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The Importance of Accounts Reconciliation

Money, like emotions, is something you must control to keep your life on the right track.” -Natasha Munson

Any active business handles a whole lot of documents that record various types of financial operations.  These documents, like bank statements, general ledgers, invoice logs, payroll records, etc. have data overlaps and exclusions.  The management of the finances and accounts of the company requires these documents to be compared and the data collated to get a more comprehensive picture of the financial state of the organization. Accounts reconciliation is a financial housekeeping activity that ensures that every entry in every financial document is legitimate and validated. This is performed by comparing the entries in these various documents to ensure that there are no omissions, errors, mismatches or discrepancies in the money shown as coming in or going out. Periodic accounts reconciliation helps in consolidating the financial status of the company, easing year-end audits, detecting frauds and mismanagement early on, and ensuring compliance.     

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 In this post, we shall look at what accounts reconciliation is, its numerous benefits to the company and the challenges associated with the process.  We shall also see how Nanonets can ease the process of accounts reconciliation and help businesses stay on top of their financial data.

What is Accounts Reconciliation?

No business can function without the in- and out-flow of money.  Keeping the in-flow more than the out-flow is the basic tenet of profitability.

But to ensure that the inflow is more than the outflow, it is essential to keep track of all financial transactions of the company.  As a company grows in size, so does the quantum of financial transactions.  The only way to keep track of all financial transactions is through account reconciliation.

Accounts reconciliation is the process in which multiple documents that record various types of financial transactions are compared to explain every cent that flows in and out of the coffer.  There are various types of financial records that a company keeps, and therefore, there are various types of reconciliations performed by the company to maintain financial hygiene.

  1. The general ledger is the master internal financial document that holds data on all transactions performed by the company.  Comparing the GL entries with various other internal and external records constitutes general ledger reconciliation.
  2. Matching bank statements with a company’s internal accounting records, like the General Ledger is known as bank reconciliation.
  3. Reconciliation of transactions recorded in the credit card statement with internal records such as invoice records, bills, and inventory records is known as credit card reconciliation.
  4. Accounts receivable reconciliation involves comparing the entries in the accounts receivable ledger with bills, invoices, and purchase orders raised by the enterprise to clients/customers.
  5. Accounts payable reconciliation is the matching of entries in the accounts payable ledger with bills, invoices, and purchase orders raised by suppliers/vendors and must be paid by the company.
  6. Intercompany reconciliation is a mix of accounts receivable and accounts payable reconciliation, except that the comparison is with invoices and bills raised between subsidiaries and subdivisions of the same parent company.
  7. Inventory reconciliation is the process of comparing the items owned by the company with appropriate logs of the items and bills/invoices involved in buying the items. 

These reconciliations are sometimes performed by dedicated teams in large companies, or outsourced to service providers.  In both cases, it is best to use software with various levels of automation (depending on the size and complexity of operations of the company) to ease and streamline the process.

Accounts Reconciliation Outsourcing Services

 While some companies perform accounts reconciliation in-house, some outsource the activity to service providers. The reasons to use external service providers include the following. 

  1. Service providers are dedicated to the task of account reconciliation.  This means that they have accountants and financial management teams that are trained to perform the task.  They are usually aware of the process, pitfalls, and challenges and have a system in place to perform reconciliation accurately and fast.   
  2. Service providers often use the right tools for the reconciliation process. Since they provide service to many clients, they would invest in powerful software tools that business owners may be unaware of.  They would also be trained in using these tools.
  3. Service providers would be aware of various formats of financial documents.  Thus, they would know where to look for information during the reconciliation process.
  4. Outsourcing providers can tailor the reconciliation processes to meet the specific needs and requirements of each client.
  5. Service providers provide regular reports and analysis of reconciled accounts, offering insights into financial trends, anomalies, and areas for improvement to support informed decision-making and strategic planning.
  6. The providers can assist in ensuring compliance with relevant regulations and industry standards. 

