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Financial record retention is an integral part of business management. These records relate to your operations and are vital for continued functioning. However, when a company fails to maintain accurate records, problems start arising. Business operations are affected, and payment reconciliation becomes difficult.
Maintaining company records is vital to generate financial statements and to manage cash flow. Poorly managed cash flow results in the failure of up to 82% of small businesses. That said, good accounting practices should focus on better record management. One of the ways to do so is through payment reconciliation.
Payment reconciliation is an accounting process involving business transactions. Every company, for every transaction, typically generates two types of documentation. These are internal and external records. Internal records go in the business's books, usually in the general ledger. External records include payment receipts or bank records.
Payment reconciliation works by comparing internal and external records. If bank account balances accurately reflect internal records, you should have no problems.
Any discrepancies between the two records would need to be investigated. It could simply indicate an accounting error, which is easily resolved. On the other hand, it may also point to some type of fraudulent activity. Businesses tend to accumulate accounts payable as they grow. With more accounts, the reconciliation process becomes much more complex and laborious.
Using different financial institutions can make keeping track of these transactions confusing. This accounting process requires excellent and efficient internal records to compare with bank statements. Without it, however, companies could find themselves in an accounting nightmare.
The types of payment reconciliations depend on the payment method you use. Cash, credit and debit card, online transfers, and digital wallets are common payment gateways today. You will need to implement corresponding payment reconciliation methods accordingly. These include:
Cash reconciliation matches transactions with the cash register at a physical location. The reconciliation process compares payments against sale receipts at the end of the day or with every shift change. The receipts should match what is left in the register.
Credit card reconciliation occurs against monthly payment processor records and credit card statements. These are matched against internal records to verify the transaction. As credit cards are increasingly preferred, such reconciliation is becoming more critical.
Bank records show a variety of payments from various sources. These can include checks, online payment services, and transfers. These need to be checked against the bank statement to reconcile payments. This can be a bit more complicated, as overdraft fees can add to the calculations. Any discrepancies should be reported to the financial regulator.
Digital wallet transactions in 2021 made up nearly half of all e-commerce transactions. Given this, it is imperative that businesses create digital wallet reconciliation policies. This can be difficult since digital wallets typically do not issue external records.
Businesses engage in various types of transactions for their day-to-day operations. Based on these transactions, a company engages in different payment reconciliation processes. These include bank reconciliations, whereby transactions are matched against bank statements. They also include:
This payment reconciliation process occurs between internal accounts payable records and vendor receipts. Vendor or supplier statements are used to ensure the amount paid is the same as the charge. Along with ensuring correct payments, it strengthens long-term vendor relations for your business.
The customer reconciliation process compares invoices sent to customers with the accounts receivable. It should show discrepancies in the amount charged and the amount paid by the customer. It is usually a month-end process before the monthly statements are drawn up.
This process is intended to reconcile payments at the start and end of the financial year. Business-specific reconciliation will show you if your year-long transactions match your records. Ideally, reported payment transactions should match external records. Discrepancies in the company account balances can indicate fraudulent activity.
This reconciliation is used to check records between a company and its subsidiaries. It's typically done before you generate financial statements. The reason behind that is to accurately present the company's financial status. Account reconciliation also allows you to rectify any mistakes before making financial reports.
Ideally, your business should have a well-developed payment reconciliation system. Consistent reconciliation gives you a chance to address any errors in time. Dishonest activities can also be spotted quickly with frequent reconciliation.
The manual reconciliation process is a strenuous task. It may be appropriate for a small business, but larger companies need a better setup. Most businesses now use payment reconciliation software to help them. The process works in four main steps:
First and most importantly, all relevant internal and external records are brought together. You will be tracking billing paperwork and gathering ledger records. Maintaining good records, such as saving receipts and bills, is a good practice.
Internal transactions and external bank statements should be in a single, comparable currency. For example, your business may use and operate with the US dollar. If you also work in other countries, you will be working with many different currencies. You would need to reconcile all amounts in dollars before proceeding.
