E-commerce Inventory Expense Controls: Three-Way Match, Supplier Vetting to Prevent Fraud

How to Prevent Inventory Fraud in E-commerce Startups

For early-stage e-commerce startups, cash is oxygen. Every dollar spent on marketing, product development, and growth is scrutinized. Yet one of the largest and most frequent expenses, inventory purchasing, often operates with minimal oversight. This reliance on spreadsheets and manual processes creates dangerous blind spots, allowing cash to leak out through overpayments, duplicate invoices, or even payments for goods that never arrived. This isn't about a lack of trust; it's about building a resilient financial foundation from day one. Founders, who often act as their own finance leads, need a practical system for e-commerce expense tracking and to control inventory spend without creating bureaucracy that stifles growth. Implementing basic purchase order controls is the first step toward protecting your runway and ensuring capital is deployed effectively. To learn more about broader policies, see our expense management hub.

Understanding Foundational Inventory Controls

Inventory expense controls are the operational habits and systems you use to ensure you only pay the correct amount, to the correct supplier, for the inventory you actually ordered and received. Think of these controls as the bridge connecting your operations team, who orders and receives goods, with your finance function, who pays the bills. For a growing e-commerce business using platforms like Shopify, a strong process here is critical for preventing inventory fraud and maintaining clear financial records in your accounting software, whether it is QuickBooks or Xero.

The goal is not to create rigid, enterprise-level rules that slow you down. Instead, it is to establish a predictable, repeatable workflow that verifies every significant inventory purchase. This discipline forms the backbone of reliable financial reporting, which is essential for complying with accounting standards like US GAAP for American companies or FRS 102 in the UK. Weaknesses in this area do not just risk immediate financial loss. They create inaccurate financial statements, making it impossible to assess profitability, manage cash flow effectively, or secure future funding from investors who demand trustworthy data. The reality for most early-stage startups is more pragmatic: start simple, build the habit, and layer in technology as operational pain dictates.

Pillar 1: The Three-Way Match, Your First Line of Defense Against Fraud

What is the single most effective process to stop overpayments and payments for phantom inventory? It's the three-way match. This is a core inventory audit procedure that validates a supplier invoice by matching it against two other key documents: the Purchase Order (PO) and the Goods Receipt Note (GRN).

The Components of the Three-Way Match

Each document serves a distinct purpose, and together they create a verifiable trail for every inventory purchase.

1. Purchase Order (PO): This is the official document you send to a supplier, detailing precisely what you want to buy, the specific quantity of each item, and the agreed-upon price. This is your statement of intent and the source of truth for the order.
2. Goods Receipt Note (GRN): This is an internal document your warehouse or operations team creates when the inventory physically arrives. It confirms what you actually received, the quantity that arrived, and the condition of the goods. It is your proof of fulfillment.
3. Supplier Invoice: This is the bill from the supplier requesting payment for the goods they claim to have shipped. It details items, quantities, and prices, and provides payment instructions.

The magic happens when you refuse to pay an invoice until it matches both the PO and the GRN on item, quantity, and price. This simple check prevents paying for incorrect quantities, unordered items, or prices you never agreed to. Research highlights the scale of this issue. A 2022 Medius survey found 81% of businesses receive invoices that don't match the purchase order (Medius, 2022). Without a matching process, these discrepancies easily become cash leaks that silently drain your bank account.

A Practical Workflow for Startups

For an e-commerce startup using Shopify and QuickBooks or Xero, a practical implementation does not require new software. You can build a robust process with tools you already use.

• Step 1: Create Centralized POs. Use a shared Google Sheet or a similar tool as your PO log. For every order, create a new entry with a unique PO number, supplier name, item SKUs, quantities, and unit prices. This becomes your official record of what was ordered.
• Step 2: Document Goods Received. When inventory arrives, your operations team must update the corresponding PO line in the Google Sheet. They should note the exact quantity received for each item and attach a photo or scan of the supplier’s packing slip. This entry, once confirmed, acts as your digital GRN.
• Step 3: Perform the Match Before Payment. When the supplier invoice arrives via email, the person responsible for payments, often the founder, must perform the check. They open the PO log, find the matching PO number, and verify that the invoice details (items, quantities, prices) align perfectly with both the original PO and the GRN data. Only after this verification should the bill be entered into QuickBooks or Xero for payment. This is the core discipline.

