Winning the Battle of Payment Reconciliation with Automation

Ira Brooker     October 21st, 2022

Payment Reconciliation

For a busy accounts payable team, payment reconciliation can feel like a never-ending battle against incoming financial records and the many requirements that surround them. Being able to consistently match your organization’s accounting records with your bank statements is at the core of maintaining a consistent, compliant, and financially healthy business.

Not so long ago, achieving that goal meant keeping diligent records by hand and learning complex accounting processes in order to track crucial records and make sure they match for each reporting period. Today, automated accounting software solutions are making that process far more reliable, speedy, and error-free for enterprise organizations and small businesses alike. Let’s examine the world of payment reconciliation tools in terms of the overall process, the benefits of automation, the risks of using an outdated system, and other important insights.

What is Payment Reconciliation?

Reconciliation of payments is by definition a process of verifying account balances and making sure that all of an organization’s financial records match up with its bank statements. For most enterprise companies, that entails recording every transaction (such as a purchase, a product or service procured, or an amount due) as a journal entry in the organization’s general ledger.

Those entries are then compared against financial documents such as bank or credit card statements to ensure that all expenses have been properly paid and accounted for. An accounting system that cannot consistently reconcile payments with financial statements quickly, accurately, and at a high volume is an invitation for expensive human errors and strained customer relationships.

Why Do Businesses Need Payment Reconciliation?

The most basic explanation for why organizations need a reliable payment reconciliation process is that businesses need to know that they have enough money available to cover their costs before they take on new expenses. A business that makes financial decisions without confirming that they can afford them puts itself at risk for costly accounting mistakes, delinquent payments, fraud, and many other financial pitfalls.

Most enterprise businesses operate at such a high volume that keeping internal and external financial records reconciled is nearly impossible without automated assistance. Even if you avoid catastrophic financial issues, a lack of reconciliation can lead to errors in your balance sheet, late or missing payments, overdue invoices, and other smaller discrepancies that add up to real costs that hurt your bottom line.

What Is the Payment Reconciliation Process?

Businesses take a number of approaches to reconciliation and payments, meaning that there is no one set process that works for every organization. For most enterprise businesses, though, the steps in the reconciliation process look something like this:

Payment Reconciliation Process

1.
Records are
retrieved

All relevant payment records are gathered from a range of sources both internal and external. That might include specific payment details from bank statements, credit and debit card statements, mobile payment apps, and any other source of payment used in transactions with your business.

2.
Records are
matched

All of the records retrieved in the previous step are compared against bank statements. Matching records are considered reconciled, while any that do not match are passed along to the next step.

3.
Records are
reconciled

Any transaction matching that failed in the previous step are examined to determine why a match could not be made. After being reviewed, the corrected records are passed along for approval.

4.
Reconciliation is
finalized

Once all relevant records have been reconciled, any corrected errors are logged as journal entries and the general ledger is updated to reflect a successful reconciliation process.

What Are Operational Reconciliation and Financial Conciliation?

While researching payment reconciliation, you may come across some related terms that can be confusing to those unfamiliar with the process. Operational reconciliation and financial conciliation are two commonly used terms that merit further explanation. Operational reconciliation involves matching the levels of physical inventory owned by your business against the levels logged in your records. Financial conciliation describes a situation in which an unmatched transaction causes a dispute between two organizations about where the error is located and which party is responsible. This scenario often requires a third party to arbitrate the dispute. While neither of these terms are likely to be part of your day-to-day payment reconciliation process, they are important ideas to understand.

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4 Common Types of Payment Reconciliation

Modern businesses engage in more than one type of financial transaction, which means that they also need to account for more than one type of payment reconciliation. Again, specific types of reconciliation will vary from business to business, but here are four of the most common forms to consider.