Statements or other external records are then matched with internal records in accounting software. An automated system would move through this account reconciliation step quickly. The records that match are eliminated from further review. Records with discrepancies move on to the next phase.
Records that don't match require investigation to determine the cause of the discrepancy. The reason behind the discrepancy may be a human error or potential fraud. Either way, the reconciliation process requires investigation and approval by accounting teams. Once you have resolved the issue, the reconciliation is complete.
The process is completed with general ledger entries to correct the previous errors. Once all transactions are accounted for, reconciliation is complete.
One of the benefits of payment reconciliation is that it helps identify accounting discrepancies. Undetected, these can become all the more difficult to figure out down the road. In addition to that, reconciliation can help you manage business expenses and spending.
A business's financial health depends on how well it can manage its cash flow. Undertaking new expenses without ensuring you're meeting current obligations is a poor decision. Payment reconciliation ensures all expenses were paid and there are no outstanding invoices. This helps your business maintain good cash flow.
Missing payment or expense records can make you think you have more or less money than you do. Consequently, your business's financial decisions will be based on misleading information about how much cash you have. Cash flow management helps you make sound decisions based on accurate information.
Reconciling payments frequently helps quickly identify and fix errors. The more time passes, the harder it gets to recall transaction information. Moreover, the longer discrepancies last on the books, the harder it can get to resolve them.
Automated payment reconciliation or accounting reconciliation removes the need for manual data entry. It combines accounting software with external records to carry out reconciliation checks. Rather than creating a spreadsheet, all the information is already stored in one spot with an ERP system.
Nearly 65% of businesses find payment reconciliation the most labor-intensive business process. Automatic reconciliation significantly reduces the time and effort taken up by matching payments. In case of a discrepancy, it allows accountants more time to resolve the issue.
Payment reconciliation requires merging data from multiple sources. Cloud computing makes this process easy by allowing cloud storage. It is entirely digital without needing technical infrastructure. You can upload, match and update data in real-time across all databases.
Cloud computing software has made payment reconciliation automation relatively simple. Real-time reconciliation makes cash flow management much simpler. At the same time, the finance team can handle discrepancies with bank accounts quickly and directly. It also helps keep track of resolution progress.
Given the necessity of reconciliation, it is essential to employ best practices. Efficient handling of the entire process can save your business time and money. Some of the best accounting practices for payment reconciliation include:
Reconciliation should not be a haphazard undertaking you do just for the sake of it. Account reconciliation and documentation should be subject to standardized policies. These help keep track of the process and keep data up to date.
It is also easier to manage large data loads with an established process. Without such an organization, even automated reconciliation will be difficult to execute.
Businesses that still rely on manual entry create more work for themselves. Automation takes away much of the labor that goes into reconciling matched payments. It also makes issue resolution much simpler. Automation software can run in the background without requiring any intervention.
Routine reconciliation is essential to manage cash flow and avoid more significant problems later. Reconciliation would not need to be performed manually unless a discrepancy arises. Create a schedule that is part of the core reconciliation policies. Enable automation to carry out regular, scheduled checks with accounting software.
Payment reconciliation is a vital fraud reduction tool for businesses. Unfortunately, it is hard to completely eradicate the possibility of fraud in the industry. However, it is possible to challenge it and maintain vigilant checks to avoid it. Any internal or external attempts at fraud are quickly identified through reconciliation.
It also saves you a significant chunk of money. The time to resolve errors is reduced when they are quickly discovered and handled. You would also save on unnecessary labor, which can be put to better use elsewhere.
Finally, reconciliation helps you better manage business expenses and payments. You can stay on top of what you owe and what is owed to you, so you are not blindsided. In return, you can manage future expenses based on current cash flows.
Maintaining accurate business records is necessary to plan for future transactions. Payment reconciliation is an important cash flow management tool. With reconciliation, businesses can stay on top of their records and bookkeeping process.
