Payment Reconciliation

When it comes time for businesses to pay their vendors, employees, and other parties they owe money to, they also need to ensure their financial records accurately reflect these payments. 

Payment reconciliation is the business process used to verify that all payment transactions are correctly recorded, both in terms of the total amount and individual breakdowns.

What is Payment Reconciliation?

Payment reconciliation is an accounting process businesses use to verify that all payments made are properly recorded throughout the accounting system.

Payment reconciliation involves:

• Matching payments made to vendors, employees, and other parties with the amounts recorded in a company’s financial records.
• Checking that all transaction details such as invoices, purchase orders, and payment instructions are accurate.
• Reviewing supporting documents such as bank statements, deposit slips, and canceled checks.
• Identifying and correcting any discrepancies between the recorded payments and actual payments made.

Payment reconciliation is a simple concept: verify that all internal and external records match. When they don’t, an accountant or bookkeeper must probe to identify the cause of the discrepancy.

However, as a business grows in size and complexity with more accounts payable, accounts receivables, and multiple payment sources, this process becomes increasingly difficult (and time consuming).

Because of its importance, payment reconciliation is a critical step in the accounting process. Errors or omissions can result in inaccurate financial statements and lead to costly penalties and fines. By performing regular payment reconciliations, businesses ensure all payments are accurately tracked and recorded.

Synonyms

• Bank Reconciliation – A process that compares a company’s bank balance as recorded in its general ledger to the actual balance on its bank statement.
• Cash Reconciliatio – The process of verifying that all cash transactions have been properly recorded and accounted for.
• Account Reconciliation – The comparison of two accounting records, such as outstanding invoices and accounts payable records.
• Credit Card Reconciliation – Reviewing credit card statements to ensure all transactions are accurate and complete.

Why Payment Reconciliation is Important

Businesses depend on payment reconciliation to ensure accurate records on each of their financial accounts.

When a company doesn’t closely examine its accounts, it can be tough to spot any discrepancies or errors. Payment reconciliation is the best way for businesses to verify that payments have been made and recorded properly.

Uncover Errors

Payment reconciliation is the best way for businesses to uncover any errors or discrepancies within their financial records. Because it requires a detailed review of payments, it can reveal mistakes such as incorrect invoice amounts, missing transactions, and bank statement discrepancies.

By uncovering these errors early on, businesses can save themselves from revenue leakage in the form of overpayments, late fees, and additional costs from data entry errors.

Collect Unpaid and Late Invoices

If a vendor, client, or customer has forgotten to pay an invoice or is late on a payment, it’s important for businesses to have all the information necessary to pursue payment. Throughout the billing process, stakeholders may forget which invoices are due and unpaid without a detailed account of each payment.

Payment reconciliation provides an audit trail of transactions, making it easier to identify any unpaid invoices or charges still owed by customers. This helps businesses increase their cash flow and reduce potential losses due to non-payment.

Ensure Accurate Financial Records

Accurate reporting is critical to business success for numerous reasons:

• Tax Compliance: Companies must ensure all payments are properly documented and accounted for in order to adhere to local, state, and federal tax laws as well as revenue recognition standards (e.g., ASC 606).
• Audits: Financial records must be accurate and up-to-date during an audit. Payment reconciliation helps businesses maintain accurate financial statements to avoid costly fines or penalties.
• Data Security: A comprehensive overview of transactions helps businesses detect any suspicious activity or unauthorized payments.
• Budgeting: Payment reconciliation helps businesses plan their budgets with accurate data on all payments. This helps them make informed decisions about their spending and avoid costly surprises.
• Revenue Forecasting: Accurately forecasting revenue is difficult when businesses lack visibility into their finances. Payment reconciliation ensures businesses have a clear picture of all payments and can accurately predict revenue over time.
• Investor Relations: Investors are more comfortable investing in businesses when their balance sheet is well-maintained. If a company doesn’t proactively reconcile payments, it can be difficult to provide investors with the necessary financial data.
• Customer Relationship Management: Messy accounting records can reflect poorly on a business’s ability to manage customer relationships. Payment reconciliation helps businesses provide customers with accurate invoices, avoiding any late payment charges or other negative repercussions. 

When businesses reconcile their payments correctly, they can realize all of these benefits.

Reduces Fraud

No matter how advanced a business’s security and safety protocols are, fraud will still be a major concern. Payment reconciliation enables businesses to detect any suspicious activities such as unauthorized payments or duplicate charges.