BANK RECONCILIATION

The most common form of reconciliation involves matching your company’s accounting books and bank statements against bank records of deposits and disbursements. That includes an increasingly wide range of transactions from traditional checks to newer, electronic transfers such as Venmo, PayPal, and Zelle. It’s important to keep an eye out for smaller transactions that can easily go unrecorded, such as penalties for late payments, fees for services and transactions, or industry-specific surcharges.

CREDIT CARD RECONCILIATION

As you might assume, reconciling credit card purchases involves matching each transaction on your business’s credit card statement against your internal records. Those records must also be matched against any bank statements that include withdrawals or deposits for the purpose of paying a credit card bill.

Learn more about Virtual Card Payments

CASH RECONCILIATION

Reconciling cash is a smaller-scale concern than some of the other types discussed here, simply because large businesses are unlikely to conduct transactions using straight cash. For organizations that include brick-and-mortar businesses or other physical locations, though, reconciling money from your cash registers with sales receipts from each day or each shift is an important step in preventing fraud, theft, and accounting irregularities.

CRYPTOCURRENCY AND DIGITAL WALLET RECONCILIATION

While purely electronic transactions are increasingly common in many industries, the reconciliation process for them is still being ironed out. Digital wallet transactions rarely involve account statements or easily accessed financial data, leaving businesses with little to reconcile. In the absence of a universal approach to reconciling these transactions, it falls to individual businesses to set policies on how to approach them, or whether to accept digital wallet spending at all.

Examples of Payment Reconciliation

How your organization addresses payment reconciliation can vary widely depending on what types of payments are being rendered. Generally speaking, it is a wise idea for a business to have a separate reconciliation process in place for:

  Payments made by check
  Payments made by credit card
  Payments made by virtual card
  Wire transfers and other international transactions
  Automatic clearing house (ACH) transfers

Why is Manual Payment Reconciliation a Problem?

Attempting to manage these functions without automated payment reconciliation software is simply unmanageable, especially for enterprise organizations. The sheer volume of transactions conducted on a daily basis makes it untenable for large businesses to effectively perform regular reconciliation functions quickly and effectively. Even with a dedicated team processing reconciliations manually, the likelihood of human error and the time involved in making corrections and adjustments are simply not worth the expense when compared to an automated payment reconciliation system.

What are the Risks of Manual Payment Reconciliation?

Let’s look a little more closely at some of the specific issues that can arise for businesses that rely on manual processes for payment posting and reconciliation. Any one of these issues could make a strong case for an automated reconciliation process. Taken all together, the argument is undeniable.

HUMAN ERROR Icon

CHANCE OF FRAUD AND HUMAN ERROR

Payment reconciliation can be a repetitive and tedious task for accounts payable and accounts receivable teams, which increases the likelihood of human error, or worse, fraudulent activity. A manual system also makes it more difficult to both pinpoint the source of mistakes and fraud, and to make necessary corrections once they’ve been detected.

POOR CASH MANAGEMENT icon

POOR CASH MANAGEMENT

A poorly reconciled payment system limits your visibility into your organization’s overall finances. That can lead to potentially costly miscommunication about how much cash you have on hand at any given time.

DELAYED PAYMENTS Icon

DELAYED PAYMENTS

Vendors and independent contractors like freelancers, affiliates, and contingent workers depend on quick, reliable payments. Delays in your reconciliation process often mean delays in issuing payments. That adds up to unhappy vendors and strained relationships.

Reconciliation Icon

LATE OR INACCURATE FINANCIAL STATEMENTS

Successful reconciliation is crucial to putting together accurate financial statements at the end of the month or the year. Inefficient reconciliation processes can lead to those reports being delayed or released with incorrect information.

DIFFICULTY COLLECTING DATA Icon

DIFFICULTY COLLECTING DATA

Any sizable organization generates data from a wide range of sources. Without an automated system, tracking down all of the data necessary for payment reconciliation can be a time consuming and tedious process involving communications across multiple departments.

LESS STANDARDIZATION Icon

LESS STANDARDIZATION

In large organizations, different teams and departments often develop different processes for handling information. Combine that with the internal processes of various vendors and you have a recipe for chaotic version-control as you try to compile data across multiple software systems and operating systems.

