According to the Global Business Travel Association (GBTA), nearly one in five expense reports contain errors.
Whether a business processes a few dozen or a few thousand expense reports per year, even seemingly minor errors or discrepancies in expense reports can quickly add up and have a major impact on a company’s finances.
Expense reconciliations aim to identify and correct these potential errors, ensuring their expense policies are being adhered to and their financial records are complete and accurate.
This guide walks through the expense reconciliation process and also dives into its importance for overall financial management.
What is expense reconciliation?
Expense reconciliation is the practice of comparing a company’s expense reports and supporting documentation against its accounting records.
The goal of reconciliation is to ensure that a company is reporting employee expense accurately, meaning it’s books are correct and up-to-date. This process is also useful for companies to verify that only legitimate business transactions are being reported.
As we’ll cover in further detail below, expense reconciliation includes reviewing and comparing expense reports, receipts, invoices, bank statements, and credit card statements from a given period to ensure that a company’s financial records are accurate and that expenses are properly categorized.
Why is expense reconciliation important?
Reconciling employee expenses is more than a to-do list item for accounting teams. Its benefits are widespread, helping businesses ensure accurate financial reporting, gain better visibility into employee spending, and support informed decision-making.
Supports financial reporting accuracy
A key benefit of expense reconciliation is that it helps businesses verify the accuracy of their financial reporting. In other words, it ensures that they’re reporting transactions at the correct amount according to supporting receipts and invoices, supporting accurate financial statements.
There are a number of reasons why an expense report might be inaccurate and not match a company’s bank statement, whether by honest human error or intentional fraud.
Either way, the reconciliation process helps to uncover these potential discrepancies and point to the cause so it can be corrected and mitigated in the future.
Uncovers potential fraud
As mentioned above, expense reconciliation can help spot employee fraud and the inappropriate use of company funds.
During reconciliation, the accounting department can determine whether reported expenses are supported by receipts or other documents. It also gives them the chance to ensure that employees using company funds for approved purchases only.
Teams should have clear expense policies in place for employees to reference, helping to avoid potential gray areas or confusion. Transactions that go above approved limits or purchases made for non-approved items may need further questioning.
Informs budgeting and forecasting
With accurate financial records, teams are in a better place to make budgeting decisions and forecasts.
It helps them understand how much needs to be allocated for employee expenses in a given period. At the same time, it provides valuable information about potential spending patterns or trends, which can be used to spot potential cost-saving opportunities.
In other words, teams that reconcile expenses can feel confident in the accuracy of their expense data, which is used as the foundation for future financial decision-making.
Key steps in the expense reconciliation process
Teams may use an automated solution to perform the expense reconciliation process. For those still managing this process by hand, here are the typical steps that are involved:
Gathering necessary documents
The first step in the expense reconciliation process is to gather the appropriate documentation, which may include:
- Employee-submitted expense reports
- Receipts
- Invoices
- Credit card statements
- Bank statements
Teams may implement standard documentation-gathering practices to help streamline this step. For instance, the accounting department may provide a strict deadline for all expense reports to be submitted by each month.
They may also require reports to be submitted with certain supporting documentation in order to be processed.
Matching expenses with receipts
With all the necessary information, the accounting team can go through and compare or match each reported expense with the supporting invoice or statement.
Teams must be diligent and thorough to verify the following pieces of information:
- Transaction amount
- Date
- Vendor
- Description
For example, let’s say an employee submits an expense report after returning from a professional conference. They should have receipts that match the details on the credit card statement, which they used to fill out the expense report.
Reviewing and approving reconciled reports
If any items are mismatching or there are missing receipts, the accounting team will need to reach out to the employee for follow-up information. Maybe the employee forgot to include a receipt, or they included a personal expense item that is non-reimbursable.
Otherwise, if all expense details match up, the accounting team can approve the report for employee reimbursement and record the necessary journal entries.
Common challenges in expense reconciliation
Expense reconciliation isn’t necessarily a highly complex or rigorous practice. However, it can be time-consuming and tedious, especially when done manually.
Here’s a closer look at some of the potential challenges with the expense reconciliation process:
Manual errors and discrepancies
One of the biggest challenges with the traditional approach to reconciliation is that it is prone to human error.
Whether done by the employee submitting the expense report or the accounting team member responsible for the reconciliation, even small errors or missed discrepancies can add up over time.
Maybe the employee reports spending $54 on transit, but the receipt actually shows they spent $45. If the accounting team misses this simple discrepancy, they could over-reimburse the employee by $11.
This may not seem like a significant amount. But, considering this amount for a company that processes hundreds or thousands of expense reports each year, it’s easy to see why manual errors during reconciliations could become a financial headache.
Time-consuming processes
Another potential hurdle with expense reconciliation is that it can be highly time-consuming. This is particularly true when done by hand, which can pose a challenge for companies as they scale and incur higher expense volumes.
First off, the accounting team needs to manually gather supporting documentation from the appropriate parties and follow up with them if any materials are missing. Next, they must review and compare these documents side by side to verify amounts for accuracy, and compare reported expenses to the company expense policy to ensure legitimacy.
Altogether, the time-consuming nature of manual expense reconciliations could result in a heavy workload for the team, or this critical process being skipped altogether.
Lack of visibility into expenses
Expense reconciliation is meant to provide decision-makers with verified expense data. However, if the team is left relying on manual processes alone, reconciliations can become delayed or sidelined or more critical tasks.
As such, it can be harder to track trends and identify patterns when everything is done by hand. It’s likey a challenge for teams to get real-time visibility into employee spending, keeping them from agile decision-making.
Best practices for efficient expense reconciliation
Even though manual reconciliation of employee expenses can be tedious, there are some ways to make it a much more efficient process.
Establishing clear policies and procedures
An important step to standardizing and automate expense management is providing clear, easy-to-follow expense policies and reimbursement procedures.
This should include what types of expenses can be reimbursed, spending limits where applicable, and how to prepare and submit an expense report.
When employees submit all the necessary documentation and closely follow the company expense policies, they can do the accounting team a big favor without requiring further questions or clarifications.
Training staff on reconciliation processes
Accounting staff who will be responsible for reviewing and approving expenses should be trained on the reconciliation process.
This might include a general outline of what documents and information to verify, how to flag suspicious or non-approved transactions, and when to escalate issues.
Utilizing technology for streamlined workflows
With so many dedicated tools and automated capabilities available today, teams don’t have to settle for time-consuming manual reconciliations.
An automated solution, like BILL Spend & Expense, automatically tracks employee spending and compares it against custom spend policies to eliminate the need for manual expense reporting or reconciliations.
Automated tools help teams reduce their reliance on manual workflows, while gaining better control and visibility over spending.
How BILL can enhance your expense reconciliation
BILL Spend & Expense helps teams streamline expense management. It’s an all-in-one solution that includes free software and corporate cards for employee use.
Accounting teams benefit by getting real-time visibility into employee spending, with the ability to create customized controls and policies to stay on-budget. The advantage for employees is that their spending is automatically tracked, with no need to prepare and submit expense reports.
The platform seamlessly integrates with a number of leading accounting systems, further automating expense tracking and management.
