Optimizing Accounts Payable with 3-Way Matching and AP Automation

In accounts payable (AP), paying bills on time and accurately involves a lot of steps. Automated 3-way matching works behind the scenes to help power the matching process, and this CloudX article will:

• Provide more details about 3-way matching in accounts payable
• Explain the benefits of 3-way matching automation
• Describe the technologies behind 3-way matching automation
• Explain how 3-way matching automation works

The Three-Way Matching Process

Before learning more about 3-way matching in accounts payable automation, it’s helpful to remember what the three-way matching process in accounts payable is. On a basic level, it’s a comparison of data across the purchase order, invoice, and delivery receipt to match relevant information. When all the data aligns, you can be assured that you’re paying a supplier correctly and you’ve received goods or services as requested.

What’s the difference between 2-Way, 3-Way, and 4-Way Matching?

Although 3-way matching is a very popular way to compare invoice-related data, it isn’t the only way to manage documents. Two-way and 4-way matching are other options, and when choosing which one to use, it becomes a matter of what internal controls you want to set.

Here’s a little more information about 2-way matching and 4-way matching:

Two-way matching compares an invoice to a purchase order, and it ensures the items on these documents match up. This option is less time consuming than 3-way or 4-way matching, but since there’s no method to cross-check receiving information, a business could end up paying too much or too little for goods and services rendered.

Four-way matching includes an inspection or confirmation report in relation to quality, specifications, or compliance of received goods or services, and it’s one additional cross-check against the purchase order, invoice, and delivery receipt. It’s a thorough process for sure, but this matching requirement can increase processing time and cause delays in supplier payments.

What Are the Downsides of Manual 3-Way Matching?

Many financial leaders are well aware of the drawbacks manual 3-way matching presents, from inaccurate data and higher processing costs to lower operational efficiency and payment delays. In addition to these problems, storing paper documents is cumbersome and having to search through them for reconciliation or audit purposes takes a great deal of time.

How Automated 3-Way Matching Works

Automated 3-way matching is a method for eliminating manual touchpoints in the accounts payable process, and the primary AI technologies involved include Robotic Process Automation (RPA), Optical Character Recognition (OCR), and Machine Learning (ML).

Combined, these technologies automatically extract necessary data from documents and then compare item details line by line to ensure all data between purchase orders, receipts, and invoices match.

Here’s a breakout of how automated 3-way matching works:

1. Receiving invoices. Incoming digital and paper documents are read and then data is captured and automatically placed on standardized digital templates created by the business’s automation solution partner.
2. Matching invoices. Purchase order and invoice information is automatically cross-matched and any exceptions are flagged for review. A business can set rules to allow a variance, if desired, and route any exceptions to individuals for review.
3. Matching delivery receipt. When goods or services are received, the supplier’s receipt is scanned and document details are compared to the purchase order and invoice by line item. A rule can also be set to flag an invoice if a supplier receipt isn’t received within a specific time frame.
4. Release for payment. Once details match on all three documents, the invoice automatically syncs to a business’s ERP and routes to an assigned individual for payment.

Across the matching process, AI technology is able to understand how data is applied to documents and then leverage that data to either automatically add it to documents or recommend data options to a user.

Over time, the knowledge that AI technology accumulates via automated 3-way matching can help a business:

• Analyze historical data
• Detect behavioral patterns in invoicing documents
• Predict the likelihood of behavioral patterns continuing
• Predict supplier payment risks
• Forecast changes in spending

The Benefits of Automated 3-Way Matching

One of the primary reasons businesses implement 3-way matching in accounts payable is to cut costs and ensure they don’t overpay for goods or services. Automated 3-way matching takes this accounts payable step even further by eliminating manual processes and providing real-time visibility into account activities.

Overall, 3-way matching automation helps:

Save Time and Money. When a purchase order, invoice, and receipt are automatically matched, discrepancies can be identified early in the payment process. This reduces the possibility of invoicing mistakes, overbilling, and duplicate payments in addition to preventing the costs related to managing post-payment billing discrepancies.

Prevent Fraud. Automated three-way matching seamlessly ties every shipment back to its purchase and invoice documents, so suspicious invoices are flagged before unauthorized payments can occur. With this higher accuracy in reconciliation, the legitimacy of transactions increases and a reliable audit trail is created.

Streamline Procurement. The procurement process ensures purchases are made according to negotiated terms and conditions, and automated 3-way matching ensures that all stakeholders follow established purchasing procedures set by pre-defined rules.

Improve Supplier Relationships. Automated three-way matching provides a transparent and systemic approach to invoicing, therefore improving the consistency, accuracy, and speed of payments. In turn, this increases supplier satisfaction and sets the stage for better pricing and credit terms.

Maintain Adequate Records Related to Audits. Whenever an audit occurs, a solid audit trail will monitor the flow of money in and out of a business. To aid in this process, automated 3-way matching creates a fully searchable and timestamped audit trail for each invoice. If manual intervention is required, automation features will identify the user involved, note any activity, and record time and date of the activity.

Manual 3-Way Matching vs. Automated 3-Way Matching

In manual 3-way matching, a person must manually compare all required line items on invoice documents … a time consuming task. Any discrepancies found make the task even more difficult since documents must be routed manually for exceptions handling and then processed by hand to reach approval and payment.

However, automated 3-way matching uses AI technology to match all required line items on invoice documents. If exceptions are found, documents are automatically routed to designated employees for manual review. Once exceptions are resolved, the employee can automatically route the invoice for payment.

Here are a couple examples of how 3-way matching and automated 3-way matching work differently:

Example 1

Manual: 3-way matching is off due to a quantity difference found on a receipt. Matching pauses and the discrepancy must be researched manually. Once the quantity difference is manually approved, the invoice is routed for payment.

Automated: 3-way matching is off due to a quantity difference found on a receipt, but matching continues because the quantity difference is within a pre-set variance allowed by a business’s automation software. The invoice is automatically routed for payment.

Example 2

Manual: An invoice contains an item with no item code. Three-way matching stops and the item code must be reviewed on the purchase order and receipt. If all documents match after identifying the code, then the invoice can be manually routed for payment.

Automated: An invoice contains an item with no item code. AI technology uses stored data to automatically locate the item code, match it to the item, and add the code to the invoice. All documents are matched and the invoice is routed automatically for payment.

Are You Ready to Automate 3-Way Matching in Accounts Payable?

No matter where your business is at on its AP automation journey, CloudX can help you fully digitize and automate your invoice documents with its APSmart software solution. Learn more about APSmart here and then contact CloudX for a complimentary consultation.