Overview
How do you make sure you're paying the right price for goods or services you ordered? Are you certain they've been received?
It is important to establish control points throughout the purchasing and payment processes to ensure what was paid for was ordered and received.
This process requires the synchronization of procurement and accounting departments to enable the receipt of purchase orders, invoices, and goods receipts.
Departments often work independently and have their own policies, strategies, and processes; however, they have similar objectives of improving cash flow, generating cost savings and value through optimization. Invoice matching and payment processes are an area of mutual interest and opportunity for improving efficiencies in an organization's procure-to-pay process.
Often, Accounts Payable (AP) Automation can streamline the payment process; however, automation is not a silver bullet for efficiency — a bad or broken process should never be automated. Leaders should ask: Are the right processes considered? Are they adequately defined? Is the right system and technology in place? Are users properly trained?
As a part of improving payments processes, adopting 2- and 3-way match may be an independent initiative and part of a larger digital transformation. Even organizations that have already implemented a 3-way match process may find that there are opportunities to improve efficiencies.
It is important to understand what 2- and 3-way matching is, when should 2- or 3-way matching be used, and how to measure success. Using modern technology, standardization of processes, supplier development, maximizing electronic invoicing capabilities, and leveraging catalog purchases, leaders in Accounting and Finance can drive value in efficient processes.
Often, Accounts Payable (AP) Automation can streamline the payment process; however, automation is not a silver bullet for efficiency — a bad or broken process should never be automated. Leaders should ask: Are the right processes considered? Are they adequately defined? Is the right system and technology in place? Are users properly trained?
As a part of improving payments processes, adopting 2- and 3-way match may be an independent initiative and part of a larger digital transformation. Even organizations that have already implemented a 3-way match process may find that there are opportunities to improve efficiencies.
It is important to understand what 2- and 3-way matching is, when should 2- or 3-way matching be used, and how to measure success. Using modern technology, standardization of processes, supplier development, maximizing electronic invoicing capabilities, and leveraging catalog purchases, leaders in Accounting and Finance can drive value in efficient processes.
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Invoice Matching:
2-Way vs 3-Way Match
Invoice matching is the process that aligns purchase order, invoice, and goods receipt.
Purchase Order (PO)
A document issued to a supplier that authorizes the purchase of goods and/or services
Prepared by the buyer
Goods Receipt (GR)
Acknowledges receipt of the goods and/or services.
Verified by the buyer
Invoice Receipt (IR)
A document that requests payment for an order.
Prepared by the supplier
What is a 2-Way match?
A 2-way match is a simplified control process that compares only the Purchase Order and the Invoice. It does not confirm that the goods were received or whether the services were rendered before making payment to the supplier.
PO Price = Invoiced Amount
What is a 3-Way match?
A 3-way match involves matching a Purchase Order (PO) and the invoice received with the actual quantities of the goods and /or services received. The purpose of this process is to reduce the risk of errors and financial loss by preventing unauthorized purchases.
PO Price = Invoiced Amount = ITEMS RECEIVED
When Should 2-Way and 3-Way Match Be Used?
There is no one-size-fits-all policy for when 2-way and 3-way match should be used. As a best practice, spend types should be differentiated and policies should be applied where best suited.
Using 3-way match reduces discrepancies in the procurement process by providing an extra layer of verification. This is best for certain types of goods and services. This confirms that payments are made only for valid goods or services received from the supplier. This validation adds a manual step to the process; however, there should be adequate business value resulting from the additional step. Not every purchase needs to be verified through a 3-way match process.
A 2-way match may be sufficient for lower risk purchases (i.e. recurring purchases, goods and services from reputable suppliers, etc). Determining situations where 2-way match is more appropriate is a better practice and will improve efficiencies in the procurement process.
To determine whether to use 2-way or 3-way match, see the table below:
A 2-way match may be sufficient for lower risk purchases (i.e. recurring purchases, goods and services from reputable suppliers, etc). Determining situations where 2-way match is more appropriate is a better practice and will improve efficiencies in the procurement process.
To determine whether to use 2-way or 3-way match, see the table below:
2-Way Match
Benefits
- Simplified verification
- Quicker approvals
When to Use
- Predictable recurring purchases
- Purchases that don’t require reconciliation
- Utilities
- Low risk purchases
- Trusted suppliers
3-Way Match
Benefits
- Identify errors and prevent invoice overpayments
- Increased visibility and traceability
- Accuracy and compliance
- Data consistency
When to Use
- Inventory items
- Orders with multiple shipments
- Perishable items
- Shipments susceptible to damage or becoming unusable
- High return rate items where tracking is important
- Complex services requiring QA or validation prior to invoicing
How Effective Is Your 3-Way Match Process?
Best-in-class Accounting and Procurement business units within organizations have high productivity, solid controls, and strong end-to-end efficiency.
The KPIs summarized below can help to determine the effectiveness of 3-way match processes and how to rank against best-in-class organizations.
Key Performance Indicators (KPIs)
KPI
Why it's Important
Best in Class
Touchless Invoice Rate
- No manual intervention
- Indicates high PO compliance, e-invoicing, first time match rate and on-time payments
Best in Class:
80-90%
First Time Match Rate
- Invoices are received and pass through the system the first time without manual intervention or delay
Best in Class:
80-90%
Invoice Cycle Time (Days)
- Eliminate late payment penalties and take advantage of early payment discounts
Best in Class:
3-6 Days
Percent of Electronic Invoice Processing (e-Invoicing)
- Reducing time spent processing invoices allows you to streamline operations and reallocate activities
Best in Class:
100%
What Are Some Common Issues?
