What is 3-way matching?
Essentially, 3-way matching is a process in accounting in which a company verifies that a purchase order (PO), supplier invoice, and goods receipt all reflect the same products and pricing. If the numbers are consistent throughout each document, wah-lah! You’ve got yourself a 3-way match! With the green light of a 3-way match, payment is then issued to the supplier.
3-way matching plays two critical roles in your accounting operations:
- They prevent fraudulent charges from being charged to a company’s account
- They prevent companies from reimbursing unauthorized purchases
As you can imagine, doing this process by hand—especially if your company orders hundreds or thousands of products every month—can be pretty time-consuming. They say ‘If it ain’t broke, don’t fix it”, but we’re here to tell you that your invoicing system is broken—and teach you how to fix it.
Download the free ebook: How Automation Can Solve Finance Teams’ Biggest Challenges
3 reasons you need 3-way matching automation
By using a platform that automates your 3-way matching, you are killing three birds with one stone. As a result, three more advantages present themselves. Your company can:
Saving time with 3-way matching automation
Think about it: when an unknown or unmatched purchase appears, that is an immediate red flag. Manpower and company time goes into investigating the charge, diagnosing the mistake, and reconciling the corresponding paperwork. With an automatic 3-way matching process, all that time is saved.
Saving money with 3-way matching automation
As the saying goes, time is money. But, not only does an automated 3-way matching system save you money with time, but it also prevents your company from paying for unauthorized purchases, otherwise known as “Maverick Spend”. When analyzing the true costs of maverick spend, it is not uncommon to find that up to 80% of a company's invoices are generated from uncontrolled purchasing. Read that again: 80%.
Sleeping easy with 3-way matching automation
Take the stress out of audits. By automating your 3-way match system, not only are all your invoices stored in one place, but your accounting team has human-error-free documents that are organized, easy to read, and ready to be reviewed. Sit back, relax, and enjoy your easy audits.
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How Automation Can Solve Finance Teams’ Biggest Challenges
Take a few pages out of WeWork’s playbook and learn how automation can solve some of the greatest challenges facing your finance team.
How Order.co’s 3-way matching automation helps companies thrive
Order.co’s automatic 3-way matching enables companies to scale their operations by eliminating the tedious process of reconciling invoices and approving payments.
With over a million invoices to process per year and a small AP team, WeWork estimated that, before Order.co, they would have needed to hire 150 AP specialists just to reconcile and process all of their invoices. Not only was their 3-way matching system confusing and time-consuming, but it was expensive—costing WeWork $20-$24 to manually process a single invoice.
WeWork has since been able to utilize Order.co’s automated 3-way match and invoice reconciliation feature—ridding WeWork of their manual invoice-to-payment process, ensuring accurate payments, and giving Finance Manager Kyle Ingerman and his team complete confidence in their AP process. The automatic 3-way purchase order match and invoice reconciliation process has been a “huge advantage and time-saver” for Kyle.
How Automation Can Solve Finance Teams’ Biggest Challenges
Take a few pages out of WeWork’s playbook and learn how automation can solve some of the greatest challenges facing your finance team.
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What Order.co Offers Accounting and Finance Teams
We put the balance back into balancing your books.
Order.co automatically matches your company’s POs, supplier invoices, and goods receipt—ensuring accurate payments, a simplified accounting process, and a streamlined P2P system. With 3-way matching, your company never has to worry about overpayments or ghost invoices ever again.
The way we see it, automatic 3-way matching is like the Advil for your accounting headache. Schedule a demo with Order.co today!
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The ability to manage cash can be the difference between life and death for a company. Exerting control over inflows and outflows with diligently managed accounts payable days is an important practice to keep your business stable, protect the company’s future growth, and maintain employee confidence in the company’s short- and long-term objectives.
Smart cash-flow maintenance also helps to maintain good relationships with suppliers, opening avenues for discounts and easier negotiations. Regardless of industry, having good contacts is the best way to increase investment in your business interests.
Let’s look at the days payable outstanding (DPO)—also known as Accounts Payable days (AP days)—measurement and how it impacts cash flow.
First, let’s review the accounts payable process and how DPO fits in.
Download the free tool: Financial Audit Preparation Checklist
What are accounts payable?
Accounts payable (AP) are accounts in a general ledger that represent a company’s commitment to paying off short-term debts owed to suppliers or creditors after purchasing goods or services on credit instead of with cash up front. The company can acquire what it needs now, and pay suppliers within an agreed-upon time frame (usually Net 30 to 90).
On a balance sheet, accounts payable are listed under the company’s current liabilities, because goods were bought on credit. The debts have to be paid on time to avoid default.
Like any other liability account, accounts payable will have a credit balance. When an account payable is paid, accounts payable will be debited and cash will be credited. The credit balance in accounts payable should be the same amount as the vendor invoices that have been recorded but have yet to be paid.
