Once you've paid a supplier, it's not time to get rid of the invoice just yet.
If your business has an invoice reconciliation process in place, you'll need to refer back to your paid invoices at some point to ensure they match the transactions shown in your bank statements.
Though invoice reconciliation may seem like a tedious and time-consuming process, it's a critical procedure that can help you detect fraud and maintain accurate accounting records—ultimately saving you time and money in the long run.
Below, we will discuss what invoice reconciliation is, what the process looks like, and provide some helpful suggestions and best practices to help you optimize this process.
What is invoice reconciliation?
Invoice reconciliation is the process businesses take to match outgoing and incoming invoices to their bank statements and other relevant documents to ensure the consistency, transparency, and accuracy of their financial records.
Specifically, invoice reconciliations are done to catch possible invoice discrepancies or banking errors and reduce financial risk for the business.
These discrepancies can be honest errors by your internal staff or the bank's personnel.
Or, you may find that some errors were made intentionally through attempted fraud, which will require further investigation.
Either way, the invoice reconciliation process exists to help you correct any errors that will impact your cash flow and recognize where you may need to strengthen internal controls to avoid similar mistakes in the future.
This process can be completed either manually or with automated software and is often done within the larger process of an accounts payable audit.
How reconciling invoices helps your business
A comprehensive invoice reconciliation process provides several benefits to businesses.
However, it should not just be seen as a "check the box" process you do to simply get out of the way.
Instead, invoice reconciliation is a critical step while processing invoices that can save your business money and headaches down the line.
It should be completed on a regular basis for best results, not just when you have the extra time or resources for the process.
Here are some of the main benefits of the invoice reconciliation process:
Better cash flow management
Paying supplier invoices can make up a large portion of your business's regular expenses.
Reconciling invoices helps you better understand your current cash position and make sure you didn’t overpay any bills, which can pinch your cash flow unexpectedly if you don't catch the mistake.
Even in the case of a slight discrepancy, when you're dealing with multiple supplier invoices at a time, small errors can quickly add up and make a significant impact on your cash balance.
Financial accuracy
At its core, invoice reconciliation is done to ensure the accuracy of your financial reporting.
During this process, your team matches bank statements against invoices and other accounting records to determine if your financial reporting is accurate and uncover any possible errors or discrepancies that would have otherwise gone unnoticed.
Provides important insights for decision-making
Invoice reconciliation ensures more accurate financial reporting and statements, which is extremely important when making decisions and planning for the future.
With accurate data on your bills and expenses, you can create better budgets for the upcoming period and make informed spending decisions.
Regulatory compliance
Regular invoice reconciliation keeps your financial reporting accurate and transparent, which helps you meet industry reporting requirements and stay compliant with relevant standards.
In turn, you can avoid costly penalties, fines, and lengthy audit processes should errors or discrepancies be found in your reporting.
Enhanced fraud detection
Invoice reconciliation also plays an important role in how your business is able to detect and prevent fraud attempts.
Checking your invoices against the actual transactions that went through your bank account will help you recognize any unauthorized charges or expenses that need to be investigated.
How to reconcile invoices in 5 steps
With a better understanding of why invoice reconciliation is an important procedure for businesses, here are the basic steps you will go through to complete this process manually.
While the steps your business takes may vary, this will give you a good starting point.
1. Gather documentation
To begin the invoice reconciliation process, make sure you have all the invoices on hand for the given period—whether that be from the previous week, month, quarter, etc.
You will also need the bank statement that covers this period, as well as any other supporting documents like purchase orders or shipping receipts to verify things like order quantity and price if needed.
2. Compare invoices to bank transactions
With all the proper documents gathered, you can start comparing the amounts you were invoiced for against the transactions shown in your bank statement.
Go through each invoice you processed during the period and find the corresponding transaction in your bank statement.
If Supplier A invoiced you for $2,250 and you see a payment to them of $2,250 in your bank statement, your books are likely accurate.
