Reconciliation is a key part of the account closure process and integral to ensuring tight financial control and compliance. However, all too often, reconciliations are performed manually, monopolising the finance team’s time while risking inaccuracies. This article examines some of the key reconciliation processes organisations need to perform, the technologies available for automating these processes and the cost, efficiency and compliance benefits to be gained from moving to automated reconciliation.
Key Types of Reconciliation
There are a number of reconciliations an organisation should carry out before closing the accounts, from bank and control account reconciliations through to petty cash and payroll reconciliations. This article focuses on three key reconciliations – bank, control account and purchase card reconciliation – exploring how often these should be performed to ensure tight cash management.
The reconciliation of the bank statement confirms that the amount of cash reported by the company’s books is consistent with the amount of cash shown in the bank’s records. The reconciliation therefore forms a fundamental part of the administrative internal control system.
The reconciliation should be done on a regular basis, at least monthly. It is also important to have a bank reconciliation that corresponds to the date the organisation closes its accounting books at the end of each financial period, whether this is monthly, quarterly, semi-annually or annually.
Control account reconciliation
Control account reconciliation is essentially a comparison between balances in the general ledger and other documentation, ensuring that the accounts are correct. For example, if audit need to see a breakdown of an account listing £n thousand as due to the company, can it be justified in terms of who owes it and why? Many businesses reconcile all balance sheet general ledger (GL) accounts, such as cash, investments, fixed assets, accounts payable (A/P), receivable (A/R) and inventories.
As with bank reconciliation, it is vital for accounts to be reconciled at the end of each financial period, whether this is each month, quarter or year. The sheer volume of incoming and outgoing GL postings on a control account can make it difficult to keep on top of reconciliation, but putting it off increases risk and makes it more difficult to take timely corrective action in the event of a problem arising.
Purchase card reconciliation
The use of purchase cards has dramatically increased in recent years as part of a drive to eliminate the lengthy processes and paperwork associated with making small business purchases. However, even though purchase cards initially reduce procurement time, all purchase card transactions eventually need to be reconciled against the corresponding bank statements.
With so many small value card transactions across an organisation, to keep on top of the reconciliation process, it is important that card purchases are reconciled regularly (at least monthly). This is in addition to ensuring reconciliation at the end of each financial period.
No matter how efficient and thorough an organisation’s finance team, if it carries out reconciliations manually, it is always going to be lagging behind finance teams that use reconciliation software solutions. This is because the manual reconciliation of an organisation’s finances is time consuming, costly and prone to human error with reconciliation errors having potentially major consequences to a company’s financial well being. High transaction volumes, multiple bank accounts, different transaction types, multiple currencies and various bank file formats only add to the problems.
The use of tailored reconciliation software provides an affordable and automated alternative to time consuming, error-prone and costly manual reconciliations.
To achieve automatic reconciliation, a functionality-rich accounting system that can be integrated with a number of reconciliation-specific software modules is first required. This ensures a joined-up, transparent and accurate financial view.
The integration of a bank reconciliation module enables organisations to quickly and efficiently perform bank reconciliation, especially when multiple bank accounts are in operation. This software module needs to support the fully-automated import of bank statement transactions for single or multiple bank accounts. Transactions can then be automatically reconciled by value and reconciliation code.
Using the automatic GL journal creation functionality for miscellaneous bank charges and fees, finance teams can save time and effort. It also eliminates the need for manually created journals and together with the automated identification and resolution of exceptions and the quick management of errors, minimal manual intervention is required.
Control account reconciliation software can be effectively used alongside bank reconciliation software (and integrated with the core accounting system) to further streamline the financial close. This account reconciliation software provides the user with the ability to populate each GL transaction with a ‘reconciling identifier’, and this is then used for automatic matching and to keep track of reconciled and un-reconciled transactions from employee loans through to customer advances and re-payments. As with the bank reconciliation solution, account reconciliation software makes the identification and resolution of exceptions simple and straightforward.
By implementing an integrated purchase card reconciliation (PCR) module, this relieves the finance team from the heavy administrative burden associated with the use of company purchase cards. This software replaces manual and often heavily paper-based purchase card reconciliation with the electronic management and reconciliation of all purchase card transactions.
A typical PCR solution enables electronic bank statements to be automatically imported into the PCR solution. Each transaction shown on the statement is assigned the appropriate GL coding and forwarded to the cardholder for review. Once reconciled by the cardholder, the statement can be electronically forwarded to the relevant budget authorisers and then finance for approval. Once approval is complete, the statements can be automatically uploaded into A/P as pre-settled invoices and the appropriate GL postings automatically generated, ensuring all purchase card spend is accurately captured.
Benefits of Automation
The implementation of a flexible accounting system with integrated reconciliation software solutions, such as the aforementioned one, delivers a number of tangible business benefits, effectively supporting the finance team in the closure of accounts. The main benefits of automating reconciliation are outlined below.
The processing costs associated with manual reconciliation can be significant. Automating reconciliation cuts these processing costs and subsequent audit cost. It can also deliver savings as a result of more closely monitoring the organisation’s finances and, in the case of PCR, procurement card spend.
Increased productivity and faster closure of accounts
Many man hours can be spent on reconciliation at the end of each financial period, monopolising the finance team’s team when their time can be much better spent adding value, such as by dealing with any exceptions that aren’t matched via the automatic process or by securing the best terms on procurement cards. As automated reconciliation is far more efficient than manual reconciliation, this also facilitates faster closure of accounts.
A number of organisations have first-hand experience of the efficiency benefits and productivity gains of moving to automated reconciliation. For instance, VSA, a Scottish social care charity, has cut reconciliation of its 15 bank accounts at the end of each month from two whole days to just 30 minutes by using a financial management system with integrated reconciliation functionality from Advanced Business Solutions (ABS). Likewise, the use of a financial management system with integrated automated bank reconciliation has improved efficiency and eliminated duplication at voluntary organisation, Freeways Trust, enabling its month-end accounts processes to be reduced by three days.
Improved data accuracy
By its very nature, manual reconciliation can result in keying errors, which ultimately leads to inaccurate financial reporting. Automating reconciliation removes the risk of human error, including keying inaccuracies, thereby providing a vital layer of control.
Greater financial control and improved compliance
An organisation that does not have automated and integrated reconciliation processes in place will fail to have an ongoing accurate and up-to-date view of its finances, leaving the organisation open to poor financial control and compliance issues. Electronic reconciliation technologies ensure the accurate recording, validation, consolidation and reporting of finance information, thereby supporting corporate governance and regulatory compliance. Purchase card reconciliation solutions, for example, can provide full auditable trails of purchasing card spend. By scanning receipts and electronically attaching them to online statements, this aids corporate governance, VAT reporting and HMRC compliance.
Reconciling an organisation’s finances can be a complex, tedious and extremely time-consuming process when done manually. Staff time is monopolised and there is the risk of keying-in errors, undermining the accuracy of financial reports. To ensure a fast, accurate and cost-effective close, using reconciliation solutions that integrate with one another and also into the accounting system, are vital. For those finance managers that persist in reconciling their finances manually, they are not only wasting valuable staff time and operating inefficiently; they are also leaving their organisations wide open to financial reporting errors and, ultimately, compliance issues.
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