t pay for something that never arrived.

The benefits of three-way match

Three-way matching helps companies of all sizes in a number of ways: 

• Fraud prevention: It prevents fraudulent or duplicate invoices from slipping through by creating a checkpoint that confirms what goods were received before payment is issued. 
• Spend control: It ensures that purchases went through the proper approval channels, and by doing so, prevents overpayment. 
• Error reduction: It flags discrepancies, such as inaccurate quantities, incorrect pricing, and duplicate charges, before they become costly issues to fix after payment.
• Financial accuracy: It validates invoices against POs so finance teams have reliable spend data to help budget accordingly. 

Common challenges with three-way matching

Though three-way matching is an important way to gain spend control, it can also be a tedious task, especially if done manually. Since the invoice, PO, and receipt are generated by different parties, data inconsistencies like a rounded total or differing item descriptions can trigger manual investigations when there’s no real issue. Partial deliveries and split shipments can also make matching complicated, especially if the invoice has the total but the goods receipts reflect separate shipments. 

Issues also arise when employees make purchases outside of the formal PO process or if the procurement system, ERP system, and AP system are disconnected and not sharing data in real time. When these things happen, the process erodes and breaks down even faster with larger volumes. This means as the company grows, the less effective the process becomes.

Three-way matching best practices 

When set up well, three-way matching can make a big difference for your business in terms of spend control. Here’s how to implement effective three-way matching: 

• Automate the process: Manual matching is slow and error-prone. An automated invoice management tool can match documents electronically, flag legitimate exceptions, and reduce processing time.
• Integrate systems: Segmented systems slow the matching process and often require manual intervention for issue resolution. Connect your procurement, warehouse, and AP systems together so they can share data in real time. 
• Standardize the PO process: Without a PO, the three-way matching process doesn’t work. Enforce a policy that dictates any purchase above a certain amount requires a PO before the order is placed so the process is strong from the start. 
• Set tolerance thresholds: Discrepancies can slow the process, especially if they’re a matter of a few cents. Establish variance thresholds, like auto-approval for invoices within one to two percent of the PO amount. That way, minor discrepancies can’t create unnecessary bottlenecks. 
• Conduct regular process audits: Regularly review your matching rules, tolerance thresholds, and exception rate to ensure the process is running smoothly. 
• Tailor your matching approach: A one-size-fits-all approach can slow the entire AP process. Instead, apply different matching methods based on the circumstance. For example, use three-way matching for higher value items and physical goods, and two-way matching for services or low-risk purchases. 

Talk to an SAP Concur expert today to learn more about how AP automation and three-way matching can help your business gain more control over spending.