Introduction
Business finance teams perform three way matching of vendor invoices as an essential internal control process. Without using three way matching to supporting documents, companies risk cash and profit drains from making duplicate, erroneous, or fraudulent payments.
The goal of this article is to understand what three-way matching is, the evolution of the process, stakeholders and their pain points, the current state of the three-way matching process in accounting, and the benefits of automation.
Three way matching is best performed as a digitized, automated solution for repetitive accounts payable tasks.
The three-way matching concept
Three-way matching is an internal control process comparing line item details and totals on a purchase order (PO), receipt for goods (verified receiving document and packing slip), and the vendor invoice sent to the customer. Three-way matching in accounting flags any exceptions for follow-up before paying an invoice.
Three way matching documents and common practices for purchase order, receipt of goods, and vendor invoice
With three way matching of invoices by the accounts payable department, businesses reduce payment errors and fraud. Automation, including AI-driven optical character recognition (OCR), can significantly speed up the three way matching process, eliminating manual processes and increasing accuracy.
Purchase order
A purchase order is a company’s standard, sequentially numbered form that becomes a contract when the PO is sent to and accepted by the vendor that intends to deliver the goods or services to the customer. The purchasing department generates a purchase order based on a signed and approved purchase requisition after vendor selection.
The purchase order form includes customer name and logo, vendor name and contact information, legal and payment terms including discounts offered, purchase order number, customer billing and shipping address, line items with services or vendor product numbers and descriptions, pricing, quantities ordered, extended amount, subtotal, sales tax if any, and total amount.
Receipt
A receipt is a physical or electronic document that reflects the actual receipt of goods, as verified by the customer’s receiving department, compared to the itemized vendor packing slip included with the delivered products relating to the purchase order. The receiving document references the purchase order number, facilitating document matching.
An employee from the customer’s receiving department documents the verification process by line item, with a signature and date and time received.
The receipt of goods may be delivery of the entire purchase order or a partial shipment if any products are back-ordered for later delivery or shipped from a different location.
Vendor Invoice
A vendor invoice is a document that bills the customer based on deliveries from a referenced purchase order number. The invoice is sent to the customer upon full or partial shipment of items from the supplier.
Like purchase orders, invoices are sequentially numbered for internal control, which aids the invoice matching process.
Invoice fields are primarily the same as the line items of a purchase order. Invoice number, order dates, shipment dates, remittance address, payment terms like early payment discounts, subtotal, sales tax, and total amount due are included on the supplier invoice.
A vendor invoice sent to the customer doesn’t need a supplier’s signature. Upon three way matching in accounts payable without exceptions, documented approval of the invoice by an authorized approver is equivalent to a signature.
Looking to automate the 3-Way Matching process in your organization? Try Nanonets™ and get the benefits of automating Three-Way Matching through an AI-based OCR technology.
Evolution of the 3 way matching process
The 3-way matching process is an evolution. It reflects the shift from handwritten paper documents to computerized accounting software systems for manually entering computer-generated paper documents to today’s efficient automated technologies for matching electronic vendor invoices to digitized purchase orders and receipts.
With paper-based processes and systems, constant problems block and tackle the chances of accounting and the accounts payable department becoming efficient at performing their job duties.
Customer delays in accounts payable (and accounting) from paper-based purchase order to payment cycles include:
- Receiving and filing separate paper purchase orders, receipts, and mailed vendor invoices in the accounts payable department
- Locating or requesting replacements for lost paper documents
- Manually entering vendor invoices into the accounting system
- Visually matching invoices with supporting documents if the ERP system doesn’t integrate software-based procurement and receiving functions with the accounting and accounts payable software
- Approving vendor invoices visually
- Month-end and fiscal year-end financial closing delays from accruing many invoices as accounts payable not yet recorded in the system
- Experiencing constant interruptions from suppliers about the status of unpaid invoices.
Customer errors from paper-based documents include:
- Errors resulting from manual data entry
- Approval of duplicate invoices for payment
- Approval of fraudulent invoices
- Financial statement errors from under-accrual of unrecorded accounts payable.
The under-accrual of accounts payable is due to a combination of delays in receiving and matching invoices and short cut-off dates after month-end.
From the standpoint of a vendor, three-way matching by the customer is delayed by the time required for the vendor to review and approve the invoice and print and mail it (plus mail in-transit time).
