Last editedDec 20212 min read
Keeping track of expenses and income is an essential process for every business. Up-to-date, well documented accounting practices ensure companies are operating efficiently and poised for growth. The best way to make sure you’re in good financial health is to establish a robust payment reconciliation protocol.
In this post, we’ll check out the meaning of payment reconciliation, why it’s important to have a payment reconciliation process, and how the process works.
Payment reconciliation: meaning
Payment reconciliation is a method of bookkeeping that compares financial records that are logged internally with bank statements, to make sure the accounting is accurate.
For example, when a bank statement arrives, costs and payments are checked against each other to ensure everything tallies.
Why does your company need a payment reconciliation process?
As time-consuming as it is, keeping good, accurate records is the cornerstone of running a business efficiently. It’s all too easy to make an error, lose a receipt or account for a payment that isn’t a business expense. And it’s essential that bank statements accurately reflect all business activities. When errors creep in, for example, if the company account is compromised in some way by an outside party, good reconciliation practices will flag up fraudulent activity.
When it comes to the bigger picture, a payment reconciliation process is vital. Detailed bookkeeping illustrates a company’s overall financial health in a snapshot. Well managed records can help companies avoid overdraft fees and bounced cheques, while also showing spending and cash flow patterns – all of which can be invaluable when it comes to boosting operational efficiencies.
How does the reconciliation process work?
There are two aspects to the reconciliation process: internal and external. Let’s explore these in a little more detail.
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, where transactions are entered and discrepancies handled. To streamline the reconciliation process, it’s best practice to use a software that integrates with your current systems (e.g., your direct debit processors) so that you can see all the payments made into your accounts and their reconciliation status.
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.
Maintaining a spreadsheet of inbound and outbound money.
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.
Best practices for payment reconciliation
It’s important to find a way that works effectively for you. When you’re considering how to go about your reconciliation process, bear in mind the following points:
Create regular weekly or monthly reconciliation events. Newer transactions are far easier to recall than older ones and it’s therefore easier to detect discrepancies. Plus, frequent reconciliation audits break the task down into smaller pieces, so it feels less burdensome.
Consider using accounting software, ideally one that integrates with your existing transaction reporting systems to reduce manual errors and boost efficiencies. For example, major accounting platforms such as Xero and QuickBooks have integrations with payment gateways like GoCardless in place, allowing payments to be collected and reconciled automatically.
A good payment reconciliation process alleviates confusion and ensures all departments know what’s expected of them. Most businesses will find it a valuable investment of time to modernise existing manual processes and replace them with systems that streamline accounting practices. With a wide range of cloud accounting softwares and other online tools, it’s easier than ever to implement an efficient and accurate reconciliation process.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team deals with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.