Invoice exceptions or mismatches are common when using 3-way match, especially if the 3-way match process is manual.
An invoice exception occurs when the invoice information you receive from the supplier does not match the information in your invoice processing solution. This discrepancy leads to manual intervention and further investigation from AP or procurement is required before payment can be processed.
Invoice exceptions can occur because of missing information, invoice disputes, human error caused by manual data entry, or uncertainty created when converting paper to digital.
Invoice exceptions can occur because of missing information, invoice disputes, human error caused by manual data entry, or uncertainty created when converting paper to digital.
Common Invoice Problems
Duplicate invoices
Quantity and price mismatch
Missing accounting information
Missing PO number, supplier, or contact information
Invoices are missing altogether
Forfeited early payment discounts because invoices are not processed in time
Completely eliminating invoice exceptions is unrealistic, but adopting innovative technology and automation can significantly minimize such exceptions. Digitizing the process of invoice matching can make it faster and easier to resolve the exceptions that do occur, with the caveat that proper processes must first be in place before implementing technology for automation.
Best Practices For Increasing The Efficiency Of The 3-Way Match Process
Efficiency and control can coexist, and a streamlined and automated 3-way matching framework will achieve both. Good policies are the foundation, and the top performers have several things in common.
Best-in-class organizations:
Implement digital platforms with automation
Work closely with suppliers
Standardize with flexibility
Prioritize accurate purchasing
Use Modern Technology
The market currently offers a variety of SaaS/cloud-based AP automation software modules as a part of P2P (Procure-to-Pay) solutions. Modern P2P platforms have minimized the tradeoff between efficiency and financial controls. When done manually, organizations would sacrifice visibility and control for speed, or would require more human resources to obtain more control.
A best-in-class P2P platform will enable your organization to:
1.
Automate data matching between POs, Goods Receipts, and Invoices;
2.
Reduce manual activity through all stages of the process with smart workflows, smart data, and mobility;
3.
Move communication into a single digital platform where buyers and suppliers collaborate and create visibility across the organization.
Standardize Procurement Process
Bottom-line savings can be achieved through the standardization of procurement processes. To improve standardization, leaders can:
Define Buying Channels
Procurement departments need to have a firm understanding of which goods and services are purchased through specific buying channels and issue policies that are best-fit for how and what they are purchasing;
Procurement departments need to have a firm understanding of which goods and services are purchased through specific buying channels and issue policies that are best-fit for how and what they are purchasing;
Unify Systems
Avoid multiple disparate systems and adopt technology that adds value to the overall procure-to-pay process, not just parts of the process;
Avoid multiple disparate systems and adopt technology that adds value to the overall procure-to-pay process, not just parts of the process;
Categorize PO Spend
Determine where 3-way match is necessary, and which are good candidates for 2-way match;
Determine where 3-way match is necessary, and which are good candidates for 2-way match;
Adopt “No PO, No Pay” Policy
This controls “Maverick spend” when users must require a PO before making a purchase;
This controls “Maverick spend” when users must require a PO before making a purchase;
Apply Tolerances
Set up auto-approval rules for common invoice exceptions;
Set up auto-approval rules for common invoice exceptions;
Identify Metrics
Set up measures to track progress and to ensure performance in efficiency and compliance.
Set up measures to track progress and to ensure performance in efficiency and compliance.
Supplier Development and Collaboration
It is necessary to collaborate with suppliers to create a more efficient and effective Procurement process, which includes improving invoicing accuracy.
These issues can include:
Missing key invoice information
(i.e. billing information, line items, contact information, etc)
(i.e. billing information, line items, contact information, etc)
Incorrectly entered line items
Repeatedly-submitted invoices
These common issues are best addressed when we can effectively communicate with and collaborate with suppliers in order to ensure invoices contain a minimal amount of errors and are not submitted repetitiously. Moving from a manual process to a digitized process can mitigate many of these issues when suppliers must manage their vendor information in a centralized repository and receive Purchase Orders in advance. A digital platform can encourage increased supplier collaboration between buyer and seller.
Maximize e-Invoicing Rate
Electronic Invoicing occurs when suppliers can submit invoices in a centralized digital platform, as opposed to manual invoicing (paper, fax, email). E-Invoicing greatly reduces costs related to invoice processing (scanning, capture, data entry), contributes to automation of the invoice approvals, and facilitates 2- and 3-way matching. Additionally, e-Invoicing can provide accurate historical records. Moving to high rates of e-Invoicing improves data accuracy, real-time visibility, and significantly reduces the opportunity for invoice exceptions by eliminating the need to manually re-key information.
Catalog Usage
The use of catalogs simplifies the ordering process in the organization for end users and prevents invoice issues after purchase. Users can avoid data entry and human error by purchasing from a pre-populated catalog.
Typical data entry issues can include:
Wrong supplier part number
Incorrect unit price information
Short or limited item description
Wrong unit of measure
(i.e. The supplier offers item in Dozens and users order Per-Unit)
(i.e. The supplier offers item in Dozens and users order Per-Unit)
All market-leading P2P platforms have functionality for users to make purchases with catalogs. Adoption of catalogs is a part of a larger procurement digitization effort that can vastly improve invoice accuracy.
Our Recommendations
2-way and 3-way match decisions are a fundamental component of an overall procure-to-pay strategy to improve payment processes.
As previously illustrated, there are several areas to address in an organization’s procure-to-pay process with no single approach. Each organization requires a tailored approach for unique procurement and accounting policies and processes; however, most can make improvements by adopting modern technology, standardizing processes, improving supplier collaboration, maximizing electronic invoicing capabilities, and utilizing catalogs.
