Complete Guide to Invoice Reconciliation

Do you often run into issues with irregularities with an invoice?

Then you would also know how problematic it becomes when you face errors with an invoice. 

Most businesses rely on goods and services from external suppliers and vendors, which represent a massive chunk of cash outflow. Facing errors in such invoices will not only create confusion but might also make you end up messing your financial accounts for taxes.

Thus, reconciling the accounts and invoices will help identify issues to make adjustments as needed to reflect the purchase and total. It might sound a lot tedious, but the impact on cash flow accounts will be significant.

If you’re new to reconciliation and invoice adjustments, then this guide will help you get back on track with your business.

What exactly is invoice reconciliation?

Reconciliation is an accounting settlement process wherein two sets of records either from an invoice, purchase receipts, book logs, registers, or financial balance sheet are analyzed to ensure that the money flowing through the bank account matches the invoices made for it. In simple terms, it lets you know that your business got paid the right amount for any product/service given or received.

Now, there could be many reasons why an invoice does not match with your accounts or a bank statement. Most common ones are:

• An invoice was paid partially for certain reasons.
• Discounts were given on early payments.
• Banking charges were applied, for instance, to international currency transactions.
• Delivery of goods got delayed, in turn, delaying payment.
• Issues on the payment period after the reconciliation period
• Misplaced or counterfeit invoices.

Reconciliation here thus helps in segregating legitimate oddities from errors and fraud to identify whether accounts are overdue or not paid and whether it needs to be recorded as a loss in the P&L statement.

Two Ways for Invoice Reconciliation – Manual & Automated

Settling invoice accounts to keep your records straight and updated to help avoid fraud. Matching the invoice data with transactions stated in bank statements helps you know how your cash has been going out or coming in, which in turn, helps you know your outstanding bills.

There are only ways to reconcile your invoices: manually and through automation.

Old accounting methods used to be a nightmare when it came to reconciling invoice accounts. It was difficult for accountants to verify figures by going through documents to document while checking matching amounts line by line. And this used to happen not only regularly but also when businesses had to submit their yearly financial statements.

Today, with invoice reconciliation software, accountants have been able to simplify their invoice settlements, helping them reduce their efforts and time put upon it. Such a software system helps them match the purchase orders with their invoices automatically, helps them receive payments, vendor records, and documents periodically. Items or amounts that do not match are alerted for the accountants to review, and the irregularities are solved immediately.

Such an automated feature in invoice reconciliation has helped to eliminate human errors, alert for overdue payments, and give opportunities to businesses to save money with payment deadlines. Due to this software, today accountants only go through manual invoice reconciliation to maintain monthly records.

Why there is a need for reconciliation invoices?

When a reconciliation is demanded, all the transactions specified with the period are examined to detect errors, and their statuses are updated. In a manual process, it involves going through spreadsheets, a physical bundle of invoices and financial records that mention the invoices. Picking out entries that don’t match with your requirements in financial statements will help you determine all the discrepancies made either by your organization or by the bank. Basically, it helps you do two things:

• To Identify, Tackle & Control Fraud

Fraud by third parties and even from internal employees makes companies lose billions of dollars every year across the world. Among these fraudulent activities, vendor fraud is one of the most common complaints from small to medium companies that have a non-organized system. Since they do not have proper billing apps to keep track of records, it becomes tough for them to spot who is stealing from them.

Invoice reconciliation software helps you minimize the possibilities of fraudulent activities by giving a feature of the three-way match. Through such software systems, payment can pass through to vendors only if the purchase orders, invoices, and documents received for the same match automatically. This three-way matching process is so well-defined that you can set specific permissions even in advance for your trustworthy vendors, thus helping you test the new vendors from their operational behavior.

Fraud through cheques is also another common problem that can also be detected through such account reconciliation software solutions. Checks that are altered, unauthorized, blank, or written without an invoice are obviously alerting issues. But a dedicated software monitored by the right people can help you prevent embezzlement, employee thefts, and cheque frauds easily.

• To Track Payments From Everywhere

While reconciling accounts, it is common to find issues that don’t help you balance your financial sheet. For instance, a deposit made on Thursday might not show on Monday’s bank statement, or a vendor hasn’t cashed out a cheque yet that was sent weeks ago. Such issues can be quickly resolved with regular account reconciliation, i.e., either by verifying with the bank or the vendor about various payments.

How to reconcile an invoice with a software?

Since it is crucial to keep your financial records updated, one can keep track of statements by matching the information with bank statements and invoices to know which bills are yet outstanding. Here’s how you can do the very same process with an invoice reconciliation software:

• Use Software

Data entry of items that need reconciliation isn’t that hard or take much time through the reconciliation software. People who run businesses through hourly wages cannot spare enough time and skills of their resources to manage figures on spreadsheets and book logs. Thus, the best way to achieve reconciliation is through an invoice software program that will match your payments given on bank statements with your open invoices.

• Find the Right Process

Reconciling software can help you guide through our administrative process to manage monthly and yearly records. To get the best output from such systems, firstly, organize all your invoices by month and run those invoices to showcase any overdue payments. Not only will this simplify your process, but also make the information easy to understand. Vendors usually have their own formats and labels in their invoices. Hence, make sure all the essential information such as due date, reference number, address, etc., are collectible from such invoices.

• Create a Checklist

A checklist is always helpful to catch the numbers that don’t reconcile during the invoice settlement process. While making a practical checklist, make sure you are covering these areas:

• Did the bank charge you any transfer fees or currency exchange rate?
• Is there any balance remaining to be paid later?
• Was there any discount offered for early payments?
• Was any vendor overcharged or under-charged?
• Does the rolled over amount from the previous balance match the current amount added for this month?

Also, Read: 6 Simple Invoicing Tips for Small Businesses

Benefits of Invoice Reconciliation

If you process an invoice late, then it can render you costly within your business operations and make you either lose on any early discounts from vendors or erode trust from them. Even missing or misplacing vendor invoices can turn out to be harmful, which can disrupt the certainty of supply deliveries on time from the vendors.

Invoice reconciliation for the same reason helps you flag any expected invoices that don’t arrive on time or get misplaced by your employee or the vendor.

Manual accounting is prone to error by getting either invoices attached in the wrong record or giving away improper payments to the right vendor and vice versa. Automate invoice reconciliation can help you guard against such mistakes by matching the purchase orders with the packing receipts.

Internal and external audits can definitely create further problems if your accounting system is already disorganized, but with invoice reconciliation software, you wouldn’t need to worry much. Accounting departments are reconciled by default through a software system alerting the admin operators about any irregularities in goods delivery, line items, missing invoices, duplicated invoices, or any other time-sensitive issues.

Even generating comprehensive reports to showcase the overall financial situation to top management becomes easy with an automated reconciliation system.

Upgrading your invoicing process will help you reach up to a potential wherein you can be at a better negotiating position with vendors. Using the information in this guide, get to make your relationships with vendors, clients, and suppliers better to make sound financial statements monthly and annually.