Vendor Reconciliation Process & Expert Automation Tips

Financial Automation
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Expense management is as much a part of a business’ success as its ability to generate revenue. Tracking vendor invoices, paying them on time and making sure that vendor accounts are in good standing can yield several significant benefits.

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Lower price quotes, positive trade lines and reduced interest rates are just a few of the positive results of frequent vendor reconciliation. We’ll take a look at what vendor reconciliation entails, as well as how automation software can assist.

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What is Vendor Reconciliation?

What is the Vendor Reconciliation Process?

What Are the Steps for Vendor Reconciliation?

What Are the Challenges of Vendor Reconciliation?

What Are Benefits for Automating Reconciliation?

What Are Some Common Mistakes During Reconciliation?

What Are Best Practice Tips for Vendor Reconciliation?

Vendor Reconciliation is a Key Function

What is Vendor Reconciliation?

Every business has outgoing expenses. For example, an online sporting goods company could have thousands of invoices per month for outgoing orders from their shipping company.  

Some businesses even have internal expenses, such as a grocery store where the deli purchases the chicken they fry and sell from the store’s meat department.

In either case, it is critical for the accounting staff to be able to monitor its expenses and make sure that all its invoices are paid on time.

The most time-tested way to accomplish this is through a process known as vendor reconciliation, where companies match their outgoing ledger payments to vendors against the vendor’s statement for a given time period.

What is the Vendor Reconciliation Process?

The basic outlines of the vendor reconciliation process are similar at all companies. The first thing to do is to figure out the time period for which the company is seeking to reconcile its books.

As a general rule, the more time there is between vendor reconciliations (also known as a sales reconciliation), the more difficult they will be and the more likely it is there will be unpaid invoices or other discrepancies.

Once the time frame for the reconciliation has been figured out, gather the company ledger and all the invoices from all the vendors whose accounts will be reconciled for the desired dates.

Best practice in a vendor reconciliation is to begin the next reconciliation from the final date covered by the last reconciliation. Then, compare the line items on the vendor’s customer statement and match them to an outgoing check from the accounting department.

As you can imagine, this becomes increasingly time-consuming and error-prone when done manually. To avoid delays and mistakes, automation software can streamline your vendor reconciliation process.  

If the company’s accounting team has paid all the invoices referenced during the vendor statement period, there will be no outstanding transactions or invoices unpaid and the reconciliation will be complete.

If that’s not the case, and some invoices are unaccounted for, or double paid, the accounting team will have to ferret out the reason for the discrepancy. Yet again this normally time-consuming, labor intensive process can be simplified with the help of reconciliation automation software.

What Are the Steps for Vendor Reconciliation?

To perform a customer or vendor reconciliation, there are several simple steps. However, they are all incredibly important.

1. Make a Schedule for Reconciliations

The sales reconciliation process is almost always time consuming. However, one way to make it as painless as possible and reduce the number of discrepancies is to establish a routine schedule for the reconciliation.

This schedule can vary with different businesses, but it should be done on a monthly basis at a minimum.

2. Gather the Vendor Statement(s) for the Period Being Reconciled

This is another area where the act of reconciliation can be challenging. Not all vendors issue statements on the same schedule. It may be necessary to use parts of different statements from different vendors for the time period being reconciled.

3. Compare the Vendor Statement to the Company Ledger

Any services rendered by the vendor will always have an invoice. Compare the invoices in the vendor statement to the company ledger to see if they have been paid.

If there is a line item that remains unpaid, contact the department who ordered the item or the service to ensure they have indeed received what they ordered.

If they have received the item/service, then the outstanding invoice can be paid. Repeat this process for all the line items in the vendor statements until the outstanding balance from the vendors is zero.

If there is double payment for a particular invoice or line item from a vendor, the outgoing payment to the vendor must be deducted accordingly. If it is not, the company’s bank reconciliation won’t balance.

This process sounds simple, but it can be incredibly complicated for companies that do thousands of transactions with different vendors and/or have multiple locations who are all ordering products from the company’s vendors.

Many companies have turned to automation software to assist with the basic steps of the reconciliation, which leaves the accounting staff or individual departments with only the discrepancies to account for.

That’s a marked improvement over them spending hundreds or thousands of billable hours to just find unpaid items or other discrepancies.

What Are the Challenges of Vendor Reconciliation?

Vendor reconciliation is a lot like a golf swing or making a souffle. The instructions in the book seem simple enough, but once the process begins, there are unfortunately many different areas that can go wrong and ruin the results.

Examples of the challenges of vendor reconciliation include:

1. Transaction Volume

The more business a company does with its vendors, the more likely it becomes that there will be unpaid transactions or discrepancies found in the reconciliation.

This is especially true for companies that are operating in different geographic locations or have specific local vendors they use instead of national accounts with the main office/company headquarters.

2. Matching Invoices with Purchase Orders and Vendor Statements

Most companies have something called a purchase order that indicates what department ordered the product/service and what the amount of the service should be.

Matching original purchase orders with the line items on vendor statements can be difficult and very time consuming.

3. Accounting for Discrepancies

Every unpaid invoice, or purchase order, must be accounted for in order for the reconciliation to be successful.

