What’s a Three-Way Match in AP & Procurement?

In modern business operations, there's a critical process that keeps the wheels of commerce spinning smoothly — the three-way match. 

This protocol is not simply a trio of steps—it's a precision-driven mechanism that ensures businesses pay only for what they order and receive, thereby promoting accuracy and integrity in financial transactions.

Below, we’ll dig into the nuances of these core components in search of a thorough understanding of how they harmoniously work together to facilitate the three-way match.

What is 3-Way Matching in Accounts Payable?

3-way match accounting or 3-way in AP refers to the process of matching what was ordered, what was delivered, and the issued invoices to ensure accuracy. This process not only ensures high accuracy but also reduces the chances of fraud. 

The main stakeholders in this process are purchasers (issue PO orders), receivers (check the quality & quantity of the deliveries), finance team (confirm the legitimacy of invoices), and vendors (fulfill the POs and send invoices).

The Core Components of Three-Way Matching

The 3-way match comprises three crucial elements: the purchase order (PO), the goods received note (GRN), and the invoice. Each has a distinctive role in the procurement process. 

Each document plays its part in this well-orchestrated process, and their synchronization ensures a successful financial performance. 

Understanding each document's unique role, creation, validation, and how they come together is key. 

Let's dive deeper into these core components that form the backbone of the three-way match  (often written as “3-way match”) process.

Three Essential Process Steps and Associated Documents

Three documents are key to the three-way match process. Each one houses critical data, falls under different teams' purview, and fulfills a unique role in the buying process. Let's dissect these one at a time:

Purchase Order (PO): This is the first step, and it's created by the buying department. The PO lists what we're buying, how much, and the price—all of which will have already been agreed upon by both parties conducting the transaction. Once a boss or supervisor checks and approves the PO, it's sent to the seller.

When the seller delivers the goods, the next step is the “goods received note.” The entire process is expedited when you use cloud-based software to manage purchase orders.

Goods Received Note (GRN): Often referred to as a delivery note, the GRN is generated when goods or services are delivered and received. In the most basic sense, it’s a receipt. 

The buyer receiving the delivered goods must make sure everything matches the PO. The GRN should only be generated after the buying company confirms that everything is correct – usually, this responsibility falls to a supervisor.

Once the GRN is done, it's time for the seller to send the invoice.

Vendor Invoice: The invoice, also known as a  bill of sale, is sent by the seller, and it lists the goods or services given and their cost. 

At this point, the baton is passed to the accounts payable team. With the help of automated accounting tools, the team can check the bill against the PO and the GRN. After the vendor invoice is reviewed and approved by the department head or financial controller, payment is routed to the seller.

Accounts payable closes the match by processing the payment and all the documents (ideally digital copies) are stored safely for any potential future audits. These three steps ensure the buying process is transparent and fair for everyone involved.

The Wisdom and Value of the 3-Way Match

A comprehensive three-way matching process is a wise addition to your procurement strategy and brings indispensable value to organizations. It serves as a firewall against fraud, a facilitator of transactional accuracy, and a bridge fostering trust with suppliers and vendors. 

It's not merely about ticking boxes but enhancing financial efficiency and driving operational excellence. In the following sections, we will unfold the multi-dimensional benefits a well-executed three-way match process can bring to the table.

A Robust Safeguard Against Fraud

Think of a three-way match as a rigorous background check. By cross-verifying three different sources of information, it eliminates the possibility of fraudulent transactions.

As a result, you ensure you only pay for the goods or services you ordered and received. This is why the three-way match is such an integral part of a robust internal control system for monitoring organizational resource use.

Transactional and Accounting Accuracy

Errors in procurement and accounts payable can cause a ripple effect, leading to financial discrepancies and strained supplier relationships. 

The three-step match acts as a filter, catching any inaccuracies or discrepancies between the PO, GRN, and  bill of sale. This boosts transactional accuracy, reduces the need for backtracking and error correction, and ensures smoother business operations.

Building Strong Supplier Relationships

Trust and reliability form the foundation of strong business relationships. The three-way match process supports this by ensuring fairness and transparency in transactions. 

It reassures suppliers that they will receive due payment for delivered goods or services, fostering a sense of reliability and strengthening the supplier relationship.

Addressing Challenges of the Three-Way Match

Despite its theoretical simplicity, three-way matching can often face challenges in real-world applications. 

From handling partial shipments and backorders to navigating discrepancies and disputes, the practical nuances can throw a wrench in the works. 

Addressing these challenges requires not just an understanding of the process, but also a proactive approach and robust strategies. 

Let's dissect these common hurdles and arm ourselves with the knowledge to overcome them.

Handling Partial Shipments and Backorders

Partial shipments and backorders can introduce complexity to the three-way match process. 

It's essential to have clear protocols for these scenarios, ensuring that payments align with the goods received. 

This might involve adjusting the invoice or goods received note, or holding payments until the completion of the order, depending on your organization's policies.

Navigating Discrepancies

Discrepancies are inevitable in any process, and the three-way match is no exception. What matters is how you handle them. 

A robust discrepancy resolution process can help identify the root cause, whether it's an error in data entry, a mismatch in quantities, or a pricing error, and rectify it promptly. 

This not only resolves the current discrepancy but also helps prevent similar issues in the future.