The customer’s departments involved in 3 way matching are:
- Purchasing
- Receiving
- Approvers
- Accounting (Accounts Payable)
Purchasing receives an approved purchase requisition, vets vendors, creates an approved vendors list, requests multiple quotes from potential suppliers, selects one or more suitable vendors, and prepares and submits an approved purchase order to the vendor.
Receiving verifies the receipt of items and prepares a receiving report for items received from the purchase order, using vendor packing slips and itemized delivery receipts.
Authorized approvers with budgetary responsibility approve matched invoices. Approval authority limits by job title and amount are stated in the company policy. For larger purchases, a second approver at a higher level in the organization must also approve the invoice.
Relating to three way matching, accounts payable employees’ job duties include:
- receiving and handling the documents
- accounting for trade payables transactions
- preparing the accounts payable aging report and cash disbursements report, and
- making batch payments of approved vendor invoices and payment runs.
Adequate internal control practices separate duties for accounting for transactions, handling cash, and approving invoices and payments. The accounting department, outside accounts payable, reconciles payments and accounts payable journals to the general ledger and prepares financial statements.
Process improvements and efficiencies gained over time for 3 way matching include business process reengineering (BPR) to streamline manual workflows and handle them with computerized systems.
Reliable OCR with AI data capture software and invoice automation handles three way matching of invoices to purchase orders and receipts. This automation process can help a company keep up with the accounts payable and payments workload, increase accuracy, reduce erroneous or fraudulent payments, close the books earlier, and cut related department labor and other administrative costs.
Looking to automate the 3-Way Matching process in your organization? Try Nanonets™ and get the benefits of automating Three-Way Matching through an AI-based OCR technology.
Stakeholders and their duties and expectations
In the three way matching process, the stakeholders are procurement teams, vendors or suppliers, and finance teams, including accounts payable and accounting.
Procurement teams
Procurement teams, also known as purchasing teams, receive approved purchase requisitions from an employee needing purchased goods or services.
Procurement is responsible for verifying vendors in a company’s supply chain and evaluating their capabilities. Procurement confers with their company’s credit department to evaluate the financial strength of vendors. Procurement ranks vendors, establishing a preferred and approved vendors list.
The purchasing department requests multiple bids before selecting a vendor or supplier for a substantial order. Procurement then issues a reviewed and approved purchase order and submits it to the vendor.
Procurement should consider vendor performance related to the purchase order and also assess the supplier’s financial strength before placing another order.
Vendors or suppliers
Vendors have a duty to accept or reject purchase orders. When vendors accept customer purchase orders, they create a legal contract to perform, complying with the PO terms.
Before accepting a purchase order, vendors should run credit reports on that customer to ensure that the customer has the financial strength to pay for the products ordered.
Vendors enter the purchase order into their system, which triggers ordering parts and products or delivering services. If the goods require manufacturing, the vendor schedules labor and pulls parts on the bill of materials to manufacture the products.
To retain the customer, vendors should strive to meet the delivery date on the purchase order. They should inform the customer of shipments and their expected delivery date.
However, sometimes vendor delays occur. If an expected delivery date isn’t close to the delivery date on the PO, the vendor should communicate any delays or backorders with the customer and get an agreement.
Suppliers are also responsible for testing and quality control. Vendors ensure that products delivered to the customer under the purchase order meet specifications and expected high-quality standards.
Finance teams
The Finance department performs the following procedures to enter or capture vendor invoice data using OCR, match invoices, get approvals, pay vendor invoices, record transactions, generate reports, and issue financial statements to stakeholders.
System access to purchase orders and receipts
Finance teams, including accounting and accounts payable, record or access purchase orders in their accounting software or company-wide enterprise resource planning (ERP) system.
When the receiving department enters receiving reports into the system, the operations department, accounts payable, and finance team members can access the verified receipt or its data.
Accounts payable team enters and records vendor invoices
Accounts payable enters vendor invoices into the accounting system and codes the entries to record inventory, fixed assets, or expenses as the other side of double-entry bookkeeping.
Accounts payable performs three way matching
The next step is for accounts payable to perform the three way matching process, ensuring that the purchase order, receipt, and vendor invoice are in agreement or that only the actual goods received to date are paid for by the due date, if possible.
Approvers approve or reject invoices for payment
After the three way matching procedure is complete, designated approvers review the matched invoices and supporting documents and approve the invoices for payment, unless an exception exists or the transaction appears to be erroneous, duplicate, or fraudulent.
Approvers may include department managers responsible for the expenditures and the Controller or Chief Financial Officer (CFO). For huge expenditures, the Chief Executive Officer (CEO) and Board of Directors may also need to approve the payment or a contract.
