Three-Way Matching in Purchase Order Management: Invoice Reconciliation Guide

TL;DR

• Three-way matching in purchase order management involves reconciling the purchase order, invoice, and receiving report to ensure that payment is made for only the correct goods or services received.
• Automated systems for invoice reconciliation streamline this process, reducing manual work by 70% and achieving 50% faster procurement.
• Implementing three-way matching ensures accurate financial records, compliance, and better vendor management.
• Tejas Software's myPOmanager automates invoice verification, enhancing efficiency and reducing errors through rule-based workflows. It can be implemented within 4-6 weeks, accelerating invoice reconciliation.

Understanding Three-Way Matching

In purchase order (PO) management: the three-way matching process is used to verify the accuracy of an invoice before making a payment. The three documents that are compared are:

1. Purchase Order (PO): The document generated by the purchasing department that outlines the items, quantities, and prices agreed upon with the vendor.
2. Receiving Report: This document is issued by the receiving department to confirm the quantity and quality of the goods or services delivered.
3. Invoice: The document sent by the vendor that requests payment for goods or services provided.

The three-way matching process ensures that all details across these documents are consistent before a payment is made. If any discrepancies are found between the documents, the payment process is halted until the issue is resolved.

The three-way matching process has been shown to significantly improve procurement accuracy, reduce fraud, and maintain financial integrity. For businesses that manage high-order volumes, three-way matching is essential to prevent overpayment, fraud, and accounting errors.

For organisations handling complex purchasing processes, like kitchen appliance retailers, it’s crucial to have purchase order verification to prevent overpayments. Tejas Software’s myPOmanager automates this entire process, reducing manual effort and enhancing accuracy.

Benefits of Three-Way Matching in Invoice Reconciliation

Three-way matching is a fundamental process in invoice reconciliation, bringing the following benefits to procurement teams:

• Prevents Overpayment and Fraud: Ensures that only goods and services that have been received are paid for, preventing overpayment for undelivered or incorrect items.
• Improves Financial Accuracy: By ensuring that the PO, receiving report, and invoice all match, three-way matching helps keep financial records accurate and in line with actual deliveries.
• Enhances Vendor Relationships: By avoiding payment discrepancies, businesses can maintain positive relationships with vendors, ensuring timely order deliveries and maintaining strong vendor trust.
• Ensures Compliance: The process ensures compliance with internal controls and audit requirements, making it easier to track and verify purchases. This is especially vital for regulated industries like healthcare and food manufacturing.

Tejas Software's myPOmanager helps integrate three-way matching seamlessly into your organisation’s workflows, providing measurable improvements across procurement efficiency, financial control, and vendor management.

How Does Automated Invoice Reconciliation Work?

While three-way matching traditionally required manual reconciliation, automated invoice reconciliation is a game-changer. Let’s look at how automation improves the process:

Automating the Three-Way Matching Process

Automated systems like Tejas Software’s myPOmanager streamline the matching of purchase orders, receiving reports, and invoices by ensuring all data is aligned in real-time. This eliminates the need for manual intervention, reducing human errors and accelerating the payment cycle.

Benefits of Automation:

• Speed and Efficiency: Automated systems route POs instantly to the correct approver based on predefined rules, speeding up the procurement cycle by 50% compared to manual systems.
• Reduced Errors: Manual data entry is prone to mistakes such as incorrect vendor codes or transposition errors. Automated systems validate data during entry, cross-reference vendor agreements, and flag anomalies, reducing errors by up to 70%.
• Real-Time Visibility: With automated systems, procurement teams gain real-time visibility into the status of POs, invoices, and receiving reports. This reduces the need for status inquiries and allows teams to identify and resolve blockers proactively.

The myPOmanager tool from Tejas Software offers all these features, automating invoice reconciliation and providing powerful dashboards for efficient management.

Handling PO Discrepancies Effectively

Despite automation, discrepancies can still occur. Here's how you can handle discrepancies in the three-way matching process effectively:

Centralised Dashboard for Tracking Discrepancies

With Tejas Software's myPOmanager, discrepancies are automatically flagged. A centralised dashboard helps stakeholders track and resolve discrepancies in real time. This minimises delays and reduces manual errors that occur in traditional systems.

Defining Resolution Rules

Setting predefined rules for how discrepancies should be handled ensures consistency. For example:

• Partial Payments: If there is a mismatch in quantities but the goods are still valuable, the system can approve a partial payment.
• Vendor Follow-Up: Automated workflows can trigger a follow-up with the vendor to resolve discrepancies, which enhances communication and reduces delays.

Communicating with Vendors

With automated matching, communication is streamlined. The system automatically updates both the procurement team and vendors, ensuring both parties are aware of any issues in the matching process.

By implementing automated invoice reconciliation, businesses can ensure quicker resolution of discrepancies, reduce the manual intervention needed, and improve overall workflow efficiency.

Two-Way vs Three-Way Matching

While three-way matching involves reconciling the purchase order, invoice, and receiving report, two-way matching is a simpler process that only involves comparing the purchase order and invoice.

Two-Way Matching

• Compares only the purchase orders and invoices.
• Best suited for low-risk, high-volume transactions where the risk of discrepancies is minimal.
• Faster than three-way matching, but may lead to overpayment if discrepancies are not caught in the receiving report.

Three-Way Matching

• Compares purchase orders, receiving reports, and invoices.
• Provides a higher level of accuracy and security, ensuring goods are received as ordered.
• Best suited for high-value or complex purchases where discrepancies could lead to significant financial impact.

For companies seeking to minimise procurement errors, three-way matching provides greater control over financial transactions, reducing the risk of overpayment or fraud.

Best Practices for Implementing Three-Way Matching

Here’s how businesses can implement three-way matching effectively:

1. Automate the Matching Process: Use an automated platform like myPOmanager to reduce manual effort and improve accuracy.
2. Establish Clear Matching Criteria: Define what constitutes a match (e.g., exact quantities, agreed pricing) and create an escalation process for mismatched documents.
3. Regularly Update Vendor Information: Ensure that your vendor agreements are up to date and match them with the POs and invoices to prevent discrepancies.
4. Implement Data Validation Rules: Leverage data validation rules that automatically flag discrepancies between the PO, receiving report, and invoice.

By following these best practices and leveraging automated systems, businesses can streamline their invoice reconciliation processes and reduce errors.

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Why You Should Automate Invoice Matching

Automating the three-way matching process comes with numerous advantages that help businesses scale operations and improve accuracy:

This table clearly demonstrates why automating the PO reconciliation process significantly improves efficiency, reduces manual work, and strengthens vendor relationships.

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