Revolutionizing the Three-Step Match with Technology

Technology is now central to modern business processes, and this three-step process in accounts payable and procurement is no exception. 

The combination of automation and dedicated procurement management systems is shifting the paradigm, taking us far beyond the realm of manual data handling and endless spreadsheets. 

Let’s take a look at how these technological advancements are redefining the 3-way match, leading us into an era of unparalleled efficiency, accuracy, and real-time audit ability.

Driving Efficiency and Accuracy with Automation 

As businesses embrace the digital revolution, automation has become a pivotal force in transforming routine operations. In our context, automation typically comes through the adoption of procurement management software. 

These systems facilitate and expedite the process with built-in workflows and approval points. They centralize purchasing data, making it easier to track and improving data integrity. 

Cloud-based systems (and today, most are) provide real-time visibility into each transaction and notify you about discrepancies the moment they occur. This simplifies tracking, managing, and auditing, which accelerates the resolution process.

Plus, digital transformation and procurement automation are now must-haves for companies that want to remain competitive. According to a recent PwC survey of 800 procurement professionals from around the world, spanning 17 industries, over 50% said process optimization and efficiency are critical to successful digital transformation. 

Pro Tips for Effective 3-Way Matching

The effectiveness of the three-way matching process hinges on more than just an understanding of the steps involved—it requires the implementation of sound practices and proactive measures. 

From promoting cross-departmental communication to investing in continuous training, you can take various actions to ensure the process is efficient and reliable. Doing so adds agility to procurement processes.

Let's delve into these best practices, providing actionable insights that you can implement today to elevate your three-way match process to the next level.

Promoting Cross-Functional Communication

A successful match isn't the sole responsibility of the accounts payable team. It requires seamless cross-departmental communication. It can help nip discrepancies in the bud, ensure timely resolution, and maintain the smooth flow of the process.

Consider meeting regularly with all teams involved to identify recurring issues or concerns, improve processes, and ensure everyone remains aware of their roles in the process.

Establishing Routine Audits

Regular audits are not a luxury; they're a necessity in the realm of accounting. Regular audits of the three-way match process help identify bottlenecks, inaccuracies, and areas for improvement. 

Audits should include random checks of matched and unmatched invoices, ensuring all documents are appropriately authorized and discrepancies resolved promptly.

Emphasizing Training and Development

The three-way process is not static; it evolves with changes in business practices, the regulatory environment, and technological advancements. 

That’s why continuous training on the new technologies, and best practices is crucial for procurement and accounting professionals.

When staff are constantly upskilling, they can manage the process more efficiently, keep up with industry standards, and make a greater contribution to a company's financial integrity. 

It’s key to view employee training and professional development as an investment in your company’s future, not a cost or budget drain.

Your Questions Answered

What is an example of a three-way match?

Let’s look at a three-way match example in the context of real life. Imagine the procurement department issues a purchase order for 50 staplers at $5 each, totaling $250. 

When the staplers arrive, the receiving team checks digital purchasing records, confirms the quantity and generates a GRN. 

Finally, the supplier sends a  bill of sale for $250. The accounts payable department will then validate all three documents—the PO, GRN, and invoice—before issuing payment.

What’s the difference between 2-way and 3-way matching?

Two-way matching involves only the PO and invoice, primarily checking that the billed amount matches the agreed-upon price. Three-way matching adds an extra layer of verification, including the goods received note, to confirm the ordered goods have been received before payment is issued.

What’s a 3-way match risk?

Three-way match risk refers to potential errors or fraud that can occur if any of the three documents—PO, GRN, or  bill of sale—don't align. For example, if you receive and pay for more goods than ordered or if fraudulent invoices are paid without a GRN check, financial loss can occur.

How can automation streamline the three-way match process?

Procurement management automation systems can digitize and automate the matching process. By electronically capturing and storing POs, GRNs, and invoices, these systems can automatically match these documents, flag discrepancies for review, speed up processing times, reduce manual errors, and enhance financial control. It's a significant step forward in optimizing the three-way match process.

Why is a three-way match important in procurement and accounting?

The three-way match is a critical control mechanism that helps prevent incorrect or fraudulent payments. Verifying the PO, GRN, and invoice against each other ensures that only valid payments are processed. It also supports good business practices, by ensuring all goods ordered have been received before payments are made, and any discrepancies can be investigated.

How does the three-way match process fit into the broader procurement cycle?

The three-way match is a crucial component of the procure-to-pay cycle. It begins with the issuance of a PO when a need for goods is identified. Once the goods are received and verified against the PO, a GRN is created. 

When the supplier's  bill of sale arrives, it is matched against both the PO and GRN. Only if all three documents match is the invoice approved for payment. This process ensures accurate accounting and provides a complete audit trail for every transaction. It is a key part of maintaining financial control and transparency in the procurement process.

The Final Word

Mastering the three-way match process in procurement and accounting isn't an overnight process. It requires a profound understanding of the process, overcoming challenges, leveraging technology, and implementing best practices. 

However, the benefits in terms of fraud prevention, transaction accuracy, and stronger supplier relationships make it a worthwhile endeavor for every business. So, it's time to embrace the intricacies of three-way matching and let your business reap the rewards.

Continued Learning

As your next steps, consider diving deeper into the nuts and bolts of procurement management with the following resources:

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