Payment reconciliation: What is it, and how can your business do it efficiently?
Efficient payment reconciliation is a vital aspect of financial management for businesses of all sizes. As transactions flow in and out, reconciliation processes are crucial to ensure accuracy, identify discrepancies, and maintain a clear financial picture.
Payment reconciliation helps highlight data entry errors, duplicate payments, unpaid invoices, and other issues that could warrant further investigation.
In this article, we will learn what payment reconciliation is, how it works, and why your company needs to conduct them regularly. We will also highlight the benefits of automated reconciling of payments and how Nanonets can assist businesses in achieving seamless and accurate reconciliation processes .
What is payment reconciliation?
A payment reconciliation is an accounting process that compares internal financial records against bank statements. This helps ensure accuracy and consistency in the recorded transactions.
A payment reconciliation involves cross-checking bank statements with book-keeping records such as invoices, receipts, and other financial documents.
For example, let's consider a scenario where a company receives payments from multiple customers for its products or services. Reconciling payments involves verifying whether the payments received in the company's bank account match the corresponding invoices or payment records in the company's financial system. This process helps identify any missing or unmatched payments, duplicate transactions, or other errors that may impact the veracity of the financial records.
Why is payment reconciliation crucial for businesses?
Payment reconciliations are necessary to maintain financial accuracy, and regulatory compliance and keep a business’s operations running well. If there are any accounting errors, payment reconciliations help detect them, preventing unnecessary consequences.
One of the reasons to conduct payment reconciliations is to have an accurate understanding of a company’s financial health. Businesses thrive on being prepared for unforeseen circumstances, yet without accurate financial foresight, even the most well-thought-out strategies could unravel.
There are several consequences to inaccurate or missing payment reconciliations. It can lead to audit issues, potential internal fraud, vendor disputes, taxation problems, wasted resources, and even reputational damage.
Payment reconciliations might not be a top priority, but their absence will affect a business. They are the backbone of informed decision-making and financial stability and provide the necessary clarity to navigate intricate business uncertainties.
How does payment reconciliation work?
Payment reconciliations can be conducted for a business's internal and external cashflows.
For both, there are a few common steps to follow:
- Gather data: The first step is to collect all relevant records to reconcile a payment. These include bank statements, accounting software records, invoices, receipts, and other relevant transaction records.
- Compare records: Once all documents relevant to a transaction are collected, compare and match the payment across different sources. Cross-reference transaction dates, amounts, payees, and reference numbers.
- Reconcile the accounts: If there are any discrepancies, determine their source(s) and make the necessary corrections to ensure accurate recording of payments.
- Validate and finalize reconciliation: Once the above is done, finalize the reconciliation process. Internal records should now accurately reflect the financial statements.
It is essential to perform payment reconciliations regularly, monthly or quarterly, to ensure that financial records remain accurate and up-to-date.
Payment reconciliation best practices
Every business can conduct payment reconciliations most suited to their requirements. When going about the process, there are a few best practices:
- Create and maintain a reconciliation schedule: Whether you perform payment reconciliations monthly or quarterly, create calendar events so you achieve them without fail. Frequent reconciliations help break the process down and identify discrepancies quickly.
- Consider using automation: Accounting software or financial management systems that offer automated reconciliation features can help match transactions, flag discrepancies, and streamline the process. This helps save time and reduce human error.
- Assign duties: Separate the employees' roles in initiating, approving, and reconciling payments. This helps prevent fraud and ensures that no single person has complete control over the entire payment process.
- Document the process: Create clear, step-by-step documentation outlining your payment reconciliation procedures. This documentation serves as a reference for employees, ensures consistency, and aids in training new team members.
- Review for patterns: Regularly review reconciliation reports for any patterns of errors or discrepancies. Identifying recurring issues allows you to implement corrective actions to prevent them from happening again.
A practical payment reconciliation process can reduce confusion and help establish clear goals for all departments involved.
Looking to automate your manual AP Processes? Book a 30-min live demo to see how Nanonets can help your team implement end-to-end AP automation.
Challenges of manual payment reconciliation
According to a PWC report, 30 percent of a finance team’s time may be spent on manual reconciliation. Even in top-quartile companies, analysts spend 40 percent of their time gathering data, not analyzing it!
Manual payment reconciliation is arduous because of the high data volume and complex payment structures. Businesses receive numerous payments from various sources, often in different currencies, via various payment methods. Thus, the data's sheer volume and complexity make it prone to errors and delays.
Further, manual data entry introduces the risk of human errors and inconsistencies. Even with meticulous attention to detail, manual reconciliation increases the likelihood of data entry mistakes, transposition errors, or missing transactions. These errors can result in inaccurate financial records, payment discrepancies, and potential financial losses.
The manual matching, cross-referencing, and investigation of payment records can take hours or even days, especially for businesses with many transactions. The time spent on manual reconciliation could be better utilized on more value-added activities, such as analyzing financial data or improving customer relationships.
Further, manual reconciliation often lacks real-time visibility into payment status and updates. Without timely information, businesses may experience delays in identifying and addressing discrepancies. This can result in missed opportunities, delayed decision-making, and potential disruptions in cash flow management.
As businesses grow and the volume of transactions increases, manual reconciliation becomes increasingly challenging to scale.
Fortunately, automation can offer significant benefits to the payment reconciliation process. In the next section, we will explore how automation can streamline the payment reconciliation process, its benefits, and how it can be achieved.
Automate payment reconciliation with Nanonets
Nanonets is a leading provider of AI-powered automation solutions to streamline payment reconciliation. With its advanced machine learning algorithms, Nanonets can automate the matching and verifying of payment data, ensuring accuracy and efficiency.
Nanonets offers a user-friendly interface that allows businesses to train the system to recognize payment patterns, match payments with invoices, and flag exceptions for review. Its intelligent automation capabilities enable businesses to achieve higher levels of accuracy, streamline the reconciliation workflow, and improve financial control.
Nanonets' AI-powered automation solutions offer a robust platform to streamline the payment reconciliation process, improve efficiency, and ensure reliable financial records. By leveraging the power of automation, businesses can optimize their payment reconciliation efforts and focus on strategic financial management.
What is payment reconciliation?
Payment reconciliation is an important accounting process that helps to ensure the accuracy of a company's financial records. It involves comparing the company's internal records of payments made and received to the corresponding entries on its bank statements.
What are the 3 main types of reconciliation?
Bank reconciliation, vendor reconciliation, and customer reconciliation.
Why should you automate payment reconciliation?
Automating payment reconciliation can save businesses a significant amount of time and effort. It can also help to reduce the risk of errors, which can lead to financial losses.