Invoice fraud can hit businesses big and small, with even tech giants like Facebook and Google not immune to it. In 2019, these two companies were swindled out of $123 million collectively by a fraudster sending them falsified invoices for services that were never provided. If only their payments departments had used 3-way matching...
But using the 3-way matching method isn't only to prevent the extreme (hopefully) rare cases of fraud. Invoices can have different errors in them, leading you to overpay by mistake: From common typos through discrepancies between what you ordered and what you got, to paying twice for the same invoice.
Business owners can easily avoid these unfortunate mistakes by running a straightforward and quick check as part of their payments routine.
In a nutshell, 3-way matching means checking for errors and inconsistencies in the three documents involved in buying goods or services from your vendors - the purchase order, order receipt, and invoice.
The documents you need for 3-way matching
Let's run through a purchase cycle by touching on the three documents you need to do a 3-way matching: The purchase order, order receipt, and the invoice.
When you order goods or services from a vendor, you fill out a purchase order (P.O. for short). The purchase order has all the relevant details of the order in it:
- Purchase order number
- Dates (issue and delivery)
- A description of the goods or services
- Price per unit
- Business information (company name, shipping and billing addresses, contact information, etc.)
- Terms of payment
When you get the goods, the vendor provides you also with an order receipt (sometimes it goes by other names, such as packing slip or bill of sales). It includes all the details of the received goods, similar to the details of the P.O.
After the goods are delivered, the vendor will issue an invoice. An invoice is a request for payment for the received goods. It includes:
- A unique invoice number
- The date of invoice
- The date of supply
- A description of the goods and services provided, including quantities and prices
- Names and addresses of seller and buyer
- Payment terms
- The total amount payable
How 3-way matching works
The matching process is straightforward: before approving invoice payment, compare all three documents side-by-side and make sure All the details for the same transaction are identical, top to bottom.
If all the details match, you can move forward and pay the invoice. If there are any discrepancies or inconsistencies between any of the documents, you should resolve them with your vendor before approving the invoice for payment.
A working example of 3-way matching
Amanda runs a hardware store, and it's been one of the most hectic weeks since she started her business. She gets an invoice from her supplier for 200 Phillips-head screwdrivers at $3 per unit. The total amount payable is $600. When she pulls out the P.O. and the order receipt and compares the three documents, she finds out that:
- The P.O. number on the invoice doesn't match the one on the P.O. form itself.
- The P.O. is for 200 flathead screwdrivers, at $2.50 per unit, for a total of $500.
- The order receipt is for 180 flathead and 20 Phillips-head screwdrivers. Amanda recalls that she was so busy, she forgot to check the order when it arrived.
Now Amanda can contact her supplier with the discrepancies she has found. The supplier exchanges the 20 Phillips-head screwdrivers he sent by mistake with the flathead screwdrivers she ordered, and issues an amended invoice for the correct amount with the right P.O. number this time.
Amanda rechecks the documents using 3-way matching and finds that everything is in order this time. Now She can pay the invoice.
3-way matching is an essential process for any business ordering goods or services. By applying it to your business payment workflow, you'll be able to avoid costly human errors and minimize the chance for fraud.
If you're using QuickBooks Online, you can look for purchase management apps that sync with QBO and offer an automated 3-way matching process like ApprovalMax and Procuredesk instead of manual matching. However, we recommend you manually check the process yourself when you implement it at first.
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.