Challenges and Risks of Accounts Reconciliation Outsourcing

 When something is too good to be true, pitfalls and challenges must not be overlooked.  The first obvious risk to outsourcing accounts reconciliation is that sensitive financial data is shared with a third party.  One bad apple can spoil the fruit basket - just one unethical person in the outsourced company can cause irreparable damage to the business.  It is therefore extremely important to vet the outsourcing team before handing over the reconciliation tasks to them. 

Another risk is that outsourcing reconciliation services to a service provider may cause the stakeholders to lose track of the financial situation of the organization.  While it is common sense and best practice for the stakeholders to oversee the outsourced reconciliation activities, this may not always happen in the busy-ness of running the business.  Occasional lapses can snowball into huge financial fires that must be fought (excuse the mixed metaphors).

The final risk is that outsourcing can work out to be a costly move.  Companies must carefully weigh the cost-benefits of outsourcing versus performing in-house reconciliation.  This must take into account the current operational workflows of the enterprise as well as projected/anticipated work escalation in the future.

Why choose Automated Accounts Reconciliation over Outsourcing?

The use of automation tools like Nanonets can be a better alternative to outsourcing account reconciliation.  More and more businesses are adopting these tools for their accounting operations; not surprisingly, the Global Account Reconciliation Software Market is projected to soar from USD 2.30 billion in 2022 to USD 8.09 billion by 2031.  Here are some benefits of adopting automation in accounts reconciliation. 

  1. Accuracy: Spreadsheets are often used in manual accounts reconciliation.  The use of spreadsheets entails manually entering the data from various documents. studies reveal that a staggering 88% of spreadsheets contain errors. Automated reconciliation software like Nanonets can extract data with more than 90% accuracy, thereby preventing reconciliation errors and mismatched data.. 
  2. Efficiency: Manual reconciliation processes take many days or weeks to complete, depending on the scale of operations. Nanonets can process large quanta of data at a fraction of the time taken with manual processes.  This can enable timely reconciliation, thereby freeing organizations to focus on their core competencies. 
  3. Flexibility:. Tools like Nanonets allow businesses to customize the software according to their work styles, and workflows. This allows easier processing and allows companies to have real-time feedback on the finances, which can help with strategic decision-making.
  4. Scalability: Software like Nanonets can be used over a wide range of operations, and are suitable for both small businesses as well as larger enterprises. Thus, they offer scope for expansion and diversification. 
  5. Cost-Effectiveness: While there may be upfront costs associated with implementing automated reconciliation software, in the long run, they reduce labor costs and minimize the need for manual intervention, leading to cost savings.
  6. Compliance and Audit Trail: Nanotnets and other advanced automated reconciliation software maintain a detailed audit trail of reconciliation activities.  This helps not only in maintaining transparency but also ease the year-end auditing process. 

 Nanonets can accurately extract data from a variety of documents including bank statements, credit card statements, invoices, bills, etc.  Thus it can save considerable time in data consolidation processes. 

Another benefit of Nanonets is that it can detect discrepancies and flag anomalies in data because it is an intelligent data extraction tool. Considering that businesses lose up to 5% of revenue to fraud and theft, Nanonets’ flagging capability can prevent losses due to mismanagement and even human carelessness. 

There is no need for advanced technical expertise in using Nanonets. The No-code nature of the software allows matching and transaction activities for people who are not techno-savvy (Read: Geeks). The software’s integration with other tools like the Google Suite, Xero, Quickbooks, etc., allows its implementation without a complete overhaul of existing systems in an organization. 

Most importantly, Nanonets takes data security seriously. All data sent to or from Nanonets is encrypted in transit using 256-bit encryption. Nanonets’ API and application endpoints are TLS/SSL only and score an "A+" rating on SSL Labs' tests. This means Nanonets only uses strong cipher suites and has features such as HSTS and Perfect Forward Secrecy fully enabled.

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Take Away

Automation tools like Nanonets can ease the account reconciliation process and save considerable time and effort for organizations. Nanonets can be installed and run without the need for too much technical expertise and can help in keeping your financial data safe. The use of automation tools in accounts management can help companies thrive in the competitive business landscape of today.