3-Way Matching Guide | How to Prevent Overpayment with Invoice Verification

“The invoice says 100 units, but we only received 80…”

This is exactly the kind of discrepancy that 3-way matching helps you catch before you pay.

This guide explains everything about 3-way matching—what it is, how to implement it, and how to automate it with AI.

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What is 3-Way Matching?

Definition

3-way matching is a verification process that compares three documents before approving a payment:

1. Purchase Order (PO) - What you ordered
2. Delivery Note (Goods Receipt) - What you received
3. Invoice - What you’re being charged

3-Way Matching: Ensuring the PO, delivery note, and invoice all agree before payment

Why 3-Way Matching Matters

Risk	Prevention
Overpayment	Verify quantities match
Fraud	Detect unauthorized purchases
Duplicate payments	Catch duplicate invoices
Incorrect pricing	Verify agreed prices

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2-Way vs 3-Way Matching

2-Way Matching

Compares only two documents:

Purchase Order ↔ Invoice

Limitation: Doesn’t verify actual receipt of goods.

3-Way Matching

Compares all three documents:

Purchase Order ↔ Delivery Note ↔ Invoice

Advantage: Confirms goods were actually received before payment.

Comparison Table

Aspect	2-Way	3-Way
Documents	PO + Invoice	PO + Delivery + Invoice
Verification	Order vs charge	Order vs receipt vs charge
Risk protection	Medium	High
Complexity	Lower	Higher
Use case	Services	Physical goods

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How 3-Way Matching Works

Step 1: Verify Purchase Order

Check that a valid PO exists:

• PO number matches
• Authorized purchase
• Within budget

Step 2: Verify Delivery Note

Confirm goods were received:

• Quantities match PO
• Items are correct
• Quality is acceptable

Step 3: Verify Invoice

Match invoice details:

• Quantities match delivery note
• Prices match PO
• Calculations are correct

Step 4: Approve or Investigate

Scenario	Action
All match	Approve payment
Minor variance	Apply tolerance threshold
Significant variance	Investigate discrepancy

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Common Discrepancies

Quantity Discrepancies

PO	Delivered	Invoiced	Issue
100	80	100	Overbilling
100	100	80	Underbilling
100	80	80	Partial shipment (OK)

Price Discrepancies

PO Price	Invoice Price	Possible Cause
¥1,000	¥1,100	Price increase
¥1,000	¥900	Discount applied
¥1,000	¥1,000	✅ Match

Other Issues

• Missing documents
• Wrong vendor
• Duplicate invoices
• Calculation errors

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Tolerance Thresholds

What is a Tolerance?

A tolerance is an acceptable variance range that allows minor discrepancies to pass without manual review.

Common Tolerance Settings

Type	Example Threshold
Quantity	±2%
Price	±¥100 or ±1%
Total	±¥500

Setting Appropriate Thresholds

Consider:

• Transaction volume
• Average invoice value
• Risk tolerance
• Industry standards

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Challenges with Manual 3-Way Matching

Challenge 1: Volume

Monthly Invoices	Matching Time
100	10-20 hours
500	50-100 hours
1,000+	100+ hours

Challenge 2: Data Format Differences

• PO in system A
• Delivery note in system B
• Invoice as PDF

Challenge 3: Notation Variations

PO	Invoice	Match?
Widget A-100	Widget A100	Human: Yes, System: No
ABC Corp.	ABC Corporation	Human: Yes, System: No

Challenge 4: Missing Documents

• Delivery note not received
• PO not found
• Invoice lost in email

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Automating 3-Way Matching

Traditional Automation (ERP)

Pros:

• Integrated with purchasing
• Workflow built-in

Cons:

• High cost
• Long implementation
• Rigid matching rules

AI-Powered Automation (Totsugo)

Pros:

• Handles notation variations
• No master data setup
• Quick implementation

How It Works:

1. Upload invoice PDF
2. AI extracts data
3. AI matches with PO/delivery note
4. Review exceptions only
5. Approve with Enter key

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Best Practices

1. Standardize Processes

• Consistent PO format
• Standard delivery note procedures
• Clear invoice requirements

2. Set Clear Policies

• Define tolerance levels
• Exception handling procedures
• Escalation paths

3. Train Staff

Everyone should understand:

• Why 3-way matching matters
• How to handle exceptions
• When to escalate

4. Automate First, Optimize Later

Start with automation for:

• High-volume vendors
• Repetitive purchases
• Standard products

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Summary

What is 3-Way Matching?

Element	Description
PO	What you ordered
Delivery Note	What you received
Invoice	What you’re charged
Goal	All three must match

Key Benefits

1. Prevent overpayment - Don’t pay for what you didn’t receive
2. Detect fraud - Catch unauthorized purchases
3. Improve accuracy - Reduce payment errors
4. Build controls - Strengthen internal processes

Automation Options

Method	Best For
Manual	Low volume
Excel	Medium volume
ERP	Large enterprises
AI (Totsugo)	Any volume, variation-heavy

Stop the manual document chase. Let AI handle the matching while you focus on exceptions.

👉 Try PDF reconciliation for free