The AP department in an organization is responsible for tracking and verifying invoices, communicating with suppliers, and making the scheduled payments.
Under the accrual method of accounting, expenses are reported when they are incurred, not when they are paid. The company that receives the goods or services on credit has to report the liability no later than the date they were received. That date is used to record the debit entry to an expense or an asset account.
The accounts payable process
The accounts payable process ensures that the transactions listed in your accounting system are accurate and legitimate. The most important information exists in the following documents:
- Purchase orders issued by the company
- Receiving reports issued by the company
- Invoices from vendors
- Supplier contracts and other agreements
The accounts payable department is responsible for the following monthly activities:
- Processing accurate and legitimate vendor invoices
- Accurate recording in the appropriate general ledger accounts
- The accrual of obligations and expenses that have yet to be completely processed
Financial Audit Preparation Checklist
Financial audits gives companies an objective read of their financial statements. Use this checklist to get started.
What are accounts payable days (days payable outstanding)?
To better keep track of payments, companies can fall back on a reliable formula to help them pay bills and other obligations on time.
Accounts payable days, also known as days payable outstanding (DPO), is a financial ratio that shows the average number of days an organization takes to pay its bills to suppliers.
A low DPO may be considered a healthy DPO, but this isn’t always the case. They can then use the cash they have on hand to make short-term investments, increasing their working capital and freeing up cash flow.
At the same time, a too-high DPO value may signal an inability to pay bills on time. It can indicate a general cash shortfall. Each business should aim for a DPO that best suits its context. If the number of payable days changes, it could indicate that the payment terms with suppliers have changed.
If a company is paying its suppliers quickly, it may mean that the suppliers are demanding fast payment terms, either because short credit terms are part of their business models or because they feel the company is too high a credit risk to allow longer payment terms.
Days payable outstanding formula
Companies calculate DPO by multiplying the average accounts payable (the total of the beginning accounts payable and the ending accounts payable) by the number of days in an accounting period. This formula reveals the total accounts payable turnover.
That number is then divided by the cost of goods sold (COGS). Also known as cost of sales, COGS is the cost of acquiring or manufacturing the products that a company sells during a period. The ratio indicates how well the company manages its cash outflows.
DPO and the cash conversion cycle (CCC)
DPO value plays a role in calculating the cash conversion cycle (CCC). This is a metric that expresses the amount of time that a company takes to convert inventory investments and other resources into cash flow from sales.
While DPO focuses on the company’s current outstanding payables, the CCC (also known as the net operating cycle or simply cash cycle) follows the entire timeline. This extends from when the cash is converted into inventory, expenses, and accounts payable through to sales and accounts receivable, and then back into cash in hand when received.
Public companies reference DPO in their annual financial statements, income statements, and balance sheets.
How DPO is used
A well-run accounts payable process affects every level of a company’s cash position. Paying bills on schedule helps to develop a relationship with suppliers and improves your credit rating. Suppliers may also deliver better privileges, such as higher discounts, in return.
A company’s DPO metric can be used to demonstrate credit worthiness to potential lenders or credit-based suppliers.
It’s important to find the right balance in determining the right number of accounts payable days for your business. We covered the dangers of a higher ratio in the previous section. But keeping DPO low restricts the amount of cash available to reinvest in future opportunities.
In contrast, increasing accounts payable days demonstrates to creditors that the company is not in a position to borrow cash for short-term capital. A weaker company may face liquidity issues.
AP automation technology can help you manage your DPO so you can maximize your working capital while maintaining good vendor relationships.
Firsthand insights from AP automation technology adopters
Whatever the state of your company, having a clear system to pay vendors at the right times is a vital component of any business. Order.co can help companies with tasks such as organizing payment schedules, easily creating informative reports, and tracking payment variances to avoid exceptions and delays.
Order.co also automates the ordering process, freeing up more time for important day-to-day operations. Automated, proactive delivery tracking provides timely updates about the status of your shipments. Customers can complete orders 95% faster than before they began to use Order.co.
Our users have seen transformative effects on their businesses since they started using Order.co. These organizations are using our automation to streamline their processes, speed up order fulfillment, and optimize supply spending.
Here are a few case studies:
Zerocater
Before implementing Order.co, Zerocater needed one or two business days a month just to record payments and manage invoices. With our platform in place, the number of invoices they needed to complete decreased considerably—from 200 invoice payments to Amazon each month to just three or four. This reduction made it easier to track spending and wade through the ordering process. (More than 80% of our clients pay just one invoice per week or month.)
The Zerocater team also took advantage of Order’s real-time analytics features to add substantial visibility to their budgets. Their managers can see where every dollar goes and handle issues proactively.
SoulCycle
In their previous system, managers at SoulCycle had to jump through several unnecessary hoops to complete transactions. Each vendor site had its own rules and logins to keep track of. Users had to manually track transactions and its effect on their monthly budgets. This made payment reconciliation a long and challenging process.
