The Complete Guide That Makes Invoice Reconciliation Simple
82 percent of all businesses that fail do so due to poor financial management. Knowing how to manage your business finances is thus the most powerful trait you can possess as a small business owner. It can help you to stay afloat in an increasingly competitive business environment.
But with so many components of financial management, where do you start? How about mastering your invoice reconciliation?
Invoice reconciliation can seem complex and time-consuming for those unfamiliar with it. To help make things easier for you, we’ve prepared this simple guide on how to reconcile invoices.
Read on to learn more.
What Is Invoice Reconciliation?
The term “reconciliation” refers to the process of matching your bank records to your incoming and outgoing invoices in order to ensure that all of your accounts are clean and that all of your book entries are accurate.
In accounting, double-checking that all totals agree is called invoice reconciliation. The method verifies that the money exiting an account equals the money being spent and that they are equal at the end of the recording period.
Reconciliation helps keep your financial accounts accurate and consistent, whether you’re using open invoices or not.
Why Conduct Invoice Reconciliation?
For some business owners, invoice reconciliation can seem like an unnecessary step in your financial accounting process. However, this process is essential when it comes to maintaining your company’s profitability. Here are two main reasons you need to reconcile your invoices.
You Get to Catch Billing Mistakes
Mistakes during the invoicing process are nothing new. For instance, a vendor may inadvertently charge you the incorrect price for a product or service or misapply a payment that you’ve already made. The vendor may also charge you for items or services that they didn’t deliver or even mistakenly double-charge you.
Unless you take the time to reconcile your invoices, catching these errors may add up and prove costly over time. Invoice reconciliation helps you catch potential billing errors and rectify them promptly.
It Enables You to Detect Fraud
Employee fraud is more common than you may think, with 75 percent of employees admitting that they’ve stolen at least once from their employer. Ignoring this fact is one of the biggest mistakes you can make. 30 percent of all businesses that go bankrupt do so as a result of employee fraud.
One of the best ways to detect fraud in your finance department and other areas of your company is through regular invoice reconciliation.
Steps in the Invoice Reconciliation Process
Now that you’ve seen the importance of invoice reconciliation, it’s time to look at how the actual invoice process looks like. Let’s dive right in.
Start by collecting and organizing all the invoices you want to reconcile for the period. You can arrange the invoices sent by a particular vendor by date. By doing so, it’s easy to understand why a particular invoice is delayed or the reason there was a mismatch in the time of deposit.
When done manually, organizing your invoices can be a time-consuming affair. One way to simplify things is to use a single platform to manage your purchase-to-pay process. Such a system can swiftly generate orders and invoices, ensuring that no funds leave your company unless the two match.
Where you’re using a single platform for your purchase-to-pay process, getting organized for invoice reconciliation is a quick affair. With just a few clicks, you can sort all your invoices by either vendor or purchase categories.
This step involves carefully checking the vendor statements against your invoices to ensure that the transactions match. Look for any mismatched transactions that you need to reconcile.
A smart way to make things easier for you is to use an automated platform that integrates with your payment system. Such a platform ensures that all transactions match at the time of purchase before payment is sent. With such a platform, step two becomes unnecessary as matching already occurred at the time of purchase.
Marking Off Each Line
This step involves checking every line of the statement and invoice to ascertain whether the date, products or service delivered, and invoice number are accurate. Place a checkmark to indicate approval if all points match.
Again, if you’re using an automated system, matching will have already been handled at the time of purchase. Thus, you won’t need this step.
Note Any Discrepancies
If any discrepancies come up while you’re verifying your invoices and statements, you need to mark them. You can do so by circling the discrepancies.
Contact your vendor and request an invoice copy. Next, cross verify once more and if you still find issues with the amount or invoice number, put a note about them.
Adding Up Invoices
The final step in the invoice reconciliation process involves summing up all invoices for a specific vendor. You want to verify whether the total payments made to the vendor equal the invoices from the vendor. If not, you’ll need to do further investigation and reconciliation.
Master Invoice Reconciliation to Succeed in Business
As a smart business owner, you need to stay on top of your company finances at all times. One way to do so is by conducting regular invoice reconciliation. When done well, invoice reconciliation can help you tackle billing errors and avert potential fraud, increasing the chances of success in today’s business world.
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