By monitoring accounts for discrepancies, businesses can identify any suspicious activities, double-check them with the customer or internal stakeholders, and take the necessary steps to stop any fraudulent activity before it becomes a bigger problem.

Saves Money, Time, and Resources

Revenue operations and accounting teams are constantly juggling multiple tasks, so automating any task they can helps them save money and time. Payment reconciliation automation is an effective way to streamline the process without sacrificing accuracy or security.

Automation eliminates manual data entry, reduces errors, and removes the need for manual follow-ups with customers or vendors.

Types of Payment Reconciliation

There are four primary types of payment reconciliation.

Bank Reconciliation

When an accounting team receives monthly statements, they need to check with internal records to ensure accuracy. This process is known as bank reconciliation and helps businesses detect any discrepancies in their accounts.

Cash Reconciliation

Cash reconciliation is the process of matching cash flows with internal accounting and bank records. This ensures all payments and deposits are correctly tracked and accounted for.

Credit Card Reconciliation

Most of the time, businesses send and receive payments via credit cards. Credit card reconciliation ensures that payments are being processed correctly and accurately.

Digital Wallet Reconciliation

A digital wallet is a digital version of a physical wallet. This type of reconciliation helps businesses match their digital wallet payments (i.e., Apple Pay, Google Wallet, virtual credit cards) with their accounting records.

Payment Reconciliation Process

There are four steps in the payment reconciliation process:

• Record Retrieval: The first step is to gather all the relevant records for reconciliation—including customer payments, monthly statements, mobile wallet records, and any other documentation related to payments. Then, the accounting team must single out specific information required to compare specific payments—such as dates, amounts, and payment methods. For companies that haven’t automated their accounting practices, this step can be cumbersome and time-consuming.
• Matching: During the pairing process, each transaction is examined against bank declarations. If a perfect match occurs, those transactions are passed off as complete. Otherwise, they advance to the following stage. An automated system effortlessly automates the matching process.
• Reconciliation: If there is an issue with a payment, an accounting or operations team member must investigate it and resolve the matching issue. It’s important to keep in mind that payment reconciliation requires a deep understanding of the company’s financial operations and documentation.
• Recording: Finally, once all transactions are reconciled, the accounting team records them into the general ledger or other financial system.

Benefits of Automated Payment Reconciliation

How a company manages its business operations significantly impacts its bottom line. Process automation is the key to optimizing revenue and ensuring accuracy.

Saves Time

AP automation can save more than $16 per invoice, and the reason for this is that manual reconciliation requires a lot of time, effort, and resources. Automation eliminates data entry, manual processing, and printing costs.

Plus, automated invoice capture and recording saves AP professionals one hour per day and enables them to take a streamlined approach to reconciliation. With automated systems in place, businesses can reduce their payment processing times from days to mere minutes.

Close Month-End Faster

Keeping books open at the end of a month is no longer necessary with automated reconciliation. This process can be performed in real-time, which translates to faster closing and more accurate financial statements.

Accuracy

A general rule of thumb states that manual data entry typically yields 1% in errors, but one study found this figure to be as high as 4%. When managing multiple revenue streams (e.g., recurring billing, one-time payments, etc.), the chances of manual errors increase exponentially.

Automated reconciliations reduce such discrepancies and eliminate the need for error-prone and time-consuming data entry processes.

Payment Reconciliation Software

Payment reconciliation software is a type of accounting software that helps businesses match their payments (invoices, bills, etc.) with their accounting records to reduce discrepancies and save time.

This type of software integrates seamlessly with the following tools:

• Customer Relationship Management (CRM): CRM software is designed to manage customer interactions, including sales and support. It helps businesses keep tabs on customer activities, such as payments and refunds. CRM records are important to financial operations because they store information about payments and other financial transactions.
• Billing Software: Billing software is used to generate invoices, manage billing cycles, and process payments. This type of software makes it easy to track all payment-related activities in one place, which helps streamline the reconciliation process.
• Enterprise Resource Planning (ERP): ERP software is designed to bring various departments, such as finance, HR, and accounting, together in one unified system. It helps businesses manage their financial operations more efficiently by providing visibility into all areas of the company’s finances.
• CPQ Software: Configure, price, quote (CPQ) software is used to create accurate quotes and proposals quickly. This type of software helps automate the quoting process and ensures that all pricing information is up-to-date. When integrated with billing software, CPQ makes it easy to keep track of customer invoices and payments.  

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