Once the company began using Order.co, everything changed. Orders were fulfilled faster since employees could place orders from one approved catalog into one cart shared across every vendor. Reporting on expenses went from a five to six-hour monthly exercise to a fast single payment with one consolidated invoice.
Financial Audit Preparation Checklist
Financial audits gives companies an objective read of their financial statements. Use this checklist to get started.
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BLANKSPACES
BLANKSPACES’ purchasing process was time-consuming, disjointed, and difficult to parse. Each month, purchases went unrecorded. Miscommunications between locations were common. But after working with Order.co, the purchasing workflow became simpler in a matter of minutes.
Acquiring supplies became much more cost-effective. The pre-established vendor network included with Order.co made setting up accounts payable schedules a breeze. In the words of facilities manager Elizabeth Nowlin, “Once we’ve added a product to Order.co, we know everything has been taken care of.”
Visibility and process are the first critical steps in attaining a successful DPO. By implementing a software system, you can optimize the procure to pay process and keep cash flow in check. To learn more about using Order.co to streamline your most important AP tasks, request a demo.
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According to a 2021 report by PayStream Advisors, 48% of respondents listed manual approvals and manual data entry as the top challenges in their invoice workflow process. Despite this acknowledgement, a large percentage of the business world still operates in this way. In fact, 86% of SMEs – those with an annual revenue of between USD $1 million and USD $100 million – rely on manually processing invoices.
As we’ve discovered from working with hundreds of customers, when the finance department uses an automated purchasing platform, it eliminates hours of billing reconciliation, prevents invoice discrepancies, and accelerates the month-end close.
If you’re in that percentage of companies still struggling along with manual processing, you may not realize how large a problem it poses. Today, let's look at the realities of manual invoice reconciliation, and how automating the process can create a whole new world of productivity for AP teams.
Why is invoice reconciliation important?
Invoice reconciliation is a key component of an accurate accounting process. Skipping reconciliation—or worse, allowing inaccurate data to persist within the books—has severe negative consequences for the business:
- It impacts the accuracy of accounting records.
- It slows down month-end close and results in errors in financial statements (especially balance sheet and cash flow statements).
- It reduces confidence in business finances, potentially impacting access to credit and investment capital.
How is invoice reconciliation “broken?”
Although reconciliation is a vital process, many organizations are ill-equipped to handle the workload. Problems increase as the company grows, resulting in issues that have a cumulative negative impact on the business.
The two main difficulties with accurate invoice reconciliation? Time and accuracy.
1. Invoice reconciliation is time-consuming
Invoice reconciliation is a huge source of busywork for a team. It pulls top talent away from strategic activities and buries them in stacks of invoices and rows of bank account transactions.
Even the most efficient, well-staffed finance departments struggle with the burden of manual billing reconciliation—it’s slow and error-prone. A Small to Medium Business (SMB) or small business owner may find this process even more onerous.
Why? Manual reconciliation requires a large amount of redundant data entry, research, and cross-checking on a monthly basis.
An Ardent Partners study found the average invoice takes 10 days to process. Consider the hundreds or thousands of supplier invoices your business receives each month and the fact that fully manual invoicing takes up to 15 steps.
Teams must first reformat and recategorize invoices sent in various invoice formats (e.g. paper, digital files)—including converting paper documents into digital files or manually entering invoice data from PDFs into the system. Considering half of all invoices are sent as paper documents, the team will spend significant time on this step before they even process them.
At close, these same invoices must be reconciled against bank statements or ledgers to be sure payments are correctly applied, open invoices are resolved, and you don’t under- or overpay. Teams, therefore, touch every document multiple times in order to complete the process.
2. Manual invoice reconciliation is error-prone
It doesn’t matter how talented a team is, anyone tasked with matching thousands of paper invoices against endless spreadsheet lines is bound to make a mistake. And teams know it. One report revealed invoice-to-payment matching as the second biggest concern for AP departments.
Spreadsheets are a primary contributor to these concerns. According to an oft-quoted statistic, over 90% of large spreadsheets have errors. Considering this, relying on the humble Excel spreadsheet to reconcile an exponentially growing number of invoices is a recipe for disaster. This could be the reason why 40% of finance leaders don’t trust the accuracy of their financials.
If you can’t trust spreadsheets, and teams are falling further behind every month using outdated methods to reconcile, what’s the best solution? A growing number of businesses are moving to automation.
The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)
If your company’s balance sheet is not portraying an accurate picture, you’re shooting in the dark. Download the ebook to learn how to avoid this lethal pitfall.
Reconcile invoices in real-time with an automated platform
When you use an automated purchase-to-pay platform, you accomplish each invoice reconciliation step simultaneously at the time of purchase. The end-of-the-month reconciliation push vanishes because there are no redundant sets of records, and no discrepancies exist.