Accounts payable department pays invoices
Some companies stretch payment of vendor invoices by a reasonable amount past the due date for cash flow management purposes or if they experience cash flow issues. Vendors will cut off future order shipments to the customer until they collect payments if payment of customer invoices or account balances are delayed for too long.
Accounts payable makes payments to the suppliers according to company policy on taking early payment discounts. If discounts aren’t offered by the vendor or taken by the customer, the accounts payable department pays the entire invoice amount by the due date.
A typical payment term for trade payables is 2/10 net 30. The vendor offers a two percent discount if the customer pays the invoice within ten days; otherwise, the total invoice amount is due 30 days after the invoice date.
Looking to automate the 3-Way Matching process in your organization? Try Nanonets™ and get the benefits of automating Three-Way Matching through an AI-based OCR technology.
Accounts payable records payments
When the accounts payable team makes batch payments, or in some cases, makes single invoice payments, the accounting system reduces the accounts payable balance by the total invoice amount or partial invoice payment.
The accounting system applies payment to a specific invoice number. When invoice numbers aren’t known, unapplied payments may occur, requiring future follow-up to clean up the detailed accounts payable aging. Accounting investigates and corrects any errors for debit balances in accounts payable, which may indicate an overpayment or mistake.
When a vendor account balance or invoice balance is zero, it is considered settled, with the transaction(s) complete.
Early payment discounts are not reflected in the accounting records until the customer takes them upon paying an invoice at the lower, discounted amount.
Accounts payable generates aging reports
Accounts payable generates accounts payable aging reports, which include columns indicating vendor invoice days outstanding.
Days outstanding is the number of days balances due are unpaid since the invoice date. Accounts payable aging details include vendor name, invoice numbers, and amounts outstanding, with total gross payments due to the vendor. Columns are current, 30 days, 60 days, and 90 days, with totals by column date range and grand total.
Accounting reconciles to the general ledger and supervises accounts payable
Accounting reconciles the accounts payable journal to the general ledger at least monthly and reviews the accounts payable aging for vendor payments status.
Finance performs financial planning and analysis (FP&A) and cash management
Finance also reviews the accounts payable aging and prepares statistics including accounts payable turnover to manage cash flow and review business performance. Finance also forecasts cash requirements. Accessing real-time financial reports and complete and up-to-date accounts payable aging reports is essential for financial management.
Finance prepares annual budgets and forecasts using sales projections and expense requirements submitted by revenue and cost center managers within departments responsible for controlling spending. Sales forecasts may be built from the customer contact level, starting at the salesperson or account manager level.
Accounting prepares financial statements that the CFO, CEO, and Board review
The accounting department prepares monthly and year-end financial statements. The detailed financial statements include actual vs budgeted amount variance reports by coded accounting line item.
Detailed financial statements are summarized and made accessible or reported to designated internal management, the Board of Directors, and external stakeholders including banks, shareholders, and the Securities and Exchange Commission (SEC) for publicly traded companies.
Pain points in the manual process
Paper-based documents cause the most pain points in the 3 way matching process.
Pain points in the three way matching process include:
- Handling variations
- One-off scenarios
- Duplicate invoices with no supporting documents to match
- Fraudulent invoices
- Invoice approval delays
- Multiple payment status inquiries from vendors.
A variation arises when the line items, quantities, extended amounts, or total due on a vendor invoice don’t match the purchase order or receipt of goods or services. The transaction will be flagged as an exception. Accounts payable will need to resolve these types of recurring issues.
In a paper-based system using alphabetized document files, paper documents can be misfiled, leading to delays and missing supporting documents for the three way matching of invoices.
A one-off scenario is a single-time occurrence rather than a repetitive issue or event. If an accounts payable employee encounters a one-off matching error, they will need to investigate the problem to solve it. The resolution takes extra time compared to a repetitive issue.
As a one-off example, if the vendor invoices the wrong product, accounts payable will need to request a corrected invoice to complete the match. Waiting to receive a corrected or replacement invoice or receipt from the vendor will delay invoice approval and payment and reduce productivity.
Duplicate invoices will not have necessary supporting documents, which have already been matched with the original invoice. If the system works correctly, the duplicate invoice will be noticed, flagged as an exception, and not be approved for payment.
Some fraudulent companies may bill the business for unordered office supplies or other products or services not delivered. Without supporting documents to match the transaction, an exception should occur to prevent payment.
