Payment Reconciliation | B2B Finance Glossary

What is Payment Reconciliation?

Payment reconciliation is an important part of the accounting process that can be done daily, weekly, or monthly; it allows finance teams to confirm bank balances by comparing the company’s bank statements to its accounting records. This ensures that bank records are accurate and fully updated.

Each business transaction is usually backed up by at least two forms of documentation: the company’s internal purchase record or the amount the customer owes and the external bank or credit card statement. Payment reconciliation helps compare internal and external records and ensures the statements match up. If they don’t, the finance team will need to determine why the mismatched records are missing.

As companies grow and scale, the payment reconciliation process gets more complicated because it is inevitable that the business will accumulate additional payment sources and expense accounts. Additionally, the rise of digital and crypto payments has complicated payment reconciliation.

How Does Payment Reconciliation Work?

Payment reconciliation is typically executed in four distinct steps:

• Record retrieval. This is the first step of payment reconciliation, and it includes the process of gathering all internal transaction records and external bank and credit card statements needed to reconcile a payment. After gathering the information, the finance team must take all relevant data to compare what was spent across internal and external records.
• Matching. In this step, every payment on record is directly compared with its corresponding bank statement. The transactions that match across internal and external records no longer have to be reviewed; however, those that don’t match need to be reviewed further to find the reason for the discrepancy.
• Reconciliation. The transactions that do not match across internal and external records are then investigated so that the discrepancies can be solved. Sometimes this process can be very labor intensive since corrections sometimes require a review and approval.
• Finalization. Sometimes certain transactions require journal entries to fix errors and adjust general ledger accounts. Once this process is finished, every transaction has been fully reconciled, and payment reconciliation is complete.

Why is Payment Reconciliation Important?

Payment reconciliation matters because it’s a key part of accounting that can uncover fraud, errors, and unpaid invoices and bills. The more frequently that payment reconciliation takes place, the faster the company can recognize and correct any errors that might occur. On top of that, payment reconciliation ensures that company accounts are up to date, which can help businesses make financial decisions that affect the company more accurately.

Businesses should undergo payment reconciliation at least once a month, but ideally, it’s a good idea to conduct this process each time a statement is received. This is because it’s much easier to solve a discrepancy the closer the reconciliation is performed in relation to the transaction itself.

Businesses that can establish a streamlined payment reconciliation process early on have a better chance of maintaining efficiency as the company grows and the number of payment methods increases.

What Are the Main Types of Payment Reconciliation?

• Credit card reconciliation. Credit card reconciliation matches the transactions that appear on monthly credit card statements with internal records and any bank statements that reveal that funds were deposited or withdrawn to cover credit card payments.
• Bank reconciliation. It’s essential that all disbursements and deposits are matched with the company’s corresponding bank statements and internal records. This is the only way to prevent future bounced checks, insufficient funds, and the fees inevitably tied to these situations.
• Cash reconciliation. Cash reconciliation occurs for businesses that accept cash, checks, and debit and credit card transactions at a physical location. These transactions must be matched against the cash register’s sales receipts between shifts or, at the very least, at the end of the business day. This prevents fraud, employee theft, and errors from occurring.
• Digital wallet reconciliation. Digital wallets are not as likely to send monthly statements in the same way that credit card companies are. This is an emerging area for payment reconciliation. Unfortunately, at this point, the brunt of the work for maintaining and matching records will largely fall on the company that is using the digital wallet for business transactions.

How Can Automation Improve Payment Reconciliation?

Automation can greatly help the payment reconciliation process by removing the need for tedious, manual processes. Here’s how automation can help more specifically:

• Speedier fraud detection. The software does a much better job of quickly flagging unmatched records than humans. This makes it possible for finance teams to detect fraud more quickly and easily.
• Saving big on time and money. When you introduce automation into your accounting process, you relieve your finance team of manual labor that can take unnecessarily long hours. This way, you free up your team to spend more time on strategic planning and save on the human labor that would otherwise be spent on rote tasks.
• Faster collections and financial closing. Automation is quicker to detect outstanding invoices so a company can take action to ensure payments are made on time. Additionally, automated payment reconciliation can help finance departments close out their books for a particular period more timely.
• Growth and scalability. By introducing automation from the get-go, finance teams are more equipped to scale their payment reconciliation processes as the company expands and as more income streams and payment methods are added.
• Increased clarity and transparency. Automated payment reconciliation helps companies more easily detect the amount of cash they have on hand; this ensures more accurate financial planning in the long run.