What to Do When Documents Do Not Match

Discrepancies are common, so you need a clear process to handle them. If an invoice does not match the PO or GRN, do not pay it. Instead, contact the supplier immediately to resolve the issue. Common mismatches include price variances, quantity shortfalls, or incorrect items. By flagging these issues before payment, you shift the burden of proof to the supplier and prevent a financial loss that can be difficult to recover later. This proactive approach is a cornerstone of effective inventory reconciliation tips.

Pillar 2: A Strong Supplier Vetting Process to Prevent Fraud

Strong purchase order controls can be undermined if you are paying a fraudulent supplier. Preventing supplier fraud begins with a formal onboarding process that protects your business from fake vendors, shell companies, and potential internal collusion. Billing schemes are a significant and costly threat. The ACFE's 2022 'Report to the Nations' identified billing schemes as a top fraud risk for businesses, with a median loss of $100,000 per incident (ACFE, 2022). A robust supplier vetting process is your primary defense.

Implementing 'Segregation of Duties Lite'

Even with a small team, you can implement a simplified version of a key internal control: segregation of duties. The person responsible for sourcing and operations can propose a new supplier, but a different person, such as the founder or a finance lead, must be the one to formally approve them and authorize their first payment. This simple separation prevents a single individual from being able to create a fictitious vendor in your system and then pay fraudulent invoices from that vendor. For more details on this principle, see our guide on approval workflows.

Your Onboarding Checklist for New Suppliers

What founders find actually works is a simple, standardized onboarding checklist that is required for every new vendor, without exception.

• Formal Information Capture: Never rely on details sent in the body of an email. Require all new suppliers to complete a formal vendor onboarding form. For US companies, this means collecting a W-9 form to get their Taxpayer Identification Number (TIN). In the UK, you will need their Company Registration Number and VAT details for proper record-keeping.
• 'Trust but Verify' Diligence: Don't just take the form at face value. A scenario we repeatedly see involves fake invoices sent from legitimate-looking domains that are off by a single letter. Take five minutes to independently verify the company's existence using public records, like Companies House in the UK or the relevant Secretary of State business search in the US. A quick phone call to a publicly listed number to confirm bank details before the first payment can prevent a costly mistake.
• Centralized and Secure Record Keeping: Store all approved vendor forms and bank details in a secure, centralized location, not in someone's inbox. This becomes your single source of truth for who is authorized to be paid. Access to this information should be restricted.

Managing Supplier Bank Details Securely

One of the most common ways businesses fall victim to payment fraud is through fraudulent bank detail change requests. A fraudster, posing as your supplier, will email you with a story about changing banks and provide you with new account details. Your team, trying to be helpful, updates the record, and the next payment is sent directly to the criminal. To prevent this, implement a strict policy: any request to change a supplier's bank details must be verified verbally over the phone using a known contact number from your original records, not a number provided in the change request email.

Pillar 3: Using Technology as a Guardrail for Inventory Fraud Prevention

As your order volume grows, a manual, spreadsheet-based reconciliation process becomes a major time sink and a significant source of operational risk. The question then becomes: when is it worth paying for software? The trigger for an upgrade isn't an arbitrary revenue milestone; it's operational pain. When your team is spending hours each week on manual inventory reconciliation or when costly errors start slipping through the cracks, it is time to invest in technology.

Weak internal controls are a primary enabler of fraud. A 2023 PwC report noted that weak internal controls were a factor in 52% of companies experiencing fraud (PwC, 2023). Technology transforms manual discipline into system-enforced workflows, acting as a powerful guardrail against human error and fraudulent activity. The technology evolution for e-commerce startups typically follows a clear path from good, to better, to best.

