3 Way Matching

3-Way Matching in procurement is a more comprehensive and detailed process for verifying that an organization's accounts payable are correct before making a payment to a supplier. It involves comparing three key documents to ensure that all the information is consistent and accurate before processing the payment:

1. Purchase Order (PO): This is the document issued by the buyer to the supplier that outlines the order details, including quantities, prices, delivery terms, and product/service descriptions. It serves as an official agreement for the goods or services to be provided.
2. Goods Receipt Note (GRN) or Receiving Report: This document is created when the goods are physically received by the buyer. It records the quantity and condition of the items delivered and confirms that the order was fulfilled.
3. Invoice: This is the bill submitted by the supplier after goods or services are delivered. It includes the amount owed, along with payment terms and other relevant details.

The 3-Way Matching Process:

• When the invoice is received, the accounts payable team will compare the following documents:
  1. The Purchase Order with the invoice: They check that the quantities, prices, and items listed in the invoice match the details in the PO.
  2. The Goods Receipt Note (GRN) with the invoice: They verify that the goods or services listed in the invoice were indeed received and match the GRN. This ensures that the delivered items align with what the supplier is invoicing for.
  3. The Purchase Order with the Goods Receipt Note (GRN): This verifies that the order was fulfilled in terms of quantity and specifications, and confirms that the delivered goods match what was ordered.

If all three documents match, the payment can be processed. If there are discrepancies, they need to be addressed before payment is made.

Advantages of 3-Way Matching:

1. More Comprehensive Verification: By adding the Goods Receipt Note to the matching process, organizations can verify not only the price and quantity but also whether the goods were actually received in the expected condition.
2. Prevents Payment Errors: The 3-way match helps prevent overpayment for undelivered goods, payment for incorrect quantities, or payment for items not ordered.
3. Better Fraud Prevention: This method reduces the risk of fraudulent invoices, as it ensures that payments are only made for goods that were ordered and actually delivered.
4. Stronger Internal Controls: It strengthens internal controls within the procurement and accounts payable process by ensuring that all documentation is reviewed and verified before making payments.
5. Improves Cash Flow Management: By ensuring accurate invoices are paid, businesses can better manage cash flow and avoid over-expenditures.

Limitations of 3-Way Matching:

• Complexity: The process is more time-consuming and complex than 2-way matching, as it requires checking an additional document (the GRN) and may involve more manual effort.
• Requires Accurate Documentation: To be effective, it requires accurate and timely documentation at each step (purchase order, receipt, and invoice), which can be challenging if there are delays or discrepancies.
• Potential Delays: If there are discrepancies between the three documents (e.g., differences in quantities or pricing), it could cause delays in processing payments until the issues are resolved.

Conclusion:

3-Way Matching is a more robust and thorough process than 2-way matching, as it ensures that the payment is based on the correct goods and services that were ordered and delivered. It helps prevent overpayments, reduces the risk of fraud, and enhances control over the procurement and payment processes.