Finance reconciliation plays a pivotal role in ensuring the reliability and accuracy of a business’s financial records. This essential practice involves comparing transactions and other financial activities with supporting documentation and resolving any discrepancies that may arise.
Financial reconciliation is a recurring process that encompasses various sources of financial information within a business. Its fundamental purpose is to verify the proper crediting of income received by the business and to ensure that outgoing funds align accurately with known payments made.
What is finance reconciliation?
Gartner defines finance reconciliation as “the process of comparing two sets of financial records to ensure they are in agreement.”
In finance reconciliation, two sets of information are compared: the internal records maintained by the business and data from external sources. This comparison allows for the verification of data accuracy within the business’s records. The source documents include invoices, receipts, and transaction statements. External sources include bank statements, invoices and receipts from external agencies, etc.
Financial reconciliation is often performed at the end of an accounting period, such as during monthly closings. Its purpose is to ensure the accuracy of closing statements and verify the validity of transactions being closed out.
There are two primary methods of financial reconciliation: document review and analytics review. In document review, a business examines its own financial records and compares them with source documents like receipts, invoices, and statements. In analytics review, historical data is analyzed and compared to current figures, allowing businesses to detect any significant deviations or irregularities.
Financial reconciliation is applied in different contexts, such as bank reconciliations, where a business compares its own financial statements with bank records to ensure consistency and identify any discrepancies that may require further investigation.
Why is financial reconciliation important?
A company’s balance sheets reflect its expenditures and asset acquisitions, making the accuracy of finance reconciliation paramount. In addition to ensuring financial accuracy, finance reconciliation can have significant cost-saving benefits. By promptly identifying errors and detecting potential overcharges, businesses can avoid unnecessary overdraft fees and prevent improper spending.
For publicly traded companies, account reconciliation is not just a good practice—it is a legal requirement. Inaccurate reconciliations can result in penalties during audits, posing a risk to compliance and financial stability. Therefore, meticulous management and serious consideration of account reconciliation are crucial for reducing compliance risk and safeguarding financial well-being.
By prioritizing account reconciliation, businesses can ensure the integrity of their financial statements, minimize financial errors, and protect themselves from potential penalties. The benefits extend beyond mere compliance, providing an opportunity for financial security and optimized operations.
How to reconcile financial statements?
The process of reconciling accounts, whether performed manually or automatically, follows a set of clear steps to ensure accuracy and integrity.
Let’s look into each step in detail:
Step 1: Consolidate
The first step to accounts reconciliation is to compile all pertinent records, invoices, and ledgers associated with each specific type of account reconciliation you intend to perform. For example, on a monthly basis, there are various transactions such as purchases, payments, expenses, and earnings. Locate the sources where these transactions are recorded and gather them together in one place.
Step 2: Compare
The next step in the account reconciliation process is to compare all transactions recorded in your internal ledger with the corresponding entries in your bank statement or other financial documents. By carefully reviewing these two sets of data side by side, you can identify any discrepancies or inconsistencies that need to be addressed.
Step 3: Identify
In this step, your focus is on identifying payments recorded in the internal cash register that do not appear on the bank statement. Such payments usually involve cash transactions that haven’t been captured by the bank yet. Additionally, for checks deposited into the bank, there might be a delay before they are reflected in the bank statement. By recognizing these types of transactions, you can deduct them from the bank statement and account for the potential timing differences that may cause discrepancies.
Step 4: Confirm
Once you have identified the transactions that need to be adjusted, it’s crucial to record them appropriately. For instance, if you find receipts from the cash register that are not reflected in the bank statement, add them to the reconciliation. Likewise, if you come across entries in the bank statement that are missing from your internal records, ensure they are included. The goal is to reconcile and synchronize the cash transactions between your internal ledger and the bank statement.
Step 5: Find errors
Although rare, errors can occur on the bank’s side, such as duplicate records, incorrect transaction entries, or miscalculated commissions. To maintain accurate reconciliation, it is essential to meticulously review the bank statement and promptly identify any errors that might be present. If any discrepancies are discovered, it is necessary to communicate these errors to the bank, providing the required information for rectification.
