It’s standard practice for organisations of all shapes and sizes to utilise various financial practices, to manage cash and keep operations running smoothly.
One of the most important of these is reconciliation, which can be valuable both for managing day-to-day finances and cash management – why?
That’s what we’re here to answer today.
What is Reconciliation?
We need to start with a definition. In finance, reconciliation is the process of matching internal ledger entries (e.g. Accounts Payable invoices) to bank statements.
The purpose of this is to make sure that any payments that were expected to be made (and which you’ll have an internal ledger record for), have actually been paid. This helps organisations spot discrepancies, so they can identify where the ledger and statement fail to match. This shows where they need to investigate any payments which could have been made erroneously or fraudulently.
Internal ledgers sit on the General Ledger, as well as within back-office software, most typically Enterprise Resource Planning (ERP) systems. It should be noted that the ERP often feeds the General Ledger. The bank statements are then loaded into the ERP, so each line entry (and therefore each transaction), in the statement can be matched back to the ledger. So how does this all work?
How Does it Work?
We need to look at what information ledgers and statements hold to answer this question. Ledgers detail the currency and amount of the payment, as well as whether it’s money-in or money-out. There may be extra details such as an invoice number and potentially a reference as well.
Bank statements also have the same basic details. The currency and amount of the transaction, as well as whether it’s money-in or money-out. It will also have its own reference. It’s worth noting that in auto-reconciliation (more on that later) your finance team can tie the reference data of the invoice/ledger back to the bank statement, making it easier to spot any discrepancies.
The process of reconciliation has historically been a manual one. An organisation’s finance team will analyse the details held in both the ledger and the statement, line-by-line via the naked eye, to see that each of the details match. There must be a better, more efficient way, to do reconciliation, right?
Spotlight on Auto-Reconciliation
Many organisations have now embraced auto-reconciliation to streamline the process and create efficiencies. In auto-reconciliation, an ERP uses a pre-defined set of criteria to automatically match the statement and the ledger together. This means that finance teams don’t have to manually match everything, they only step in when there are exceptions that need to be investigated.
The pre-defined criteria used for auto-reconciliation includes the usual suspects e.g. amount. But reference data can also be used. For example, if a supplier sends you payment for an invoice, the bank might include their own reference first, and then the invoice number may be listed somewhere further down in the field. This logic needs to be built into your ERP to enable auto-reconciliation.
Intraday vs. End-of-Day
So how often is reconciliation done? Usually, it’s either end-of-day and/or intraday (meaning ‘within the day’). End-of-day assesses which payments have been executed and confirmed on the account by your bank. This is the only type used to drive ERP reconciliation, and it’s the one that’s important for finance, as it identifies which specific expected transactions have and haven’t been completed.
Intraday doesn’t provide the same minute level of detail as end-of-day. Used most often for treasury purposes, intraday reconciliation will show you that an expected payment hasn’t been received, but not necessarily which transaction is outstanding. Intraday is very much a high-level process, used by treasury teams to show how much they have to invest/how much they need to borrow on a daily basis.
Uses for Intraday
Yes. end-of-day reconciliation (manual or automated) is used as the standard for finance. Yet various members of your finance function can benefit from intraday too. For example, treasury operations teams can use it to figure out if expected payments have been received before the end of the day, providing more accuracy of available funds for investment, and more details for the treasury process.
Intraday is useful for finance teams as well. It can be used to give them a head’s up, so they can start investigating any missed payments today, as opposed to tomorrow as they’d have to if they’d only learned about it at the end of the day. It would be possible in this scenario for your finance team to either get the missed funds paid on the same day or start chasing the client who owes you money.
There’s one thing we need to mention. Intraday is only viable if you automate the reconciliation process. Finance teams are busy enough. Asking them to do end-of-day and intraday reconciliation manually would give them too much work. However, if you automate the intraday piece and just give them any exceptions to investigate, it’s much more manageable, providing real value.
Naming the Benefits
There are various benefits that reconciliation offers your organisation. This includes…
- Easy management of exceptions
The process allows you to identify, and then investigate and manage, exception payments with ease. Otherwise, you’d have no way of telling which payments haven’t been made, damaging cash flow.
- Fraud detection
Reconciliation also serves as another tool in your organisation’s fraud prevention arsenal. This is because you can see which payments have been expected to be paid and what actually happened, so if one is missing it could be an indicator of fraud. Numbers show that the cost of fraud to the UK’s private sector alone was £140 billion in 2017, so it’s vital to have solutions to this issue at the ready.
- Trend identification
It can be used to identify trends as well, allowing you to improve processes in future. For example, you could deploy reconciliation to spot trends in when people pay your organisation. Say one debtor always pays late. You could identify this, and account for it rather than relying on internal account records. That way, you can say let’s not expected those funds in today as the debtor’s bound to pay a few days late, giving you a more accurate cash flow forecast so you don’t go overdrawn.
Tackling the Challenges
The reconciliation process also comes with its fair share of challenges for you to tackle, such as…
- Data input
One of the biggest challenges is getting the data into your systems. Think about it. Often, you’ll need to go into online banking, download the statement, then upload it into your ERP. Every single online bank has a different format – so you’ll also have to align and standardise files before the upload. This is risky in and of itself, as this provides a devious employee with the opportunity to amend the statement (e.g. by inserting or deleting a line), so someone committing fraud can cover their own tracks.
- Headcount requirement
In cases where you do reconciliation manually, there’s the headcount issue too. Your team would be required to match ledgers and statements, line-by-line, and the fact that statements may not be in the best format only makes this harder, so the whole process is very labour-intensive.
- Prone to error
Any manual process is prone to human error, and reconciliation is no different. The opportunity for error presents itself throughout the process, from downloads, uploads and file standardisation, to matching, and the consequences can be serious. There’s evidence to show that human error is costing businesses in both the UK and US around £315 per employee every single year.
Work with AccessPay
You can work with AccessPay to address these challenges, allowing your organisation to make the most of reconciliation. We can automate the statement retrieval process and deliver it into your ERP, as well as transform the statement and standardise all of the outputs along the way. This means that the transformation exercise doesn’t need to be done in your ERP, creating efficiencies.
Using AccessPay for transformation and automated delivery offers another benefit, as far as reconciliation goes. You can increase your match percentages (when using auto-reconciliation), as through standardisation you employ a single rule across all banks (you’ll still have multiple matching rules but it won’t be per bank) to govern matches. This will boost efficiency and accuracy, causing your ledger/statement matches to increase.
Utilise Cash Management
AccessPay’s automated statement retrieval function will also allow you to use reconciliation for effective cash management. In ERPs, information is viewed on an account by account, transaction by transaction basis. However with AccessPay, not only do we pass you all the necessary info (e.g. MT940s), we display it all in our easy to navigate and user friendly interface so you can view and interrogate the data at leisure.
The added advantage is that not only can your finance team see all the necessary statement info in the user interface, but so can your treasury team. They can view all consolidated balances for your organisation via our Cash Management solution – as well as all the factors contributing to those balances – allowing them to use our best-in-class analytics tools to help you make the most of your cash.