If departmental management or executive approvers don’t approve matched invoices promptly, accounts payable will need to follow up until the approval happens. Paper invoices and supporting documents may be lost somewhere in a black hole in the company, requiring that replacement documents be obtained before payment.
With paper-based three way matching of invoices with supporting documents, approver delays can result from procrastination, heavy workloads, resolving questions with the requester, and business travel.
When long delays occur in invoice payment due to exceptions in the three-way matching process (or other causes), the accounts payable team will be frustrated by constant interruptions from suppliers requesting payment status. They may miss deadlines or require overtime to complete job duties. Labor time and costs will be higher.
Looking to automate the 3-Way Matching process in your organization? Try Nanonets™ and get the benefits of automating Three-Way Matching through an AI-based OCR technology.
Current state of the three way match process
Businesses are rapidly adopting AI and OCR for data capture and integrating it with ERP or accounting software and robotic process automation (RPA) software. OCR helps them conduct three way matching (and other routine processing tasks). We cite examples of businesses adopting advanced OCR systems to gain significant efficiencies and competitive advantage.
Use of AI and OCR in three way matching of invoices
Using best practices, businesses now use optical character recognition (OCR) scanning, artificial intelligence (AI), and deep learning technologies for digitization and three-way matching. OCR can be integrated with robotic process automation (RPA) software.
Nanonets provides a leading-edge automated platform for accurately capturing and electronically processing the purchase order, receipt, and invoice documents needed for three way matching of invoices.
Businesses can capture unstructured data in requested fields and add new fields. Machine learning lets the system become more accurate as it gains experience from prior document data capture and retrains. Besides using OCR capture for the three way match process, the best systems enable uploading electronic invoices received via email or other online delivery methods.
Robust OCR and AI/ML systems for data capture, like Nanonets, include integrations with other software. The integration includes using Zapier to import data from your email, inbox, Dropbox, Box, or another source.
Integrating with your enterprise resource planning (ERP) software and warehouse management system (WMS) facilitates three-way document matching. OCR systems, like Nanonets, also integrate with customer relationship management (CRM) systems like Salesforce.
For invoice automation, AI-powered OCR software captures vendor invoice data and feeds it into the accounts payable module of an ERP system. Invoice automation matches supplier invoices to purchase orders and receipts for three way matching.
Users can opt to seamlessly integrate with robotic process automation (RPA) platforms like UiPath to automate three-way matching using bots. Nanonets combines with your choice of several RPA platforms.
Besides integrating with other software, users can query the OCR model after training it or using a pre-trained Nanonets model.
To relieve the pain point of fraudulent invoices, if users specify indicators of a fraudulent document, Nanonets OCR can detect and flag fraudulent invoices to prevent the payment of these invoices.
Tech advances in OCR include using computer vision, working with unstructured documents, and applying deep learning algorithms and natural language processing (NLP).
According to a 2020 report co-authored by Deloitte Digital (U.K) and UiPath that quotes a 2019 Everest survey:
“Many organisations are devoting more financial and human resources to deploy intelligent document processing capabilities. Success by forward-looking organisations is driving confidence in a market expected to grow 70-80% over the next two years to US$1.1 billion.”
Business thought leaders using tech advances for three-way matching
The major global accounting firms are huge supporters of invoice automation using OCR with artificial intelligence and machine learning, plus robotic process automation. As an example, Deloitte is a Nanonets customer that regularly reports on the advantages of an automated invoice matching system that streamlines accounts payable workflows, reducing required labor time and costs.
Cummins, P&G, and Sherman Williams are Fortune 500 industrial companies using Nanonets to accomplish OCR-related tasks. DoorDash also uses Nanonets. And large insurance claims processing companies use Nanonets.
Insurance claims processors benefit significantly from using Nanonets OCR solutions to digitize data from invoices and receipts, as described in this case study.
Besides these large companies, small to medium-sized enterprises (SMEs) gain efficiency from implementing Nanonets OCR solutions for accounts payable.
In a case study, a multi-state, multi-location, SME jewelry retailer benefits from using Nanonets to enhance its capabilities beyond those provided by QuickBooks alone. In a Nanonets testimonial, Happy Jewelers states: “Our employees now feel more productive and happy as most of the clerical work is now out of their lives.”
The automation process
The OCR/AI automation process can efficiently handle a diverse range of business objectives, including verifying loan documents for financial institutions, identifying inappropriate social media postings using computer image processing, and invoice processing, including three way matching. In this blog article, we focus on the three way matching use case.
