The stages of the purchase-to-pay cycle
A disciplined cycle passes through clear stages, each with its own document and owner: • Purchase request: the requesting department states its need and its manager approves it. • Supplier selection: through quotations or pre-approved suppliers depending on the request's value. • Purchase order: a formal document sent to the supplier with quantities, prices and terms. • Receipt: the warehouse or requesting department confirms what actually arrived and its condition. • Supplier invoice: recorded and matched against the purchase order and the receipt. • Payment: on the due date and after approval by the authorised person. Each stage is recorded in the system linked to the one before it, so any payment can be traced back to the request that started it.
What is three-way matching?
Three-way matching is comparing three documents before approving a supplier invoice for payment: the purchase order, the goods received note and the invoice. The purchase order proves what the business ordered and at what price, the receipt proves what actually arrived, and the invoice shows what the supplier is claiming. If quantity, price and supplier agree across all three documents, the invoice is approved for payment. If they differ, it is held until the difference is explained: did a smaller quantity arrive? Did the price change without approval? Is the invoice a duplicate? Two-way matching, between the purchase order and the invoice only, is usually used for services with no warehouse receipt, provided the requesting department confirms the service was completed.
A practical example of a matching difference
A business issued a purchase order for one hundred cartons of a certain material at a set price per carton. The warehouse received only ninety-five cartons, and the supplier's invoice arrived for one hundred. Without matching, the invoice would have been paid in full, and the shortfall discovered only at the stock count, if at all. With three-way matching in the system, the system automatically holds the invoice because the invoiced quantity exceeds the quantity received, and notifies purchasing of the difference. Either the supplier sends the missing quantity or issues a credit note for its value, and only then is the invoice approved. This example is illustrative, but it describes a situation that recurs weekly in businesses with high purchase volumes.
Tolerance limits and approval authorities
Not every difference justifies holding an invoice. Minor rounding differences or acceptable weight variances for some materials may be normal. So the business sets tolerance limits, as a percentage or an amount, within which invoices are approved automatically, and beyond which they are held. In parallel, set a clear authority matrix: • Who approves a purchase request, by value. • Who approves a purchase order, and when more than one quotation is required. • Who approves payments, and the limit that requires a second signature. The core principle is that whoever requests does not approve for themselves, and whoever approves the purchase does not execute the payment.
The supplier invoice and input VAT
The supplier invoice has an important tax effect: it is the document with which the business deducts input VAT. According to ZATCA's Input Tax Deduction guideline, the taxable person must hold the tax invoice received in order to deduct the tax, and it must contain the details required by the Implementing Regulations. The guideline also states that deduction takes place in the tax period in which the supply occurred, with the possibility of deducting it in a later period, provided this is not more than five calendar years after the year in which the supply took place. So make reviewing the tax invoice's details part of matching, because an incomplete invoice may cost you the right to deduct.
Scheduling payments: balancing cash and supplier relationships
Paying too early drains cash, and paying late harms the business's reputation and may raise supplier prices or stop deliveries. The answer is deliberate scheduling: • Record each invoice's due date according to the supplier's terms, not the date it arrived. • Set fixed payment days in the week or month, instead of sporadic daily payments. • Extract a report of upcoming payables and compare it with collection and cash forecasts. • Take advantage of early-payment discounts when they make financial sense. • Give priority to suppliers that are critical to operations. A supplier that knows your business pays regularly on time is usually more flexible on prices and terms, and more willing to prioritise your orders when goods are scarce in the market.
Common risks and how to prevent them
Risks that recur in the payment cycle include: • Paying the same invoice twice: prevented by the system checking the supplier invoice number, date and amount before recording. • A change in the supplier's bank account: any request to change account details must be verified directly with the supplier through a channel known in advance, not through the email the request came from. • Fictitious suppliers: prevented by separating the authority to create suppliers from the authority to pay. • Purchases outside the system: limited by a clear policy that an invoice without a purchase order is paid only with an approved exception. These controls do not slow work down when implemented in the system; they prevent losses that are hard to recover.
Supplier statement reconciliation and monitoring reports
Even with a disciplined cycle, supplier balances in your books may differ from those in theirs, because of an invoice that did not arrive, a payment the supplier did not apply, or an unrecorded credit note. So request a statement periodically from your main suppliers, reconcile it with their balance in your books, and resolve differences before they pile up. Reports worth tracking monthly include: • Aged payables, to spot arrears and avoid late-payment penalties. • Invoices held because of matching differences, and the reasons. • Goods received not yet invoiced, which are liabilities that must be recognised in the correct period. • Purchases made without a purchase order, as an indicator of policy compliance.
Frequently asked questions
Does three-way matching suit small businesses? Yes, in a simplified form. Even a small business benefits from linking every payment to a purchase order and a confirmed receipt, and the system does this without much extra effort. What do we do with urgent purchases? Set a fast track for emergencies with a maximum value, provided the document is completed in the system within a short time and reviewed periodically. Can supplier invoice entry be automated? Many systems support receiving invoices electronically or reading them automatically, while matching and approval remain subject to authorities. How do we handle recurring expenses such as rent and subscriptions? With contracts or blanket purchase orders covering the period, against which periodic invoices are matched.
Conclusion
A disciplined purchasing cycle links every riyal paid to an approved request, a purchase order, a confirmed receipt and a correct invoice. Three-way matching, with a clear authority matrix and deliberate payment scheduling, protects the business from incorrect payments and preserves both its right to deduct input VAT and its supplier relationships. At Shams Solutions, we help businesses implement the purchase-to-pay cycle in finance and ERP systems, from designing approvals and tolerance limits to automatic matching, payment scheduling, training and post-go-live follow-up. Contact us to review your business's setup and agree on the right next steps.