3-Way Reconciliation of Bill/PO/GRN

Effective accounts payable procedures are crucial for preventing overpayments, which can significantly impact businesses. These errors, such as duplicate invoices or incorrect quantities, can lead to unnecessary costs. To mitigate these risks, companies employ 3-way matching in accounts payable. This process ensures accuracy by comparing the purchase order (PO), goods received note (GRN), and invoice before making payments. Studies indicate that automating this verification process can reduce processing costs by up to 80%. 

Therefore, finance teams, including finance controllers and CFOs, prioritize implementing accounts payable procedures that incorporate 3-way reconciliation. This optimization not only enhances financial efficiency but also fosters stronger supplier relationships.

Definition of 3-way matching

Three-way matching in accounts payable is a critical practice to prevent overpayments and ensure precision. It involves verifying invoices against purchase orders (POs) and goods receipt notes (GRNs). By comparing these documents, finance teams guarantee that payments correspond accurately to received goods or services. This method not only minimizes errors but also enhances financial records, benefiting organizations by improving efficiency and strengthening supplier relationships. 

For example, a major automotive manufacturer achieved a 20% reduction in accounts payable costs through the implementation of 3-way matching. Therefore, adopting this process is essential for maintaining precise financial management and reducing discrepancies effectively.

Key Concepts

• 2-way matching: Compares the supplier’s invoice against the purchase order (PO) or plan. Ensures pricing and terms match but doesn’t confirm goods receipt.
• 3-way matching: Compares invoice with PO and goods receipt note (GRN/SRN). Confirms goods or services were received, preventing overpayments.
• 4-way matching: Extends 3-way matching with a quality assessment. Verifies goods or services meet set standards before payment.
• 5-way matching: Adds vendor statement to 4-way matching. Compares invoice with vendor’s account statement for discrepancies.

Three-way matching in accounts payable provides crucial safeguards against overpayments. By verifying invoices against POs and GRNs/SRNs, it ensures accuracy in billing and receipt of goods or services. This process significantly reduces errors and unauthorized charges, improving financial control and compliance. For instance, a large retailer reduced overpayments by 75% after implementing 3-way matching, leading to better cash flow management and supplier relations. Such practices enhance transparency in procurement processes and mitigate financial risks effectively.

Thus, 3-way matching stands out for its role in enhancing financial discipline and operational efficiency within organizations. It not only prevents financial discrepancies but also strengthens internal controls, making it a cornerstone of modern accounts payable procedures.

Common challenges in Invoice Reconciliation 

• Invoices Paid Before Goods Arrive: When payments are made before receiving goods or services, there’s a risk of overpayment due to incomplete transactions.
• Duplicate Invoices: When vendors accidentally send the same invoice multiple times, it leads to paying the same bill twice, causing financial losses.
• Invoices with Different Numbers for Same Service: Vendors sometimes submit invoices with different numbers for the same goods or services, which can result in overpayments if not properly reconciled.
• Incorrect Invoices: Errors in invoices such as wrong prices or quantities can lead to paying more than agreed upon, impacting financial accuracy.
• Delivery Across Multiple Batches: Receiving goods in batches requires careful reconciliation to avoid overpayment for undelivered items.

Overcoming the above issues

1. Ensuring the PO has been filled out correctly: Purchase Quantity, Unit Rate, Unit of Measurement, Delivery Time, and Delivery Location are crucial details that must be accurately recorded on the purchase order (PO). This ensures the foundation for accurate invoicing and reconciliation.
2. Ensuring all data is captured at the time of GRN: It’s vital to compare Delivered Quantity against the ordered amount and verify Unit Rate and Unit of Measurement on the Goods Receipt Note (GRN). This step helps in identifying any discrepancies early on.
3. Ensuring all the data from the Bill/Invoice is captured correctly: The invoice must accurately reflect Quantity, Rate, UOM, Tax Information, Base Amount, and Discount as per the PO and GRN. This prevents overpayment due to invoicing errors.
4. Identifying mismatches and patterns: After the 3-way reconciliation, analyzing mismatches helps detect inconsistencies in Purchase Orders, GRNs, and Invoices. This method, as cited, can reduce overpayment risks significantly.
5. Alerting if mismatches and patterns resembling frauds are identified: Prompt notification is crucial upon detecting any mismatches or suspicious patterns resembling fraud. This proactive approach helps in safeguarding financial integrity.
6. Implementing a robust 3 way matching in accounts payable process ensures accuracy and prevents financial losses. By adhering to accounts payable procedures and incorporating three way matching, finance teams can streamline operations, reduce errors, and protect the company’s finances effectively.

