The distinction between two-way and three-way PO matching matters in practice. Choosing the wrong one either creates unnecessary process overhead or leaves a control gap that costs real money.
This piece explains what each matching approach checks, where each is appropriate, and how Australian businesses should choose between them based on their operations rather than on what is technically possible.
What two-way matching checks
Two-way matching compares two documents: the purchase order and the supplier invoice. The comparison checks three dimensions:
- Supplier identity: Does the invoice come from the same vendor named on the purchase order?
- Unit price: Does the invoiced price per unit match the agreed rate on the purchase order?
- Quantity: Does the invoiced quantity match the quantity ordered?
When all three match within the configured tolerance, the invoice clears matching and proceeds to approval. When any dimension falls outside tolerance, the invoice is routed to an exception queue for investigation.
Two-way matching does not verify that goods were received. It verifies that the invoice corresponds to an authorised order. This is a meaningful control. A fraudulent invoice from a vendor that was never ordered from, or an invoice inflating the price above the agreed rate, will be caught by two-way matching.
What it will not catch: an invoice for goods that were ordered but never arrived. The matching check confirms order-to-invoice alignment, not delivery.
What three-way matching adds
Three-way matching introduces a third document: the goods receipt note (GRN). The GRN is generated by whoever receives the goods - warehouse staff, a site foreman, or a project manager - and records what was actually delivered, in what quantity, and in what condition.
Three-way matching requires that all three documents align before the invoice can proceed:
- Purchase order: The business authorised the purchase at the specified price and quantity
- Invoice: The supplier is billing for the correct amount at the correct price
- Goods receipt: The goods were physically received in the ordered quantity
The additional check closes the gap that two-way matching leaves open. An invoice for 500 units against a PO for 500 units at the correct price will pass two-way matching. If only 400 units were delivered, two-way matching will not catch the discrepancy. Three-way matching will, because the GRN records 400 units received.
The cost of three-way matching: the receiving process
Three-way matching requires a receiving process. Someone must record, at the time of delivery, what arrived. That record must enter the AP system. Without it, the third leg of the match does not exist.
In large distribution businesses with warehouse management systems, GRNs are generated automatically when stock is put away. The AP system can access the GRN data and run three-way matching without additional manual steps.
In smaller businesses without warehouse management systems, the receiving process requires:
- Designating who is responsible for recording deliveries
- Establishing a consistent process (a paper delivery docket, a digital form, or a system entry)
- Ensuring the GRN reaches the AP system in time to match against the invoice
This is not a large process burden for businesses that already handle physical goods carefully. It is a material change for businesses that currently receive deliveries informally. The question before implementing three-way matching is whether the receiving process is ready to produce the documentation the system requires.
When two-way matching is the right choice
Two-way matching is appropriate when:
The business is primarily service-based. Professional services, accounting, IT services, and consulting businesses buy time and deliverables rather than physical goods. There is no delivery to receive. Two-way matching against the service agreement or SOW is the relevant control.
Invoice volumes are moderate and supplier relationships are established. Businesses with 50 to 200 invoices per month from a stable set of known suppliers where price variances are rare get most of the matching benefit from two-way without the overhead of a receiving process.
The business does not have formal receiving documentation. Implementing three-way matching without reliable GRN records produces a system that flags every invoice (because the receiving record does not exist) and creates work that cannot be resolved efficiently. Two-way matching in this environment is more effective because it operates on documents that actually exist.
Construction project invoicing. Progress claims and subcontractor invoices reference completion milestones rather than physical delivery. Three-way matching is not an effective control for this invoice type. Two-way matching against an approved contract or purchase order value is the more relevant check.
When three-way matching is the right choice
Three-way matching is appropriate when:
The business handles significant physical goods volumes. Wholesale distributors, manufacturers, and importers with high SKU counts and regular deliveries from many suppliers have a material risk that invoices will be submitted for goods not delivered. Three-way matching provides the receiving confirmation check that two-way matching cannot.
Warehouse management or inventory systems are already in place. When GRNs are generated automatically as part of existing operations, adding three-way matching requires minimal additional process change. The receiving data exists and can be fed to the AP matching system.
Invoice values are large relative to the cost of receiving documentation. A business receiving AU$200,000 of inventory per month has more to gain from three-way matching than one receiving AU$5,000. The threshold at which the control value justifies the receiving process overhead will differ by business type.
Significant history of delivery disputes. Businesses that have experienced supplier disputes over quantities delivered - partial shipments invoiced as complete, incorrect quantities counted at delivery - benefit from the documented receiving confirmation that three-way matching requires.
Practical implementation for Australian SMBs
Most Australian SMBs should start with two-way matching. It is implementable immediately without process change, provides the most common fraud and error protections, and integrates directly with Xero and MYOB through purpose-built AP automation platforms.
Once two-way matching is operating and generating a manageable exception rate, evaluate whether the volume and type of goods received justifies adding a receiving confirmation step. This evaluation is based on:
- Whether you have had incidents of paying for goods not received
- Whether your inventory system or warehouse management generates any form of GRN
- Whether your supplier contracts specify delivery quantities that are consistently verifiable
The answer for most businesses is to operate two-way matching well rather than implement three-way matching poorly. A two-way matching process with clear tolerance configuration, efficient exception resolution, and direct accounting system integration provides meaningful AP control for the majority of Australian SMBs.
For more on how Pulsify handles PO matching, including two-way matching configuration and exception routing, see the feature overview. For the broader approval workflow that PO matching feeds into, see approval workflows.
Sources: ATO eInvoicing for business · ACCC Targeting Scams Report 2024