Introduction
You are focusing on growing your business, getting more users, customers & revenue. However, when you see the balance of your checking account the numbers don’t somehow match up. This is where payment reconciliation plays in.
As we know cash is king. Payment reconciliation can be called a kingmaker
What is payment reconciliation?
Payment reconciliation is a critical process for all businesses. It may sound like a complicated term, but it really just means making sure that all payments that were received and recorded by a business or organization match up with the actual money received in their accounts.
The goal is to ensure that the business has received all the payments it is owed and to identify any discrepancies or errors in the payment process. In this blog post, we will explore the importance of payment reconciliation and provide some tips for conducting it effectively.
Why is payment reconciliation important?
In today’s fast-paced business world, it is easy to lose track of payments made and received. Payment reconciliation is the process of matching financial records to ensure that what was expected to happen did indeed happen. It plays a crucial role in maintaining the accuracy and integrity of your financial records.
Here are some reasons why payment reconciliation is important:
Prevents errors and fraud: By reconciling payments, businesses can catch any errors or fraudulent transactions, preventing financial losses.
Ensures accuracy: Payment reconciliation ensures that the financial records are accurate and up-to-date, providing a clear picture of the company’s financial health.
Saves time: Payment reconciliation helps businesses save time by identifying and correcting errors early on, reducing the need for extensive audits or investigations.
Improves cash flow: By reconciling payments, businesses can identify unpaid invoices or delayed payments, allowing them to take appropriate actions to improve cash flow.
Helps with budgeting: Payment reconciliation provides accurate financial information that can be used to create budgets and financial forecasts, allowing businesses to plan and make informed decisions.
How does the payment reconciliation process work?
There are two aspects to the reconciliation process: internal and external. Let’s explore these in a little more detail.
Internal
When a transaction, e.g., a bill or payment is posted or scheduled, the company records this activity. This can be done in a number of ways via accounting software like Xero, QBO, NetSuite, Zoho etc where transactions are entered and discrepancies handled.
To streamline the reconciliation process, it’s best practice to use bank, merchant account, or third-party software that integrates with your current systems so that you can see all the payments made into your accounts and their reconciliation status on daily basis. The more frequent it is rather than after the effect, the more effective the reconciliation process is.
Saving receipts and tracking billing paperwork. This method involves a high degree of risk since manual paperwork is error-prone and can be easily misplaced.
External
When transactions are processed, the bank records this activity. When monthly statements become available, companies check the statement of record. Every transaction is listed, including cost and vendor payment methods, as well as income.
To reconcile transactions, the internal and external activities are matched up. In case of discrepancies, companies have to figure out if the errors are internal or if the bank is in error (possibly as a result of a breach). In any case, action needs to be taken as soon as possible when a discrepancy is detected.
Why does your business need to do payment reconciliation regularly?
Reconciliation is not just another chore on your to-do list; it’s a crucial process that protects your business, maintains compliance, and benefits your cash flow.
Here are three benefits of payment reconciliation:
1. Reconciliation uncovers errors and unauthorized payments
Reconciliation keeps you in tune with your business’ finances. By comparing internal and external records, you can catch errors sooner rather than later, ensuring a faster resolution and improved cash flow. What’s more, you can identify unauthorized payments or a security breach at your banking institution.
2. Reconciliation helps you chase unpaid or late invoices
You sent the invoice out, but you didn’t get the funds in return – it’s a scenario familiar to businesses large and small. By regularly reconciling your accounts, you can make sure every missed or late invoice is followed-up and settled.
Several merchant processor payments are not received in account on time due to chargebacks, percentage holding, escrow or any other factor which if known after the effect, taking own money becomes a chasing game
3. Reconciliation ensures your business’s financial records are accurate
Without accurate financial records, you cannot keep on top of your business’s health, make informed business decisions, or easily demonstrate your financial standing to banks, investors, and lenders.
Plus, some industries and sectors are subjected to record-keeping requirements and regulations. In these instances, accuracy is crucial to maintaining compliance and protecting your business against penalties.
Payment reconciliation best practices
Payment reconciliation once linked to the company’s important KPI acts as a very strong indicator of cash position & disciplined collection of funds
Establish and follow policies.
Standardize the payment reconciliation process. Define in a formal and transparent way how it will be conducted and then stick to it. This lends authority to the entire process.
Automate.
The sustainability of having regular payment reconciliation is only when it’s automated & tracked on regular basis.
The lion’s share of payment reconciliation results in confirmation that internal and external records match. Automation can relieve staff of that time-intensive responsibility so they can focus on what doesn’t match and on other higher-level tasks.
Set thresholds for unreconciled differences.
By establishing a threshold, a company ensures that valuable time is spent on resolving larger dollar discrepancies.
Reconcile regularly and frequently.
It stands to reason that reconciling payments on an ongoing basis can help a company more quickly catch errors or possible fraudulent activity that may worsen the longer problems go unchecked. Doing so also increases the likelihood that a company can close its financial books on time.
Improve processes.
Just because a company establishes and follows policies doesn’t mean it can rest on its laurels. The key: Analyze financial and performance metrics. This will provide the hard data needed to determine whether changes need to be made, such as introducing automation to the process.
Automate Payment Reconciliation
Automation hands companies a win they can’t ignore. GATP Solutions provides automated solutions to ensure end to end process of payment reconciliation is automated. We use automated tools that can bolster the payment reconciliation process including:
Cloud computing:
The advent of cloud computing created a platform that makes payment reconciliation more efficient. Not only does the cloud provide infrastructure for running technologies that can separate the entries that match from those that don’t, but the collaborative, anytime-anywhere nature of the platform can also spread the payment reconciliation responsibilities across an organization.
ERP:
ERP automates business processes across a company’s various departments, so it’s a natural fit for payment reconciliation. Indeed, ERP systems can track all transactions (payables and receivables) via a financial module that handles payment reconciliation and generates financial reports.
Accounting software:
Accounting software can also automate the payment reconciliation process, taking over the time-consuming record-matching step.
Conclusion
With great growth comes greater responsibility 🙂 It’s a given fact that your business is most attractive when you are cash rich. There is no bigger happiness to see your bank account growing by the day.
Payment reconciliation ensures you are in control, the earlier you are able to catch discrepancies easier it is to resolve. Even the bank, processor & third-party application treats your account with more respect as they know they will be questioned if there is an error.
Thanks for reading, hope this article was helpful and then I’ll ask the reader a few questions in hopes that they’ll leave a comment on the blog post
