Businesses of various shapes and sizes utilise different practices to manage cash and keep all their financial operations running smoothly. One of the essential steps of financial management is the procedure of synchronisation of inner transactions data with vendors’ statements and is called reconciliations. What are the key points of reconciliations and why is this procedure so important? We’ve envisaged the answers below.
What are reconciliations?
To put it in a nutshell, it is the process of matching several data sets. It’s all about finding balance — like in a Zen-practice. Reconciliations help you to make sure that all the expected payments or payouts (logged in your accounting system) — have actually been paid or received.
Reconciliations help to ensure that all the expected transactions have actually been finalised.
When done timely and regularly, this helps to maintain consistency of transaction flows and protect your finances from all kinds of pitfalls, like overdrawing money or fraud. Reconciliations allow you to reveal the statements that do not match and to spot out fraudulent or erroneous transactions.
Key points of reconciliations
To understand the essence, just imagine two information ledgers: one from your entity, another from a bank or vendor. Both ledgers contain transaction details, including currency, amount, status, and whether it’s a payment or a payout. They also may contain some extra details — an invoice number or a reference as well.
Further steps depend on the type of reconciliations — manual or automatic. Manual reconciliations imply the thorough analysis of both data sets from the two ledgers by a finance team. Apart from being quite labour-extensive, comparing data line-by-line just by the naked eyes implicates another tricky pitfall — the factor of human error.
Historically, the process of reconciliations has been manual. But, fortunately, current smart technologies and tools allow businesses to tackle it automatically with added efficiency. The majority of businesses now stick to auto-reconciliations, for it reduces manual work and streamlines the whole process — you can process the results at once.
How often should reconciliations be done?
There is no predefined schedule on how often to reconcile your statements. You can just go by the volume of transactions — the larger is the number, the more repeatedly you should reconcile. If your transaction volume measures hundreds to thousands of transactions per day (oftentimes for restaurants or busy stores), it makes sense to reconcile on a daily basis. But if you run a small business and some days there are no transactions at all, you might opt for weekly or monthly reconciliations. But the general rule for any size and type of business is as follows: the more often and regularly you do reconciliations, the easier each time is.
What if the balances do not match?
The results of reconciliations help to pinpoint the discrepancies in statements. Still, mismatches can be legitimate in certain cases. Here are the two situations worth paying attention to:
- You’ve issued a check or money transfer and recorded it on your books, but the bank has not yet processed it. This is an outstanding check or withdrawal.
- Your company receives some payments and you record them in your books, but the bank has not processed them yet. Mismatches of that type are called deposits in transit or outstanding deposits/receipt.
There’s nothing detrimental about these two cases so long as you keep track of them.
6 reasons on behalf of reconciliations
Maintaining financial hygiene in your business pays off tenfold. Businesses in different industries see several compelling reasons to devote time for reconciliations on a regular basis.
- See the reality. Matching all your statements with that of providers, you see the real state of things. This allows you to plan your further spendings and investments.
- Track the transaction flows. Proper and timely reconciliations allow you to monitor all the incoming and outgoing flows, and the relationship between them.
- Pinpoint fraud. Alas, it won’t save you from fraud. But the detected discrepancies will let you know when it’s happened.
- Detect errors made by banks or providers. Seldom or never, but such errors happen. So, if you target certain inconsistencies that you can’t explain, it might be time to speak to your bank.
- Identify trends. Deploying reconciliations, you might spot some trends. For instance, the most “popular time” for payments or the most persistent violators of payments due dates, etc.
- Increase business efficiency. Staying in control of all mismatches or errors on a regular basis gives you insights into what processes need improvement or readjustment.
That way, you’ll be able to forecast your cash flows more accurately so you don’t go overdrawn.
Reconcile without efforts
Reconciliations by Corefy solve all the abovementioned challenges in the most efficient way. Opting for our fully-equipped finance management tool you reduce manual work and get a reliable accounting partner. It allows you to tackle the procedure in a snap, switching your focus towards handling exceptions instead of a time-consuming manual check of each transaction. Corefy detects and alerts you about any mismatches in statements, granting consistency, and facilitating the whole process.
All the necessary tools to resolve edge cases and eliminate your headache — get in touch today to find out more about our ready-made solution.