Transaction Reconciliation: Best Practices & Tips

Financial Automation
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If the ultimate goal of every business is to make money, then it’s also equally important for businesses to ensure the money they make, and spend, is properly accounted for. That’s why almost all businesses conduct a process called transaction reconciliation on a regular basis.

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This process helps companies account for all their revenue and expenditures in a given time period. But, the process becomes time-consuming, error-prone and repetitive, especially as transaction volume grows and payment processors in use expand.

Check out these tried and true best practices and tips to expedite and improve your transaction reconciliation process.

Coming Up

What is Transaction Reconciliation?

Why is Transaction Reconciliation so Important?

What Are the Types of Reconciliation?

How Are Transaction Reconciliations Performed?

What Are the Basic Steps of Transaction Reconciliation?

How Often Should Reconciliations be Performed?

What Are Transaction Reconciliation Best Practices?

What Are Risks of Transaction Reconciliations?

What Are the Benefits of Automated Reconciliations?

You Have to do Reconciliations, so Make it Easy on Yourself

What is Transaction Reconciliation?

Have you heard anyone say “A penny saved is a penny earned?”. This truism applies equally to household finances and businesses. One of the most effective ways for businesses to save pennies is by making sure that all company funds are properly accounted for.

That’s where a process known as transaction reconciliation comes into play. During a transaction reconciliation, companies match every transaction on their internal ledgers to the company bank and payment processor statements.

This is a key element of corporate governance. Some companies also refer to this as a bank reconciliation, or an account reconciliation. No matter what it’s called, the reconciliation process is a mission critical function for a company’s accounting staff.  

Unfortunately, as companies get larger and conduct more transactions, reconciliation gets exponentially more difficult and prone to be derailed by human error.

The irony here is that truth only underscores the necessity of routine account reconciliations. Finance automation solutions are paving the way for streamlined account reconciliation workflows with utmost accuracy.

Why is Transaction Reconciliation so Important?

Without conducting transaction reconciliation, a company could literally be taking in millions of dollars per year and routing the funds to the wrong account. Worse still, a rogue employee could be embezzling money, and no one would know without transaction reconciliation.

As if this weren’t important enough, there is another key reason for companies to make bank reconciliation a part of their schedule.

Company shareholders, regulators and tax authorities all have the expectation that a company’s internal ledger will match with its bank statements. If that doesn’t happen, it could be evidence of poor management or worse, impropriety.

Neither is something that a company’s leadership structure wants to be known for allowing on their watch. It's not an understatement to say reconciliation may be the single best way for companies to keep their financial house in order.

What Are the Types of Reconciliation?

Although almost all reconciliations deal with money or inventory (which represents money), there are several different types of reconciliation a company may conduct. Some of the most common types of transaction reconciliation are listed below.

1. Bank Reconciliation

This is perhaps the most common type of reconciliation. In a bank reconciliation, accounting staff will match the company’s ledgers against the bank statements. Everything from ACH deposits, wire transfers, payments by check and auto-payments should all balance out on both sets of records.

2. Transaction Specific Reconciliation

In a transaction specific reconciliation, companies will reconcile all the inflow and outflow related to specific transactions. For example, a company that pays out a dividend to all of its shareholders will conduct a transaction reconciliation to make sure that each shareholder was properly compensated in relation to their equity in the company.

3. Inventory or Asset Reconciliation

This type of reconciliation process is done by retail businesses or operations that market consumer goods.

It’s important because every item in a store’s inventory is connected to a purchase cost and should generate specific profits when sold. Inventories should match the total number of units sold, or an investigation must be made to discover why not.

How Are Transaction Reconciliations Performed?

Businesses can perform transaction reconciliations in a couple of different ways.

1. Forensic Audit

The first, and most common method is basically a forensic audit. In this process, a company gathers all of its sales receipts, incoming payments and outgoing line items for a given time period.

Then it compares all of that data to the company’s books and bank statements. If everything has been properly accounted for, all the balances and transactions will balance out.

As you can imagine or know, this is painfully time-consuming and likely to be full of errors due to the nature of the process.

Finance automation software takes the manual effort out of this critical process by collecting your data, performing transaction matching, and alerting you of any mismatched information.

2. Analytics

Another way to conduct a reconciliation is through analytics. A business can conduct an analytic reconciliation by comparing past data with current data for the same period.

