What is 3-way matching?

3-way matching refers to the automatic validation or approval of invoices based on purchase orders, order plans, and/or delivery confirmations.

The principle is simple: you have three data sources:

1. Invoice
2. Purchase Order (PO)
3. Receipt

Do these three match? If so, the invoice is automatically approved and released for payment, without human intervention. This is the most common 3-way match, but you can also perform the match using other combinations of data sources.

Depending on how many sources you use, there are several common variations:

• 2-way match: The invoice is matched to a purchase order. This is also known as order matching.
• 3-way match: The invoice is matched to a purchase order and a receipt.
• 4-way match: In addition to the 3-way match, another source is consulted, such as a contract or payment plan.

The more sources you use, the more robust the verification. But keep in mind, more isn’t always better—it also makes the process more complicated.

How does 3-way matching work?

Let’s start with the classic 3-way match between an invoice, a purchase order, and a receipt. The order of matching in the steps below may vary depending on the software you use, but the principle remains the same.

Step 1

A purchase request is submitted and approved. This is, of course, recorded digitally.

Step 2

The services or goods are delivered, and proof of delivery—let’s say a packing slip—is sent. This is also recorded digitally. Based on details such as the PO number, the packing slip is matched to a purchase request.

Step 3

Based on the (automatically extracted) order numbers on the invoice, the corresponding receipt lines are retrieved from the ERP system.

Step 4

The receipt information and invoice information are matched against each other. This process takes into account both purchase orders and receipts (3-way match) as well as the corresponding quantities, prices, and units.

Step 5

If there is a positive match, invoices are immediately forwarded for further processing. Depending on exactly how your process is set up, the invoice is automatically approved in this step and prepared for payment.

No match?

Then the invoice is circulated for review by budget managers or held if any data is still missing, after which another attempt to match the data will be made later.

Benefits of 3-way matching

Anyone who implements 3-way matching takes a close look at the purchase-to-pay process and sets up the entire process in a well-thought-out manner. This offers several benefits:

No unauthorized expenditures

You move the approval step earlier in the process. So not afterward based on an invoice, but before the expense is incurred, at the time of the purchase request.

Greater insight

By bringing spend under management in this way, you gain greater insight and a clearer overview. The finance department knows well before the invoice arrives what expenses to expect.

Process optimization and time savings

Automatically matching and approving invoices when they match (pre-approved) purchase requests and receipts results in significant process optimization and time savings.

Reducing the burden on various stakeholders

Purchasing and Finance now only need to address invoices that do not match. Budget holders no longer need to review every invoice.

💡Recommended reading: Invoice matching that reduces costs and eliminates the need for budget holders to review invoices

Is 3-way matching really necessary to reap the benefits? You can still make a match with just two sources, so what about order matching?

The false sense of security of order matching

Order matching holds a special status; it’s viewed by many as the ultimate form of invoice processing automation. And yes, the benefits of 3-way matching apply here as well, because even with order matching, you can automatically approve invoices, bringing the approval step earlier in the process. So it does indeed deliver results.

But if you stop and think about it carefully, you’ll realize that order matching offers a false sense of security. Because when you approve invoices based solely on an order match, you’re approving an expectation, not reality. Do you see what’s missing?

The packing slip. It’s the only document that connects the physical world with the administrative one.

• The order tells us what we wanted;
• The packing slip shows what was delivered;
• The invoice requests payment for what—hopefully—matches the previous two.

💡Recommended reading: Why the packing slip is more important than the invoice

Challenges of matching

Matching different documents or sources seems like a simple task, but it presents a number of challenges. When you start working on matching, be sure to consider the structure of matching scenarios such as this one:

One order, multiple invoices

For many orders, there isn’t just one invoice; instead, payment is spread out over installments, and you receive partial invoices for each one. A matching scenario must be adjusted accordingly, because the amount linked to the order number “doesn’t match.”

Multiple orders, one consolidated invoice

A common scenario for many organizations. A nightmare if you have to check it manually, but with the right setup, it can be matched automatically very effectively.

Header or line level?

Matching at the header level (the totals) is very common, but matching at the line level is also possible. This is technically a bit more challenging, but it provides more reliable matching.

Tolerances: small differences, big impact

Small discrepancies between purchase orders and invoices are the rule rather than the exception. A rounding error, for example, or prices in the ordering system that haven’t been updated. Correcting these isn’t always cost-effective. By building in tolerances that overlook very small differences, you’ll often save money.

Last, but not least: dealing with mismatches

To achieve a smooth approval process, you not only need to set up matching properly but also need to establish a process for handling invoices that do not match.

Depending on the cause of the mismatch and the available configuration options, an invoice can, for example, be automatically submitted to budget managers for approval. Alternatively, the invoice can be automatically returned to the supplier with an explanation of why it cannot be approved.

Getting started with matching means getting started with mismatches. You gain more insight: Which suppliers cause the most exceptions? What specific mismatches do they lead to? You can use this information to initiate an improvement process: contact your supplier, adjust tolerances, and work toward a higher matching rate.

The ultimate goal? To no longer be preoccupied with invoices, but with exceptions. The fewer exceptions, the more efficient your process.