DIFFICULTY AUDITING Icon

DIFFICULTY AUDITING

Third-party audits are a part of doing business for most large organizations. A manual reconciliation system not only makes it more likely that those audits will uncover avoidable errors and fraudulent activity, but also makes it physically more difficult to collect all of the necessary documentation.

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Why Automated Payment Reconciliation Is the Future

Workflow management tools are constantly evolving, and each advancement forever changes the way people work. Payment reconciliation is no exception, as new account reconciliation software technology continues to make automation the only way to go for any large organization.

For example, automating your AP payment processing not only speeds up your workflow, eliminates much of the risk of human error, and helps to ensure compliance, it also frees up time for your accounts payable team and allows them to focus on tasks that make better use of their skills. Along similar lines, advancements in optical character recognition (OCR) technology can drastically reduce the time your AP team spends searching through financial documents and retrieving records. An automated system with OCR makes it simple to digitize files, making them searchable and easy to find when they’re needed for payment reconciliation.

8 Key Benefits of Automated Payment Reconciliation

By now it should be evident that manual payment processing and reconciliation are the way of the past for any modern organization. To fully drive home the point, let’s look a little more closely at some of the specific benefits that come from automating your accounting reconciliation process.

IMPROVED ACCURACY

Even for accounting professionals, sorting through the sheer volume of numbers and documents involved in payment reconciliation is a tedious and time-consuming process. Automating those often mind-numbing tasks removes human touch points, which in turn eliminates much of the risk of human error. That adds up to more accurate records across the board.

REDUCED FRAUD

The same tediousness that leads to human error can also contribute to greater risk of financial fraud. When fraudulent behavior arises, an automated reconciliation process can flag records that don’t match, numbers that don’t add up, and suspicious activities such as a specific vendor repeatedly receiving duplicate payments. That makes it much easier to identify potential fraud and to pinpoint where and when in your process it’s occurring.

QUICKER PAYMENT OF INVOICES

An automated solution can flag outstanding invoices and send out notifications to all concerned parties, making it much less likely that those invoices will go unnoticed. That helps organizations avoid late fees and lengthy attempts to track down customers.

LESS NEED FOR ADMINISTRATION

Managing payments and financial transaction requires a lot of oversight, but automation means that many of those functions can be taken out of the hands of administrators and instead entrusted to your software solution. That means less time spent on repetitive tasks like matching records rather than more productive uses of your team’s skill sets.

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EASIER SCALABILITY

As your organization grows and your business needs evolve, an automated software solution makes it easy to keep up with your current volume of payments and reconciliations. That reduces time spent training new team members in reconciliation-related tasks.

MORE RELIABLE COMPLIANCE

Regulatory compliance is always a key concern no matter your business or industry, and financial records are a particular area of compliance concern. An automated solution drives more accurate payment reconciliation, helping you avoid compliance violations. In the event that your organization is audited, your software system also provides an easy-to-follow digital audit trail.

DEEPER CASH-FLOW VISIBILITY

Even minor errors in matching and payment reconciliation can create deep confusion about how much cash an organization has on hand at a given time. An automated solution allows immediate insights into how much cash is available.

QUICKER CLOSING OF BOOKS

Rather than scrambling to get all of your payments reconciled and your accounting books closed at the end of a month, an automated solution allows for ongoing reconciliation throughout that period. That allows you to close out books smoothly and accurately before financial close.

Automate Your Payment Reconciliation Process with MHC

As you’ve seen here, payment reconciliation is too important and too complex a consideration to tackle without a reliable, automated software solution. MHC offers top-of-the-line AP automations software, including industry-leading workflow process automation and OCR technology. Don’t take chances when it comes to making your books balance and getting your payments reconciled. Request a free demonstration of MHC software solutions today to learn more about the many ways we can help keep your accounts payable operations running smoothly, speedily, and in full compliance with regulations.

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