There may be some variance, but overall, the current results should be within touching distance of past results. If, by contrast, business is significantly down for one period vs another, it may be time to dig around and figure out why.

What Are the Basic Steps of Transaction Reconciliation?

The broad strokes of transaction reconciliation will be similar at almost all companies. They may have some different specific procedures that relate directly to the type of business, but the end process will have a lot of commonality.

The basic steps are as follows:

1. Gather Documents

The first step in transaction reconciliation is figuring out the time period for which you will be reconciling all your transactions.

As a general rule, the best place to start is the first day after the date of your last reconciliation report. Then, gather all the company documents (e.g., statements, receipts, invoices, ledgers) for that time period up to the present day.

2. Match Transactions

Compare every transaction from all the company ledgers and financial records to the bank statements for the time period being reconciled.

In a perfect world, each transaction should appear in both sets of records, and all the monies will be perfectly accounted for at the end of the transaction reconciliation.

However, if the records don’t match (and there could be many reasons for this), the accounting staff along with any department involved in missing transactions will have to conduct an internal investigation to figure out why the books don’t match.

Then the books will have to be adjusted accordingly, usually with a manual journal entry of some kind, until all the transactions are accounted for.

As transaction volume grows and the use of multiple payment processors (i.e. Amazon, Stripe, Worldpay, etc.) do too, the transaction matching step takes more and more valuable time away from your staff (when being done manually).

3. Record Creation and Sign-Off

Once all the books have been reconciled, compile all the supporting documents used for the reconciliation, along with the final reconciliation itself and create a single, unified record of the reconciliation. Have it signed off on by the accounting staff and added to the company’s official records.

How Often Should Reconciliations be Performed?

Every business has a different profile in terms of its cash handling or transaction management. That’s why the question of how often reconciliations should be performed is so dependent on the type of business conducting the reconciliation.

Companies with a high volume of low dollar transactions or paypoints located all over the world will need to conduct reconciliations very frequently. Other businesses will have different needs.

For example, a property management company might do a monthly reconciliation for all of its rents and deposits, whereas a hotel might need to conduct a daily reconciliation because of the high turnover.

An ecommerce company may use multiplate payment providers like ebay, Amazon, Worldpay, Paypal and have high volumes of transactions to match to many bank statements.

With all that said, the longer companies go between reconciliations, the longer they take to do and the more likely it is there will be discrepancies. So, for some companies daily reconciliations are best whereas for others a monthly account reconciliation is generally sufficient.

However, one of the challenges posed by account reconciliations is that they can be time consuming. While it’s important to conduct them regularly, businesses want to avoid a “doom loop” where the accounting staff is constantly in a state of reconciling books or tracking down discrepancies.

That will keep them from being able to participate in more important corporate tasks like data analysis or profit modeling for a new project.

With automation software implemented, it becomes simple to perform reconciliations as often as you’d like, even daily! Automation software increases accuracy and takes only minutes to perform, rather than days or weeks.

Therefore, your staff will have more time to focus on value-added tasks and providing detailed insights to the business as opposed to being bogged down with manual and data-heavy processes.

What Are Transaction Reconciliation Best Practices?

No matter what type of business is being reconciled, or what kind of reconciliation is being done, there are some best practices that are essential aspects of a professional account reconciliation.

1. Focus on Accuracy

The first one, is of course, accuracy.  Every transaction should be entered accurately into the company ledger, and matched to a corresponding source document such as a bank record and/or signed expense authorization.

It’s also critically important to match dollar amounts of transactions, even though that can be tedious.

2. Standardize the Process

Every reconciliation must also have a clear procedure for error reporting and correction. It is almost inevitable that in a large company, there will be transactions that don’t match to bank records for the corresponding time period.

Whether this discrepancy is down to a difference in the bank statement period and the company reporting period, or an error, the accounting staff should have a way of forensically working back through transactions to arrive at the source of the error.

There must also be a method for recording the resolution and explanation of the discrepancy.

3. Centralize Reporting

Finally, the reconciliation, and all supporting documents must be compiled into one single, unified report. It should be titled and stored in chronological sequence from the last reconciliation.

The report should also include a complete summary of who participated in the reconciliation (e.g., which departments), the methodology and sign-offs from the appropriate parties.

4. Leverage Automation

Overall, the greatest advice to accurately and consistently perform transaction reconciliation properly is to leverage automation technology.

