According to research, 72% of finance teams spend over 520 hours annually on manual accounts payable tasks such as data entry, document matching, and resolving payment discrepancies. That's nearly three months of a full-time employee's year wasted on preventable busywork. 

Meanwhile, your business growth demands that finance teams focus on strategic initiatives rather than administrative paperwork. 

The solution lies in implementing a thorough 3-way matching system, a verification process that significantly reduces errors and fraud while improving supplier relationships.

In this article, we’ll break down how 3-way matching works and how it can help you reduce errors, save time, and keep your financial processes in check.

What Is 3-Way Matching?

3-way matching is a verification process used in accounts payable to confirm that the details on three key documents match before a payment is approved:

• Purchase Order (PO): This is the document that originates when a department orders goods or services. 

• Goods Receipt Note (GRN): This document confirms that the goods or services were actually received. 

• Supplier Invoice: The invoice is sent by the supplier, detailing the amount due for the goods or services. It’s the final request for payment.

The system compares critical information across these documents, including item descriptions, quantities, unit prices, supplier details, and more.

When all three documents align, the invoice is approved for payment. Any discrepancies trigger an investigation before payment is released.

How 3-Way Matching Works: Key Steps Explained

3-way matching follows a simple yet structured approach that ensures accuracy at each step of the accounts payable process. Here's how it works:

Step 1: Purchase Order (PO) Review

The first step involves reviewing the purchase order created by the buyer. The PO contains key details such as the goods or services requested, quantities, agreed prices, and delivery dates. 

It serves as the foundation for the transaction and provides a reference for the supplier to follow.

Step 2: Goods Receipt Note (GRN) Verification

Once the goods or services arrive, the receiving department issues a goods receipt note (GRN). This document verifies the quantity and condition of the goods or services delivered. 

It ensures that the actual items received match the order placed in the purchase order. If there are discrepancies (such as missing items or damaged goods), it’s flagged and resolved before the payment process moves forward.

Step 3: Invoice Matching

Finally, the supplier sends the invoice, which specifies the amount owed for the delivered goods or services. The accounts payable team will compare the invoice against both the purchase order and the goods receipt note. 

If the quantities, prices, and terms match across all three documents, the invoice is considered valid for payment.

Let us put things into perspective with a simple example. Let’s say your marketing department orders 100 promotional t-shirts at $10 each. Once the shirts are delivered, the GRN confirms that 100 shirts arrived in good condition. 

The supplier then sends an invoice for $1,000. You check the PO, GRN, and invoice, making sure the quantity, price, and total amount match. You can approve the payment once you ensure all details are on point.

Now that the basics are clear, let’s talk about the specific advantages of implementing this verification method in your finance operations.

Why Is 3-Way Matching Important?

The 3-way matching method serves as both a preventive and detective control that adds significant value across multiple dimensions of your business. Here are the key benefits you can expect by implementing 3-Way matching in the accounts payable process:

1. Better Financial Control

3-way matching acts as a financial safeguard that protects your company's resources. The process creates multiple checkpoints that catch errors before money leaves your accounts. 

Your team can verify that you're only paying for goods you've ordered and received at the agreed price, preventing costly mistakes and potential fraud attempts.

2. Improved Risk Management

In a compliance-heavy business environment, having proper controls is non-negotiable. 3-way matching significantly reduces your exposure to financial risks by creating multiple verification points that make fraud more difficult. 

Each matched document serves as evidence that a transaction is legitimate, creating a comprehensive audit trail that satisfies both internal and external compliance requirements.

3. Enhanced Operational Efficiency

While implementing controls might seem like adding work, 3-way matching actually streamlines your payment process in the long run. With standardised verification procedures, your team spends less time investigating problems and more time on value-adding activities. 

The systematic approach reduces the chaos of missing information and disputed payments, allowing for smoother workflows and better resource allocation.

4. Better Data Quality

Besides transaction verification, 3-way matching generates consistent, reliable financial data across your systems. 