That means it’s up to the accounting staff and whichever branch of the company created the purchase order to coordinate investigations into discrepancies such as unpaid invoices, unfulfilled purchase orders or double paid invoices.

4. On-Time Payments

It’s not just enough to pay invoices. Most vendor statements or sales contracts have a standard rate that assumes payment on a certain schedule. Every company has a different expectation as to when their invoices should be paid.

Whether it’s net 90 or a 30 day billing cycle, companies that don’t make payments on time can be subject to penalty fees and finance charges. All of these eat into company profits.

Regardless of the fact different vendors have different payment schedules, the accounting staff has to stay on top of all of them with only one reconciliation.

5. Reporting and Record Keeping

A complete vendor reconciliation report containing all the paid invoices, the purchase orders they are matched to, and record of payments must be made for every vendor reconciliation.

This volume of information can take up a lot of space over time if the records are kept on paper or in file cabinets. However, automation software can help companies keep their reconciliation records in a cloud, where they are available with the push of a button.

What Are Benefits for Automating Reconciliation?

In year’s past, the vendor account reconciliation process was a painful one that had the potential to overload an accounting staff. After all, they are already responsible for bank reconciliations and accounts payable reconciliations.

So, the necessity of a third reconciliation being conducted on a regular basis can really place a strain on an accounting staff. However, automated reconciliation software offers tremendous benefits, which include:

1. Efficiency and Accuracy

Automated reconciliation software can match invoices and ledger statements automatically, leaving accounting staff with only the discrepancies to decipher once the automated process is complete.

This process is not only more efficient than traditional spreadsheets, it is more accurate.

2. Force Multiplier for Accounting Team

Having automated software that can conduct much of the “grunt work” associated with reconciliation means that companies won’t need as many employees in the accounting department to contribute to a vendor reconciliation.

This means that smaller groups within the accounting department can be broken up to accomplish different areas of the reconciliation process. It also frees the accounting team up to make projections, assist in business planning and assist in other key company functions.

3. Cloud Storage

One of the greatest advantages of automated reconciliation and accounting software is that it automatically generates reports and stores them remotely. That means the records can be accessed from anywhere in the world by anyone who needs them.

With bank-grade security, access restrictions, and integrations to connect your data securely, you have peace of mind knowing your information is safe.

So, executives can pull these records together easily on a business trip or in a meeting with regulators even if the accounting team is unavailable.

4. Compliance and Reporting

Many businesses are required by regulators to make their accounting records available or maintain them for a set amount of years.

With automation software, they can maintain and access these records easily. Additionally, it’s easy to access audit trails with version controls and set up approval workflows without bottlenecks.

5. Continuity

Using automated software for vendor reconciliation offers companies the benefit of continuity. In today’s world, many employees move from company to company, which can be a real issue for an accounting staff that conducts manual reconciliations.

With automated software, the process will remain basically the same regardless of company turnover.

What Are Some Common Mistakes During Reconciliation?

The manual reconciliation process is performed by human beings, and even though accounting teams have keen eyes for mistakes, they are not infallible. That means there are several different mistakes that can be made during a manual reconciliation. Invoices or payments can be double-entered, which result in over-payments to vendors.

They can also be missed by an employee with tired eyes at the end of the day, which will lead to an invoice remaining unpaid even after a reconciliation was conducted.

This is also true for the actual payment amounts, as one missed keystroke can be the difference between a payment of $5,000 and $50,000. The process of collating purchase orders, vendor statements and payment records also creates the risk of errors.

Another frequent mistake companies make is failing to reconcile on a regular schedule. The longer time goes between reconciliations, the more likely it is that invoices will be paid past their due-date and cost the company money in late fees or finance charges.

Finally, not bringing all the line items (e.g., credit card bills, long-term notes) to the reconciliation will always result in unbalanced books.

What Are Best Practice Tips for Vendor Reconciliation?

Companies can take several simple steps to make the vendor reconciliation process as painless as possible.

1. Set a Regular Schedule for Reconciliation

First, setting and sticking to a regular schedule for vendor reconciliation will go a long way toward simplifying the process.

Doing reconciliations on a regular schedule will minimize the chances of invoices going unpaid or being double paid for an extended period of time. It will also make the vendor reconciliation process more manageable by not overloading the accounting staff with too many transactions to reconcile.

2. Keep Invoices and Related Paperwork Together

Second, keeping vendor invoices in the same place so they can easily be accessed for the reconciliation period will cut down on the workload. Having a standard process for resolving discrepancies is another key to vendor reconciliations.

No matter who is responsible for tracking down an error, if they all do it the same way, anyone in the accounting staff will be able to follow their work or assist if the normal person who does the job is unavailable.

3. Consider Automated Options

Perhaps the best solution for accomplishing all these tips and taking the paint out of the vendor reconciliation process is using a finance automation tool. These programs are powerful and can perform many of the most tedious tasks associated with vendor reconciliation without needing human hands.

Download Now: Reconciliation Data Sheet

Vendor Reconciliation is a Key Function

Accounting is such a mission critical function of every company, but many businesses only think of it in terms of accounts receivable.

Yes, it’s important to be paid on time, but without paying out invoices in a timely fashion, a company can easily lose profits in late fees and finance charges.

This is why vendor reconciliation is such a critical function, and why automation software can be such a valuable investment.

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