This technology was designed to overcome the common challenges of reconciliation and make the process easy and straightforward with the aid of easy-to-use tools. With automation, you get to remove manual tasks so your team can focus on strategy and better decisionmaking capabilities.

Processes are completed 100x faster and 90% fewere errors. The modern cloud architecture makes it possible to connect your existing technologies so that no data gets lost in the shuffle.

What Are Risks of Transaction Reconciliations?

Transaction reconciliations are vital functions, which means they also pose a serious risk to companies if they are not properly done or fail to adequately account for errors. One of the most obvious risks of any transaction is the human error factor.

1. Manual Errors

Anytime there is a situation where massive amounts of transactions are being manually entered, there is the opportunity for one or more of those transactions to be incorrectly recorded.

Every mistake born out of human error must be figured out and adjusted accordingly in the books. This also means every mistake found during a reconciliation process basically can shut the process down, or at least delay it significantly.

2. Lots of Time

No matter what process companies use to balance discrepancies, it will take extra time that delays the reconciliation. More importantly, the reconciliation can’t be complete until all human error has been accounted for.

3. Fraud Risk

Another potential risk with transaction reconciliations is they place a lot of trust in just a few people. Sadly, the accounting department is one of the best places for a rogue employee to hide their dishonesty.

4. Key person Dependencies

Over reliance on one person, or a few key people, to do reconciliations leaves companies vulnerable both to impropriety or the chaos that will result if one of those key people leave the company or are unavailable to assist.

What Are the Benefits of Automated Reconciliations?

Transaction reconciliation is a catch-22 for many companies. It is a vital function that must be done accurately, but the high quality accounting personnel who can do it are in very high demand.

You want to have continuity in the process, but not so much that any one well placed accounting employee becomes such a fixture at  your company that they could theoretically conduct impropriety under your nose without you becoming aware of it for an extended period of time.

Since many of the stress points with transaction reconciliations come when human hands touch the process, an automated reconciliation solution is something worth considering. Automated reconciliation offers a host of potential benefits, which include:

1. Accuracy

Most automated reconciliation software tools are powered by a strong artificially enhanced computer brain that inputs and scans thousands of transactions at a time with a zero percentage error rate. This will make the process much quicker, and produce reliable results every time.

2. Less Human Interaction

Aside from the possibility of error, the other issue with human interaction in account reconciliation is that it’s probably not the best use of time for a company’s accounting staff. Automated reconciliation software can handle almost all the data input or human activity.

That means your accounting team only needs to be involved in finding the source of discrepancies and solving them, instead of also needing to find them.

3. Fraud/Impropriety Prevention

Automated reconciliations are not going to try and shave money off the company books to pay off gambling debts or other expenses, but sadly, humans might.

The use of an automated tool for reconciliations drastically reduces the chances that a dishonest or rogue employee will commit acts of fraud or impropriety with company funds.

4. Ability Scale Upwards

As companies expand, reconciliations can become increasingly more difficult. This is especially true if there are branches in different time zones or even different countries, all of whom may conduct their reports at different times.

Automated reconciliation software allows companies to scale upwards from a two or three person team to a multinational operation. All the while, you are removing key person dependencies and ensuring that your processes never get delayed or stuck waiting on anyone to perform.

5. Compliance and Reporting

Many businesses have regulatory authorities they are required to report to. This is of course, in addition to the state and federal tax authorities.

Automated reconciliations will not only complete this work accurately, it can be used to generate reports and audit trails (with version control) that are necessary for the company to remain in compliance with the governing rules for its industry.

In either case, preparing reports after an automated reconciliation is as simple as the push of a button.

6. Remote Storage

Many companies are required to maintain records for a certain amount of years. This can take up a tremendous amount of space.

However, most automated reconciliation software offers users the ability to upload reports to cloud storage with bank-grade security, where they can be accessed on demand.

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You Have to do Reconciliations, so Make it Easy on Yourself

Transaction reconciliation is something that every business has to do in one form or fashion. Without it, the business can never be sure how much money it’s making or how much money it has at a given point. However, that doesn’t mean the reconciliation process has to be painful.

Companies can take advantage of a no-code, out-of-the-box software solution that can automate transaction account reconciliation, reporting and a host of other essential company functions. The best part is it can be setup and used without needing IT.


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