Blog · Controls and audit
Three-way matching, explained
Three-way matching means you only pay a supplier invoice once it agrees with two other documents: the purchase order that said what you agreed to buy, and the delivery record that says what actually arrived. If all three line up, the invoice is paid. If they don’t, someone asks why before the money leaves. It needs no special software, but it does need a purchase order raised before the work, because without one there is nothing to match against.
The three documents
Each document comes from a different person, and that is the point. The purchase order comes from your side before anything is bought. The delivery record comes from whoever received the goods. The invoice comes from the supplier. When three independent records tell the same story, it is very likely true.
Matching compares the same few facts across all three: the supplier, the items, the quantities, the unit prices and the total. The purchase order number ties them together, which is why suppliers are asked to quote it on every invoice.
| Document | Who produces it | What it shows |
|---|---|---|
| Purchase order | Your business, before the purchase | What was agreed: items, quantities, prices, supplier and who approved it |
| Goods received note or proof of delivery | Whoever received the goods | What actually arrived, how much of it, and in what condition |
| Supplier invoice | The supplier, after delivery | What the supplier is asking you to pay |
What gets compared
Work through the invoice line by line. For each line, ask three questions.
- Was it ordered? The item and supplier appear on an approved purchase order, and the invoice quotes that order’s number.
- Did it arrive? The quantity billed is no more than the quantity received on the delivery record.
- Is the price right? The unit price on the invoice matches the price on the order, and the totals add up.
Two-way matching for services
Services rarely come with a delivery note. Nobody signs for a consultant’s advice or a month of office cleaning. For these, most teams use two-way matching: the invoice is checked against the purchase order only, and the person who asked for the work confirms it was done before payment.
That confirmation does the job of the delivery record. Keep it in writing, even if it is a one-line email saying the work is complete, so the person passing the invoice for payment can see it.
Tolerances
Invoices rarely match to the cent. Rounding, a small delivery charge or a price that moved slightly between quote and invoice all create small differences. A tolerance is the gap you are willing to accept without stopping the invoice.
A common approach is a small percentage of the line value, capped at a fixed amount. Anything outside the tolerance goes back to the person who raised the order to explain, or to the supplier to correct. Write the tolerance down and apply it the same way every time, or it quietly grows.
What the match catches
Most mismatches are honest mistakes. A few are not. Either way, the match finds them before payment rather than after.
- Overbilling: a unit price higher than the one agreed, or extra lines nobody ordered.
- Short delivery: you are billed for 50 boxes and 40 arrived. Pay for 40, and ask for a credit note or the missing 10.
- Unauthorised work: an invoice with no purchase order behind it means somebody committed money without approval.
- Duplicates: the same invoice sent twice, or once by post and once by email. If the order has already been fully invoiced, the second copy stands out. See how to stop duplicate supplier payments.
None of it works without a purchase order first
Matching only means something if the purchase order existed, and was approved, before the work started. A purchase order typed up after the invoice arrives simply copies the invoice. It will always match, and it proves nothing.
So the real control starts earlier than the invoice. Somebody asks for the purchase, someone with the right authority approves it, and the order goes to the supplier with a number on it. Only then does the match have something independent to check the invoice against. If the line between the two documents is unclear, read purchase order vs invoice.
It also helps to keep the roles apart. The person who approves the order, the person who confirms delivery and the person who pays should not all be the same person. Segregation of duties in purchasing explains how to split them in a small team.
How a small team does it with a spreadsheet
You don’t need a matching system to start. An approved purchase order and one shared spreadsheet will do. Give the spreadsheet one row per order line, with columns for order number, supplier, item, quantity ordered, unit price, quantity received, invoice number, quantity invoiced, invoice price and status.
- Raise and approve the purchase order before anything is bought, and send it to the supplier with its number. Add each line to the spreadsheet.
- When goods arrive, the person receiving them checks the delivery note against what is in the boxes, signs it and fills in the quantity received. For a service, the requester confirms the work is done.
- When the invoice arrives, look up the order number it quotes. No number, or a number you can’t find, means the invoice goes back to the supplier or to the person who placed the order.
- Compare each invoice line with the order and the delivery: same item, quantity invoiced no more than quantity received, and price within your tolerance.
- If everything agrees, mark the line matched and pass the invoice for payment. If not, note the difference and hold the invoice until it is explained or corrected.
- Record the invoice number against the order, so a second copy of the same invoice is spotted straight away.
- Once a month, review lines received but not invoiced, and lines invoiced but not received. Both are worth a phone call.
Questions
What is the difference between two-way and three-way matching?
Two-way matching checks the invoice against the purchase order only. Three-way matching adds the delivery record, so you also confirm that what you are paying for actually arrived. Two-way is common for services, three-way for physical goods.
Who should do three-way matching?
Usually whoever processes supplier invoices, often a bookkeeper or an accounts payable clerk. The person who receives the goods records the delivery, and ideally neither of them is the person who approved the order.
What happens when the invoice doesn’t match?
Hold the invoice and find out why. A short delivery is paid for what arrived, a price difference outside tolerance goes back to the supplier for a credit note or corrected invoice, and an invoice with no order goes to the person who placed it.
Do small businesses need three-way matching?
If you pay more than a handful of supplier invoices a month, a light version is worth it. Approved purchase orders and a shared spreadsheet cover most of the risk, and the habit is easier to start small than to add later.