Having an accurate view of your business’ finances is an integral part of making the right business decisions. Finance reconciliation is just one process that requires timely completion. Whether your business has few or many transactions in any given month, you can rely on automation tools to help accurately reconcile accounts quickly.
Let’s dive into everything you need to know about finance reconciliation and how to manage it properly.
Reconciliation is an accounting process that looks at internal records against external financial records, like bank statements, to find and resolve discrepancies. In its simplest terms, reconciliation ensures that money leaving an account is being properly spent and that the bank records accurately reflect the transactions.
If your business finds that two records are mismatched between financial records or account balances, then account reconciliation is useful in figuring out why. Sometimes, differences are easily explained by timing differences or processing delays. However, when significant discrepancies happen that are unexplainable, then it could be a simple way to highlight fraudulent charges or a business that is “cooking the books.”
Businesses reconcile accounts either daily, weekly, monthly or annually or a combination of all of these.
For starters, account reconciliation helps to make sure that your financial statements are correct. Balance sheets represent all the money you spend and all the assets you buy, so this is highly contingent on the accuracy of account reconciliation of accounts.
Furthermore, account reconciliation can save your business money by potentially reducing overdraft fees and preventing improper spending. While some differences will naturally occur because of timing, finance reconciliation can highlight errors and spot overcharges promptly so you can take action to fix such charges. Finance reconciliation automation tools can run reports and compare transactions in the matters of minutes to point out anomalies in the transaction patterns.
If you run a public company, then account reconciliation is mandated. If it’s inaccurate, you can face penalties when you get audited. So, to reduce compliance risk and protect your finances, account reconciliation is something that should be carefully managed and taken seriously.
Generally Accepted Accounting Principles (GAAP) set the required standard use of double-entry accounting. This means that every transaction is input into the general ledger in two places. This way, it’s easy to spot errors on either side of an entry. Companies will post a transaction in both the income statement and balance sheet. One will be recorded as a debit, and the other will be recorded as a credit.
With double-entry accounting, it is also possible that just the balance sheet is affected. One example of this could be if your business takes out a loan. The loan is debited on the cash account (which is an asset on the balance sheet) and then credited in the long-term debt account (as a liability on the balance sheet). The goal is so that credits and debits balance each other out on the balance sheet. If they don’t, then there’s a problem because the sheet isn’t balanced!
As a leader in business, you undoubtedly understand the importance and necessity of reconciling your accounts. You also probably do so on at least a monthly basis. As such, your accounting team may be spending time manually comparing books and statements to avoid balance sheet errors and check for fraud.
The swift nature of business demands accurate accounting processes. To reconcile your cash flow statement, income statement and balance sheet, you can leverage automation tools that will compare records for you automatically. This way, you can limit human error and free up your team’s time to work on high-level analytical tasks. The role of the finance department is shifting to provide business leaders insights to make business decisions. By automatically reconciling accounts, you can boost your competitive advantage and allocate resources optimally.
The account reconciliation process follows straightforward steps, whether or not it’s performed manually or automatically. Here’s how it works.
Compare: The process begins by comparing all transactions noted in your internal ledger against your bank statement.
Identify: Identify all payments that are recorded in the internal cash register, but are not reflected in the bank statement. These payments should be deducted from the bank statement because they are cash payments. For checks deposited into the bank, there may be a delay for when they are reflected. As such, you want to be sure to identify these types of transactions because they could be cause for the discrepancy.
Confirm: Once you’ve identified these types of transactions, they must be recorded. If you have receipts from the cash register that are not reflected in the bank statement, add them, and vice versa.
Find errors: It’s unlikely, but possible, that the bank has made a mistake. This could be in the form of duplicate records, incorrect records of transactions, commissions, etc. To reconcile the bank statement to be correct, you must modify these errors by notifying the bank.
Balance records: Once you’ve found discrepancies or resolved errors, ensure that the records are balanced and accurate.
Account reconciliation software performs all these steps automatically by pulling data from every source of financial information, including bank statements, merchant services, credit card processors, and ERP systems.
Performing account reconciliation regularly and continuously is needed to maintain accurate statements. For whatever method you want to use, account reconciliation software can do so automatically and quickly.
Two main methods are used to reconcile accounts, including:
Naturally, given the importance of financial reconciliation, there are established best practices that should be followed to get it right. Consider the following:
Automation tools are helping businesses thrive and maximise their efficiency across departments. Within finance departments, automation tools are particularly useful because the nature of the business perfectly meets the criteria for automation - repetitive, data-heavy and time-sensitive tasks.
Automation can help finance reconciliation by providing a multitude of benefits, spanning:
Finance reconciliation is a standard process within every business. Since it follows a set flow of steps and is repetitive, it’s a perfect fit for automation tools. Automation software can manage your reconciliation process with greater control and accuracy, providing you with the reports you need promptly. You will be able to reduce human manual error, speed up the process and store data in a centralised location with a finance automation tool like SolveXia.
The automation of financial reporting will save your business time, money, and many headaches. See how it can work within your organisation.
Robotic process automation in finance has become ubiquitous because it is so well-suited for finance processes. Take a look.