Step-by-Step Process for 3-way matching

• Step 1: Ensuring the PO has been filled out correctly
  • The first step in 3 way matching in accounts payable is verifying the Purchase Order (PO). Check for details like item description, quantity, and total amount to prevent errors.
• Step 2: Capturing all data at the time of GRN
  • During Goods Receipt Note (GRN), capture essential info like item details and quantity received. This helps in identifying any discrepancies early.
• Step 3: Ensuring all the data from the Bill/Invoice is captured correctly
  • Lastly, verify that the Bill or Invoice matches the PO and GRN. Check item descriptions, quantities, and unit prices to avoid overpayments.

This structured approach, incorporating accounts payable procedures such as three way matching, reduces errors and enhances financial accuracy. By adhering to these steps, finance teams and CFOs can minimize invoice exceptions and discrepancies, as highlighted by the Aberdeen Group, which reports a 43% lower exception rate with proper 3-way matching.

Stakeholders Involved

Stakeholders Involved	Role	Importance
Finance Team	Oversees reconciliation, ensuring payments align with purchase orders (POs) and goods received notes (GRNs), maintaining financial accuracy.	Ensures payment accuracy by reconciling invoices with POs and GRNs, preventing errors that lead to overpayment.
Procurement Team	Generates and manages POs, ensuring they reflect agreed-upon terms with vendors to prevent discrepancies.	Manages PO creation to accurately document purchase details, crucial for preventing incorrect invoices.
Receiving Department	Validates goods receipt against POs, creating GRNs to confirm correct delivery, crucial for accurate payment processing.	Validates received goods, ensuring they match POs to prevent discrepancies and financial losses.
CFO	Approves significant payments, oversees financial operations to maintain stability and prevent fraud.	Provides oversight on large payments, ensuring the reconciliation process functions effectively to prevent financial inaccuracies.

Benefits for Businesses

• Reduces the risk of overpaying: Three way matching in accounts payable ensures invoices match purchase orders and goods received notes, preventing excess payments. For instance, companies can cut processing costs by up to 80%.
• Prevents duplicate payments: Accounts payable procedures become more secure with 3-way reconciliation, stopping errors like double entries. Healthcare providers, for instance, avoided losses due to this.
• Ensures accurate financial records: Three way matching maintains precision in financial reporting, crucial for audits and compliance. Retailers benefit by avoiding errors in inventory management.
• Improves vendor relationship through timely and accurate payments: Timely payments enhance supplier relationships, vital for steady supplies. Construction firms, for example, boosted efficiency and cost savings.
• Provides insights into spending patterns and potential frauds: By scrutinizing trends, three way matching detects anomalies, averting misuse of funds. Organizations with robust controls reduce fraud losses significantly.

Automating 3-way Reconciliation with DataTwin

Why DataTwin?

• Automated data extract ensures accurate capture at GRN & Bill creation.
• Real-time reconciliation aids quick go/no-go decisions.
• Insights into mismatch reasons streamline resolution.
• Identify patterns to detect fraud swiftly.

DataTwin leverages AI to automate data extraction from POs, GRNs, and invoices, reducing manual entry significantly. For instance, a major automotive manufacturer slashed data entry by 80% using 3 way matching in accounts payable. Real-time matching of POs, GRNs, and invoices accelerates decision-making, cutting invoice processing times drastically. A consumer goods company shortened processing from 2 weeks to 2 days by adopting accounts payable procedures with DataTwin.

The platform not only flags mismatches but also provides insights into causes like incorrect quantities or prices. A pharmaceutical distributor, for instance, decreased GRN quantity errors by 80% after analyzing data with DataTwin. By continuously monitoring matches, DataTwin detects anomalies early. A retail giant caught an employee fraud scheme early on, preventing significant losses through three way matching.

In summary, automating 3-way matching in accounts payable with DataTwin offers accuracy, real-time insights, and fraud prevention. Finance teams benefit from faster processes, reduced errors, and enhanced financial oversight. To further enhance your financial operations, check out our blog on achieving financial operational excellence: How to Achieve Financial Operational Excellence with DataTwin iFOS.