The automation process begins with advanced optical character recognition (OCR) software, like Nanonets, that uses artificial intelligence, machine learning, and computer vision technologies to improve accuracy and enhance its capabilities.
How it works…
Nanonets accepts online invoices, purchase orders, and receivers from several of your online sources. Nanonets also provides significant value by capturing data from paper documents, including hard-to-read handwritten ones, with a high accuracy rate. Not all AI-driven OCR systems offer precise handwritten document functionality like Nanonets.
Upon capturing documents data and mapping it to fields, Nanonets can perform post-processing applying its AI and machine learning capabilities. During and after data capture, changes can be made in Nanonets. For example, field data formats can be standardized for documents received from various vendors.
Users can train and retrain the model with a Nanonets machine learning algorithm using a sample of data with labels or select a pre-trained Nanonets model. Retraining and repeated use of a model improve accuracy in OCR detection (and other uses like image classification and object detection).
As a reference point, Nanonets support believes that it usually takes two to eight hours to train a model. If it takes longer to train your model, consider upgrading your Nanonets software plan.
Nanonets describes how its users are building custom deep learning based OCR models in a detailed guide.
Nanonets provides the API interface and code. Nanonets exports data in the computer language you prefer to your choice of apps.
Nanonets can integrate directly with software like a company-wide ERP system or QuickBooks (or a competitor’s) accounting software and a warehouse management system through an API connection.
Nanonets has an optional API integration with robotic process automation (RPA) software bots to conduct RPA-based automated invoice processing and three way matching with supporting documents.
Nanonets security includes a Software Development Lifecycle Policy for its users, employees, and third-party contractors. The Nanonets software policy addresses encryption, standards, and worldwide GDPR compliance for the privacy of EU-based residents using the software.
Pricing options
Nanonets offers monthly, per model SaaS pricing plans (plus usage costs) at different levels for each type of software Model, including Starter, Pro, and Enterprise. The free Starter plan has limited features and is offered as a try-out platform. Nanonets models offered include Custom Model, Receipts, Invoices, Driving License, and Passports.
The Enterprise plan offers more features, including a dedicated Account Manager, personalized 1-1 team training, and a higher security and control level. Request a custom quote from Nanonets sales for Enterprise.
Control & support
Nanonets software users can access Usage Stats for their number of documents processed, number of fields processed, and cost incurred during a billing cycle. This access allows users to access status information and control usage costs.
For customer support, Nanonets provides a searchable knowledge base in its online Help Center that includes a Getting Started Guide and documentation by topic for self-training.
Nanonets also provides short video tutorials, including How to build an OCR model with Nanonets.
Looking to automate the 3-Way Matching process in your organization? Try Nanonets™ and get the benefits of automating Three-Way Matching through an AI-based OCR technology.
Benefits of automating the process
Benefits of automating the three way matching process include:
- Audit readiness
- Error reduction in accounting
- Fraud reduction
- Seamless sync
- Man hour savings
Companies and their auditors are moving from inefficient and ineffective manual processes to accounting and auditing software with digitized processes using OCR, AI, automated bots, and data visualization tools with business intelligence for analyzing results and patterns.
By using accurate, automated three way matching of invoices, purchase orders, and receivers, the chance for errors and fraud is reduced when users provide specific instructions for fraud detection.
Audit software can seamlessly sync with an ERP system already integrated with AI-driven, OCR data capture.
Accounting internal controls and financial statement reliability reduces the scope of additional audit procedures needed. Efficient and reasonably current processing, approval, and payment of vendor invoices make the financial statements more reliable.
Time savings are substantial, leaving more employee time for fulfilling audit requests. Modern, digitized audit software using AI technology can reduce the need to request some of the information from clients. Accounting and accounts payable can complete any audit request on a timely or early basis, so the auditors don’t experience delays due to waiting time, increasing audit fees.
And time savings result in reduced labor and hiring needs, reducing business costs.
Reliable OCR with AI data capture software and invoice automation handles three way matching of invoices to purchase orders and receipts. This automation process can help a company keep up with the accounts payable and payments workload, increase accuracy, reduce erroneous or fraudulent payments, close the books earlier, and cut related department labor and other administrative costs.
Conclusion
This article provides an in-depth guide to three way matching of invoices. Automation improves the three way matching process in finance by increasing efficiency and reducing risk of errors from manual data entry. Nanonets provides a state-of-the art, AI-driven OCR software solution for implementing the three way matching process.
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Source: https://nanonets.com/blog/three-way-matching-3-way-matching/