Stage 1 (Good): The Manual Foundation

In the early days, your process will be manual. Using a combination of Google Sheets or Excel for your PO and GRN tracking, alongside accounting software like QuickBooks or Xero for bill payment, is a perfectly acceptable starting point. This system is effective as long as your order volume is manageable and the founder or a trusted lead can personally oversee every three-way match.

Stage 2 (Better): System-Enforced Matching with an IMS

The first and most crucial technology upgrade is an Inventory Management System (IMS). Platforms like Cin7 or Katana provide a central hub to create POs, log goods received, and track inventory levels in real-time. An IMS digitizes and connects the different parts of your manual process, creating the data required for an accurate three-way match. It becomes the foundational layer of control, making inventory audit procedures far more efficient and reliable.

Stage 3 (Best): Fully Automated Procure-to-Pay

For businesses at a larger scale, the next step is to integrate your IMS with Accounts Payable (AP) automation software. These systems can automatically ingest invoices, use technology to match them against POs and GRNs from your IMS, and flag exceptions for human review. This fully automated "procure-to-pay" workflow minimizes manual intervention, reduces payment errors to near zero, and provides a complete, auditable trail of every transaction.

Your Three-Step Action Plan to Prevent Inventory Fraud

For an e-commerce founder juggling growth and operations, preventing inventory fraud can feel overwhelming. The key is to start with scalable habits, not complex systems. Staged implementation is key to building durable inventory fraud prevention without slowing down your business.

Here is how to get started today:

1. Implement a 'PO Zero' Policy. Mandate that no inventory is ordered without a corresponding Purchase Order, even if it is just a line in a shared spreadsheet. This is the first and most critical step in establishing effective purchase order controls.
2. Establish 'Segregation of Duties Lite'. Immediately split the responsibility for selecting and onboarding a new supplier from the responsibility of approving their first payment. This simple division of labor between two people drastically reduces the risk of fake vendor payments.
3. Formalize the Goods Receipt Process. Ensure your team understands that when a shipment arrives, their job is not just to put it on the shelf. They must count it, check for damages, and formally confirm receipt against the PO in your central log. This step is non-negotiable for accurate records.

These manual processes, managed through tools like QuickBooks, Xero, and spreadsheets, will serve you well in the early days. As your order volume increases and the time spent on manual e-commerce expense tracking becomes a bottleneck, that is your signal to invest in an Inventory Management System. The goal is to evolve your controls in step with your company's complexity, transforming manual discipline into system-enforced rules that protect your cash and support your growth. You can explore more topics at our expense management hub.

Frequently Asked Questions

Q: How often should my startup conduct inventory audits?
A: While large companies perform monthly or quarterly physical counts, an early-stage startup should aim for a full physical inventory count at least once a year. More importantly, implement cycle counting, which involves counting small subsets of inventory every week. This makes inventory audit procedures less disruptive and helps you spot discrepancies faster.

Q: What are the biggest red flags for supplier fraud?
A: Key red flags include invoices from a slightly altered email domain, sudden and unverified requests to change bank details, pressure for urgent payment, and invoices that lack a corresponding purchase order number. A robust supplier vetting process and a mandatory three-way match are your best defenses against these schemes.

Q: My business is very small. Do I really need purchase orders?
A: Yes. Even for a one-person business, creating purchase orders is a critical discipline. It establishes a formal record of what you agreed to buy and at what price. This simple step is the foundation of all purchase order controls and is invaluable for resolving disputes with suppliers and preventing accidental overpayments.

Q: Can't my accounting software like QuickBooks or Xero handle the three-way match?
A: While accounting software is excellent for managing payments and bookkeeping, it doesn't manage the operational side of purchasing and receiving. QuickBooks and Xero can't confirm if the goods actually arrived at your warehouse. That's why you need a separate operational process, whether manual or with an IMS, to generate the PO and GRN data.