Step 6: Balance records
Once discrepancies have been resolved and errors corrected, the next step is to ensure that all records are balanced and accurately reflect the financial situation. This involves reviewing the reconciled data and ensuring that the adjusted figures align with the overall financial picture, demonstrating consistency between the internal ledger and the bank statement.
What are the benefits of finance reconciliation?
Finance reconciliation is an essential requirement for upholding the overall financial integrity of an organization. Accounting teams aim to consistently and efficiently carry out the reconciliation process, devoid of errors.
Mishandling this process can have consequential repercussions during the financial close, leading to more significant complications down the line.
Specific benefits of financial reconciliation include:
- Enhanced Financial Integrity: Account reconciliation is crucial in maintaining the overall financial integrity of an organization. By ensuring the accuracy and reliability of financial records, it helps establish trust among stakeholders and supports informed decision-making.
- Error Detection and Prevention: Through the process of reconciliation, errors such as incorrect calculations, omissions, duplications, and human errors can be promptly identified and rectified. This helps prevent the propagation of errors and ensures the integrity of financial data.
- Fraud Detection and Prevention: Account reconciliation plays a vital role in uncovering potential fraud and unusual activity within financial records. By comparing different sets of records, organizations can detect discrepancies, unauthorized transactions, and patterns indicative of fraudulent behavior. This helps safeguard the company’s assets and mitigate financial risks.
- Accurate Financial Reporting: Reconciling account balances in the general ledger (GL) with external documentation ensures the validity and accuracy of financial reporting. This process provides transparency and reassurance that the recorded account balances align with supporting documents, enhancing the reliability of financial statements.
- Improved Cash Flow Management: Account reconciliation helps avoid overdrafts in bank accounts by maintaining balanced GL account balances that reflect the actual funds available. By reconciling GL accounts with bank statements, organizations can effectively manage their cash flow, prevent unnecessary fees or penalties, and make informed financial decisions.
- Cost Savings: By scrutinizing financial records during the reconciliation process, organizations can identify hidden fees and unnecessary expenses. This includes charges such as storage fees, fuel surcharges, service charges, and administration fees. Identifying and validating these fees allows businesses to negotiate better terms, eliminate unnecessary costs, and ultimately achieve cost savings.
- Operational Efficiency: Financial reconciliation helps uncover delayed, incorrect, or surprising activity within various aspects of business operations. For example, during inventory reconciliation, discrepancies in shipment delays, incorrect quantity counts, or unusual levels of damage can be identified. This enables organizations to take corrective measures promptly, optimize operational efficiency, and maintain accurate inventory records.
Automate finance reconciliation with Nanonets
Nanonets, a leading platform powered by machine learning OCR technology, offers comprehensive solutions to streamline the finance reconciliation process. By automating the extraction of data from bank statements and various documents, Nanonets minimizes the need for manual data entry and reduces the risk of errors.
Its customizable workflows enable businesses to specify the data points they want to extract, such as transaction dates and amounts, and process them according to custom logic. This automation eliminates manual efforts, saves time, and ensures the accuracy of the extracted data.
It promptly flags any match errors that breach tolerance levels and facilitates further approval for successful matches. With the powerful ML capabilities built into Nanonets, businesses can train the system to recognize payment patterns, match payments with invoices, and flag exceptions for review.
The platform seamlessly syncs and integrates month-end close processes with popular ERPs, accounting software, and other business tools like Sage, Xero, Netsuite, and Quickbooks, providing a comprehensive and efficient solution for finance reconciliation.
Financial reconciliation serves as a crucial practice in maintaining the reliability and accuracy of a business’s financial records. By comparing internal records with external data sources, businesses can verify the accuracy of their financial transactions and ensure the proper alignment of incoming and outgoing funds.
This recurring process helps identify and resolve discrepancies, providing a solid foundation for sound financial management. Adhering to best practices in financial reconciliation enables businesses to maintain transparency, comply with regulations, and make informed decisions based on reliable financial data.
While challenges may arise, understanding the importance of financial reconciliation and implementing effective strategies, such as leveraging automated tools like Nanonets, can streamline the process, mitigate risks, and ultimately contribute to the overall success and integrity of a business’s financial operations.