When purchase orders, receipts, and invoices align perfectly, you create a single source of truth for each transaction. This clean data supports more accurate financial reporting, better forecasting, and smarter procurement decisions that can generate additional savings.

Now, you may wonder, why choose 3-way matching over its much simpler 2-way method? What is the benefit of one over the other? Before we proceed any further, it’s important to clarify the distinction between the two. 

3-Way vs 2-Way Matching: Key Differences

When implementing an accounts payable verification system, you'll need to choose between 2-way and 3-way matching based on your business needs. While both approaches aim to verify payment accuracy, they differ significantly in their complexity, control level, and appropriate use cases.

2-way matching is the more straightforward approach, comparing just the purchase order and supplier invoice. This streamlined process works well for service-based purchases or organisations with limited resources. 

Two-way matching works well for businesses that don’t need to verify the actual delivery of goods, such as service-based industries. 

However, three-way matching provides a more comprehensive check for businesses dealing with physical goods. It ensures that not only are the order and invoice correct, but also that the delivered items match the purchase details.

While the benefits are indeed compelling, implementing 3-way matching isn't without its challenges. Pinpointing these potential challenges can help you prepare for a smoother implementation.

Common Challenges of 3-Way Matching in Accounts Payable Process

Even with its clear benefits, many companies struggle to implement 3-way matching effectively. Recognising these challenges early allows you to develop strategies to overcome them. Most difficulties fall into four key categories that require specific attention during your implementation planning.

1. Process Delays

Time is often the biggest obstacle in 3-way matching implementation. Manual matching requires staff to physically locate multiple documents and compare line items one by one. 

When documents go missing or contain discrepancies, the entire approval process grinds to a halt while investigations occur. These delays can frustrate both your team and suppliers waiting for payment.

2. Lack of Integration Between Systems

If the systems for creating purchase orders, receiving goods, and processing invoices are not integrated, it becomes difficult to compare documents quickly. Many companies still use separate tools for each step of the process, making it time-consuming to match POs, GRNs, and invoices manually.

Kodo eliminates the headache of sorting through fragmented data by easily integrating with your accounting software and ERP systems. Use Kodo to effortlessly manage the full-cycle AP management process without putting your finance team through unnecessary hassle. 

3. Discrepancies Between Documents

Even with 3-way matching, discrepancies can arise due to pricing errors, incorrect quantities, or damaged goods. Resolving these issues can be time-consuming and requires effective communication with suppliers to ensure that any mismatches are addressed promptly.

4. Data Visibility and Access

Limited visibility into the status of purchase orders, goods receipts, or invoices can delay the matching process. If key stakeholders lack access to real-time data, it can be difficult to identify and resolve discrepancies efficiently.

5. Inconsistent Document Formats

Suppliers often send invoices in different formats, which may not always match the structure of your internal documents. This makes it harder to perform an accurate 3-way match, and disparate formats lead to inefficiencies in data extraction and validation.

6. Delayed Invoices

If invoices arrive late or are sent without prior purchase orders, it disrupts the matching process. Late invoices can hold up payments and create backlogs in the accounts payable department.

7. Exception Handling

Not every purchase fits neatly into the standard 3-way matching process. In some cases, transactions may require extra attention or alternative workflows to ensure accurate matching. For instance, urgent purchases may bypass normal procurement channels, creating invoices without corresponding purchase orders. 

On the other hand, Service purchases don’t have physical receipts, making traditional goods receipt verification impossible. Partial deliveries can also create complex matching scenarios where quantities differ legitimately across documents. All these scenarios require special handling procedures.

With Kodo, you can automate both two-way and three-way matching, saving time and eliminating errors to make reconciliation effortless. Our system integrates seamlessly, ensuring smooth and accurate matching with minimal manual intervention.

Up next, we are going to learn how to implement 3-way matching successfully in your organisation.

