CRM ARTICLE
Understanding Three-Way Matching: A Comprehensive Guide
SmallBizCRM Staff – August 13th, 2024
In accounts payable (A/P), ensuring that payments are accurate and justified is crucial for maintaining financial integrity. One of the essential processes to achieve this is three-way matching. This method involves a careful comparison of three key documents: the Purchase Order (PO), the Receiving Report (RR), and the Supplier Invoice. By scrutinizing these documents, businesses can prevent overpayments, fraud, and errors, making three-way matching a cornerstone of effective financial management.
How Does Three-Way Matching Work?
Three-way matching is a systematic approach designed to verify that all elements of a transaction are accurate before any payment is made. The process involves the following steps:
- Purchase Order (PO): This document is created when a business places an order with a supplier. It details the items or services ordered, including quantities, prices, and terms of the purchase.
- Receiving Report (RR): Once the goods or services are delivered, a receiving report is generated. This document confirms that the order has been received and details the quantity and condition of the items delivered.
- Supplier Invoice: After the delivery is confirmed, the supplier issues an invoice requesting payment. This invoice lists the items or services provided, the total amount due, and payment terms.
The core of three-way matching is to ensure that the details on all three documents align perfectly. Specifically, the quantities and prices on the PO should match the quantities and prices listed on the RR and the supplier invoice. Payment is only approved when these documents are in agreement, ensuring that the business only pays for what was actually ordered and received.
Why Is Three-Way Matching Important?
Three-way matching is a critical process for several reasons:
- Prevents Overpayments: By verifying that the quantity and price of goods or services match across all three documents, businesses can avoid paying more than what was agreed upon. This helps maintain budget control and ensures that financial resources are used efficiently.
- Reduces Fraud Risk: This matching process acts as a safeguard against fraudulent invoices. If a supplier attempts to submit an invoice for goods not ordered or received, the discrepancy will be identified through the three-way matching process.
- Minimizes Errors: Human errors are inevitable in financial transactions. Three-way matching helps identify and correct discrepancies before payments are made, reducing the likelihood of costly mistakes.
- Enhances Accuracy in Financial Reporting: Accurate matching ensures that financial records reflect true business expenditures. This accuracy is crucial for financial reporting, audits, and overall business analysis.
What Documents Are Involved in Three-Way Matching?
The three essential documents involved in three-way matching are:
- Purchase Order (PO): The initial document that outlines the details of the purchase, including item descriptions, quantities, and agreed-upon prices.
- Receiving Report (RR): A document confirming receipt of the goods or services, detailing the condition and quantity of items delivered.
- Supplier Invoice: The invoice issued by the supplier requesting payment, listing the total amount due based on the delivered goods or services.
These documents must be cross-referenced and reconciled to ensure that all details align correctly.
Can Three-Way Matching Be Automated?
Yes, three-way matching can be automated, and doing so offers several benefits. Automated systems can handle large volumes of transactions more efficiently than manual processes. Specialized accounts payable software, such as Bill.com, provides tools to automate the matching process. These systems streamline document comparison, flag discrepancies for review, and expedite payment approvals.
Automated three-way matching helps businesses:
- Reduce Processing Time: Automation speeds up the matching process, enabling faster invoice processing and payment approvals.
- Decrease Errors: Automated systems minimize human errors by using predefined rules and algorithms to compare documents.
- Improve Efficiency: By integrating with other financial systems, automated solutions provide a seamless workflow, enhancing overall operational efficiency.
Can Capsule CRM Be of Any Use in This Process?
Capsule CRM, while primarily designed for customer relationship management, can complement the three-way matching process in several ways. Although Capsule CRM is not specifically tailored for accounts payable functions, it can support related processes:
- Tracking Communications: Capsule CRM can be used to track communications with suppliers and internal stakeholders, ensuring that all relevant information regarding orders and invoices is documented and accessible.
- Managing Documents: While Capsule CRM does not directly handle financial transactions, it can be used to store and organize documents related to purchase orders, receiving reports, and invoices for easy retrieval and reference.
- Integration with A/P Systems: Capsule CRM can integrate with accounts payable software, enabling a more cohesive approach to managing supplier relationships and financial documentation. This integration can help ensure that all relevant data is synchronized across systems.
While Capsule CRM may not replace specialized accounts payable software, it can play a supportive role in managing and organizing the broader context of procurement and supplier interactions.
Here are five specialized accounts payable software solutions:
- Bill.com – Known for automating the accounts payable process, including invoice management, approval workflows, and payment processing.
- Tipalti – Offers end-to-end accounts payable automation, including invoice management, payment processing, and compliance.
- Divvy – Provides a comprehensive accounts payable and expense management solution, with features for budgeting, expense tracking, and automated invoice processing.
- MineralTree – Focuses on automating invoice-to-pay processes, including invoice capture, approval workflows, and payment execution.
- AvidXchange – Specializes in automating accounts payable and procurement processes, offering solutions for invoice management, payment processing, and supplier management.
These tools can help streamline and optimize accounts payable functions, enhancing efficiency and accuracy in financial operations.
Three-way matching is an essential process in accounts payable, ensuring that businesses only pay for goods and services that were ordered and received. By comparing the Purchase Order, Receiving Report, and Supplier Invoice, companies can prevent overpayments, reduce fraud risk, and minimize errors. Automating this process with specialized software like Bill.com enhances efficiency and accuracy, making it a valuable tool for businesses managing substantial procurement activities. While Capsule CRM may not directly handle three-way matching, it can complement the process by managing related documentation and communications. Together, these tools help businesses maintain financial integrity and streamline their accounts payable operations.