Take a look at the 5 steps of reconciling invoices before vs. after automation.
1. Get organized
Before: When you reconcile invoices manually, getting organized becomes a process within a process. It’s time-consuming and requires teams to put on the detective hat each month. You must collect invoices across each delivery method (paper, emailed, and electronic) and transactions from each account. You must also check for outstanding invoices to tie up loose ends, check for incorrectly coded payments, and attempt to verify the accuracy of the spreadsheet data from month to month.
After: Once the purchase-to-pay process is managed through a single platform, there’s nothing to organize. The same system generates purchase orders and invoices. If those two don’t match, the transaction isn’t approved. Without approval, no money leaves the company. The system communicates with other financial tools (such as accounting software, ERP systems, and FP&A platforms) to automatically maintain database accuracy.
Automation also makes it easy to sort invoices by vendor or purchase category. Automation gives you complete visibility with a few clicks. From purchase to pay, every transaction is tracked and perfectly organized.
2. Matching
Before: Matching is the painstaking exercise of going through each line item on spreadsheets and comparing transactions against invoices. The reviewer is looking for mismatched transactions that need reconciliation.
In many cases, matching isn’t a one-to-one process. Discrepancies and issues make it harder to tell what payments correspond to associated invoices. Common issues that complicate matching are:
- Incorrect due date or deposit dates
- Early payment or late payment issues
- Recording to the wrong bank account
- Incorrect ledger book entry
- Miskeyed invoice numbers
After: Automated purchasing platforms integrate with payment systems, automatically matching bank statements to known completed transactions. Payment terms and information are centralized in the system for seamless processing. Transactions must match at the time of purchase, otherwise payment isn’t sent.
3. Mark off each line
Before: Reviewers mark off each clearly-matched transaction/invoice pair to indicate reconciliation isn’t needed. The remaining pieces will require more research.
After: Transactions are essentially matched at the time of purchase. The platform doesn’t allow payment for unmatched transactions.
4. Research discrepancies
Before: Circling discrepancies is the opposite of marking off approved transactions. Reviewers flag transactions that don’t match invoices and that require reconciliation.
After: Since the automated system ensures that each transaction is matched at the time of purchase, no transactions require further investigation.
5. Add up invoices
Before: Conduct a vendor-by-vendor review to double check the first four steps. When the total amount paid to a specific vendor does not equal the total invoices from the vendor statement, further investigation and reconciliation are needed.
After: Automated matching and checking make redundant accuracy checks unnecessary.
The Hidden Risks Behind Your AP Balance Sheet (Some Will Surprise You)
If your company’s balance sheet is not portraying an accurate picture, you’re shooting in the dark. Download the ebook to learn how to avoid this lethal pitfall.
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What an improved invoice reconciliation process looks like
SoulCycle spent five to six hours each month on financial reporting. This included chasing invoices, reconciling those invoices, and hopefully closing accurate books. The company relied on Excel spreadsheets for its financial review.
Now SoulCycle completes these tasks faster by simply consolidating its invoices with a software-driven, purchase-to-pay platform. Instead of purchasing from dozens of different portals with invoices flowing in throughout the month from various suppliers, the company pays a single invoice each month.
SoulCycle no longer has to work through a slew of vendor invoices, making processing multiple invoices unnecessary. There are fewer invoices for the finance team to manage, so they complete month-end close more easily.
Sarah Richman, a former SoulCycle operations manager, expanded on the benefits:
“I can… get a report without waiting for someone to provide me with the data. 90% of the things I need to do, I’m able to do in the moment.”
The time SoulCycle previously spent on invoice reconciliation is now dedicated to more value-added activities:
- Managers review spending trends to stay under budget.
- Managers track vendor-specific metrics to increase fulfillment rates.
- Managers spend more time training new hires on strategic initiatives instead of reconciliation and reporting.
Ardent Partners found that “best in class” AP departments (the 20% of enterprises with the lowest invoice processing costs and shortest invoice cycle times) were 125% more likely to use fully-automated purchase-to-pay systems. SoulCycle’s experience with an automated system illustrates how these platforms empower finance teams.
I can… get a report without waiting for someone to provide me with the data. 90% of the things I need to do, I’m able to do in the moment.
-Sarah Richman, Operations Manager, SoulCycle
The end of invoice reconciliation as we know it
Invoice reconciliation is broken at most companies. But the existence of invoice reconciliation indicates a larger problem in the purchase-to-pay process. An effective, automated purchasing platform eliminates the need for end-of-month invoice reconciliation, saving the finance department hours of work each month.
Want a deeper understanding of how to optimize your accounts payable process through finance automation? Order.co’s Finance and Automation Webinar features expert advice from WeWork on how businesses can use technology to overcome key challenges and revolutionize growth.
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