Manual Processes Make Achieving an Accurate 3-Way Match Difficult
Three-way matching is the “gold standard” for accounts payable; however, if you still rely on manual and paper-based processes, meeting that standard will likely be a challenge.
What is a 3-way match?
Very simply, a three-way match is an internal control that enables AP departments to verify that they are paying suppliers the correct amount for goods received, not underpaying or overpaying. They do this by matching the PO, Receipt of Goods, and Invoice. When the amounts and line-item charges on these three documents match, payment can be disbursed with confidence in its accuracy.
Done right, 3-way matching streamlines the invoice approval workflow and payment process, cutting processing costs and time, and enabling organizations to capture early payment discounts, dollars that go straight to your bottom line and improve your cash flow.
Other benefits of the 3-way match process include a reduction in errors, and a significant reduction in fraudulent invoices and duplicate payments. According to a CFO article, citing an APQC 2020 benchmarking survey on duplicate payments and erroneous disbursements, on average 1.5 percent of overall payments are duplicates or erroneous. For laggards, it is 2 percent, and even best-in-class can see 0.80 percent. Although these numbers may seem small, the survey notes that it doesn’t measure the amount of the disbursement, so these problem issues can result in a significant amount of dollars lost.
When matching is manual
The important phrase above is “done right,” which doesn’t always happen if your organization is still reliant on legacy paper and manual processes, which are labor intensive and time-consuming, and/or if your Procurement and AP departments still operate in silos. To understand why this matters it is necessary to follow the steps in a transaction and pinpoint where responsibility lies in the transaction cycle. There are three groups involved in this procedure:
- Procurement is responsible for creating a unique purchase order and sending it to the supplier, while a digital copy goes into the PO system.
- Receiving enters the packing slip information or receiving report into the PO system, notifies Procurement that the shipment was received, and provides AP with confirmation of that receipt.
- AP then sends the invoice through the invoice approval process and submits it into the ERP or accounting system for payment.
But the process doesn’t always follow this sequentially.
Potential flaws in 3-way match manual processes
More and more, companies are transitioning to automation and digitization throughout their B2B transaction and supply chain processes, especially when they see how this technology can eliminate so many of the problems that are inherent when dealing with human intervention.
Bad Timing – Very often, a supplier will submit an invoice as soon as goods are shipped. That means AP gets an invoice before the goods are even received. AP may be able to match the invoice to the purchase order, but that’s meaningless without the corresponding goods receipt. That leaves AP depending on Receiving to log in the shipment as soon as it arrives. The later that occurs, the later approval can be completed, and payment made.
Mismatches – Human error can easily affect the matching process which inevitably slows things down:
- Data entry– The supplier may leave the PO number off the invoice, making it difficult to match the invoice without spending a great deal of time searching for the appropriate purchase order. Or AP could key in the wrong PO number and, again, not be able to match an invoice. The supplier could enter incorrect data to the invoice which would then not match the PO. All these situations add to the length of time needed to move the invoice along for payment.
- Receiving errors– In this case, Receiving may put in a quantity that agrees with the PO, but does not correspond to the actual quantity received.
- Pricing errors– Although Procurement should always include the current pricing in the PO, when manually entering the data and to push ahead the order, the price may be left off. Or, Procurement keys in the wrong price on the PO while the supplier invoice reflects the correct price, leaving AP to search out the right information once again.
Lack of visibility – In many companies, automated systems exist for both Procurement and AP; however, they are not the same operating system, so Procurement’s system either doesn’t communicate with AP’s system, or inconsistent data is passed between the two. Another problem; a company may not have implemented AP automation, so the accounting department is essentially flying blind. Without automation and without that communication between systems, there is little to no visibility into the front end of the process, when a PO was generated. In fact, AP may not even know a PO was issued until they receive an invoice from the supplier.
Mis-keyed information – Since the line-item detail from the invoice is on paper or an e-mailed image, AP will have to key in information such as PO number, vendor information, or item code in order to bring up the PO and Receipt data in the system to match. This process is prone to human error.
Missing documents – Paper goes missing or gets misplaced. That can hold true for PO’s, goods receipt, or vendor invoices. Searching for them takes time, with AP contacting Procurement and Receiving, and that time can translate into late payments.
Automation is key to ensuring an accurate 3-way match
Invoice matching is reliant on the Procurement or Purchasing department, Receiving department, and AP department all working collaboratively to ensure that all invoices are paid on time and at the right amount. Automating the entire procure-to-pay process which includes an automated three-way match will help achieve these goals. Besides breaking down silos and increasing interdepartmental communications, automation creates full visibility into the status of every invoice, ensures that payment terms and matching rules are being met, and accelerates the entire AP process. This translates into on-time and accurate payments; plus, it can reinforce good relationships with valuable vendors.
Download the white paper Why Automating the 3-Way Match Matters.