Implementing 3-Way Matching: Best Practices

Successful implementation of 3-way matching requires thoughtful planning and execution. The following best practices will help you establish a robust verification system while minimising disruption to your operations. This structured approach addresses the common challenges while maximising the benefits of 3-way matching.

1. Standardise Your Documents

Document standardisation forms the foundation of effective matching. Begin by creating consistent templates with identical field names and formats across all procurement documents. Include essential information like item codes, descriptions, quantities, and unit prices in the same location on each document. 

Lastly, implement unique reference numbers that link related documents throughout the purchase-to-pay cycle.

2. Define Clear Processes

Clarity starts with thorough documentation of every step in the process. Make sure all team members are in the loop and understand their roles. Also, ensure that everyone knows what to do in case of exceptions. Keeping that in mind, here’s what a well-documented process looks like:

• Create detailed workflows showing each verification step, the responsible parties, and the expected timeframes. 

• Establish reasonable tolerance levels for minor variances in pricing or quantities to avoid unnecessary exceptions. 

• Develop specific protocols for handling common exceptions like service purchases or partial deliveries.

3. Automate Where Possible

Technology dramatically improves matching efficiency and accuracy. Invest in digital document management to eliminate paper-based limitations and make documents instantly accessible. 

Consider specialised AP automation solutions like Kodo that perform matching automatically based on your predefined rules. Kodo’s Invoice Scrutinizer tool highlights important details such as due dates and vendor risks, leading to faster, friction-free approval process. 

4. Train Your Team

Comprehensive training ensures everyone understands both the mechanics and importance of proper matching. Here’s how you can train your staff to reconcile with precision using the 3-way matching method:

Start with basic training for all departments involved in the procurement cycle. When procurement staff create detailed purchase orders, they set the foundation for smooth matching later in the process.

The accuracy chain continues with your receiving team. Train them to properly document the arrived goods. Make sure they create a detailed account that includes partial shipments and quality issues as well. 

Your staff may hit roadblocks while comparing invoices against the established records. Give them practical troubleshooting skills to handle common discrepancies they'll encounter. Lastly, consider regular refresher sessions to keep everyone's skills sharp and reinforce the importance of their role in the overall process.

5. Monitor and Improve

.Continuous monitoring and improvement of the process are just as important as the management methods. In the final phase of the AP management process, your responsibilities include tracking key performance metrics like exception rates, processing times, and cost per invoice. 

Doing so will help you quickly identify areas where you can improve. Simultaneously, keep an eye on recurring discrepancies to spot patterns, understand the root causes, and address any systemic issues. 

It's also important to periodically review your matching criteria and tolerance levels. This helps strike the right balance between maintaining control and ensuring efficiency. Through consistent improvements, your AP process will evolve to become faster, more accurate, and ultimately more cost-effective.

Implement 3-way Matching with Kodo

Looking for a partner to simplify this transformation? Kodo automates your entire invoice processing workflow through advanced OCR technology that captures data from any invoice format. 

Our Invoice Scrutinizer feature automatically flags critical elements like due dates, vendor risks, and pricing discrepancies, enabling faster and more informed approvals. 

With both two-way and three-way matching capabilities built in, Kodo eliminates manual reconciliation efforts while maintaining robust financial controls.

Conclusion

3-way matching with precision is one of the trickiest tasks in the entire accounts payable process. This is primarily because the process demands the involvement of multiple teams working together for an error-free outcome. 

Manually reconciling hundreds of invoices every month can drain your resources and lead to silly mistakes. Make it easy for your team by automating invoice reconciliation.

Use Kodo to simplify the 3-way matching process, automatically track, approve, and reconcile invoices with precision, all from a unified platform. Our system also supports 2-way matching, making it easy to compare purchase orders and invoices. 

Integrate Kodo with your existing accounting software to reduce errors, speed up approvals, and ensure complete transparency throughout your AP process.

Still have doubts about how Kodo fits into your existing finance operations? Talk to our sales expert today for clarity.