In other words, if there is a match, then you don't need to do anything further. However, any discrepancies or missing payments should be flagged for further investigation.
For instance, maybe you have an invoice to Supplier X for $1,800 that you thought was processed, but you don't see an outgoing payment to them of the same amount.
In this case, you may need to do some further digging to avoid making a late payment.
3. Confirm payment dates
While reconciling invoices, you should also verify the date the payment was made against the due date of the invoice.
This will help you determine whether you were able to get early payment discounts, if the payment arrived late to the supplier, and how this might cause you to incur late fees or penalties.
4. Investigate discrepancies and unmatched transactions
If you discover a discrepancy between your processed invoices and your bank statements, you will need to do some additional work to uncover the cause of the variance.
Especially when accounts payable and other accounting tasks are handled manually, human error can play a factor and create recording errors.
Let's say you have a vendor invoice showing an amount owed of $4,600, but the only transaction you can find to that vendor during the period was $4,000.
After speaking with the accounts payable team, you find out that the invoice showing the $4,600 amount was incorrect, and you actually owed just $4,000.
The AP department confirmed this over the phone with the supplier, but never received an updated invoice with the correct amount, leading to the discrepancy during reconciliation.
Similarly, if you find a transaction in your bank statement that does not correspond to any vendor invoices, you should figure out to whom the payment was made and for what purpose to ensure it's a legitimate transaction.
5. Update the general ledger
Depending on what caused a discrepancy, you may need to update your general ledger to accurately reflect your expenses and supplier payments.
You will likely do so if the mistake was made by your team, either through a misrecorded journal entry, transposed payment amount, or other honest mistake.
Make the proper journal entries or adjustments to ensure your records are thorough, accurate, and up-to-date.
Using the above example of the $4,600 invoice and $4,000 payment, we'll assume that in a different scenario, you did actually owe the vendor $4,600 and your team accidentally underpaid them.
When you make the payment for the remaining $600, this will need to be properly recorded in your general ledger to balance your books.
But, if you believe the mistake was made by the bank, and your books are accurate, you will need to bring the discrepancy to their attention to get corrected on their end.
How to improve you invoice reconciliation process
If you are looking to establish an invoice reconciliation process for your business for the first time or improve your existing system, here are some best practices to help you minimize risk while working efficiently.
Set a regular schedule
Invoice reconciliation should be performed regularly to ensure your records are accurate and compliant with relevant reporting standards.
Plus, reconciling your invoices on a regular basis will help you catch any mistakes or errors in a timely fashion, making them easier to rectify.
Provide a clear outline for the process
Your company should have a clearly laid out procedure or policies in place outlining the invoice reconciliation process.
This may include how often it needs to be done, who handles the process, the specific steps to take, and any other important details.
Your outlined processes and procedures for invoice reconciliation should also include how staff should handle discrepancies, including who needs to be notified, any required documentation, and what other steps they may be responsible for in this scenario.
Proper delegation
To avoid conflicts of interest, you may want to assign the invoice reconciliation process to an internal team besides the accounts payable team, like the compliance department.
The goal here is to separate responsibilities and create strong internal controls so the team handling payment authorization is not the team reconciling invoices.
Document the process
Whoever is in charge of the invoice reconciliation process should keep all their actions well-documented to create a transparent audit trail.
This may involve recording all discrepancies that were found, how they investigated it, who they contacted, and any journal entries or adjustments they had to make to resolve the issue.
Leverage technology
Performing invoice reconciliation manually can often lead to avoidable mistakes. It can be a tedious and time-consuming process, and even the most experienced staff can make errors at times.
Instead, using automated invoice reconciliation software and other tools can make the process more accurate and efficient.
For instance, BILL can automatically match invoices against purchase orders and goods receipts before you send the payment.
This process (three-way matching) reduces the likelihood of discrepancies during the reconciliation process because the amount you pay is verified against at least one other document.
Ready to automate your invoice reconciliation process?
Tools like BILL can help you streamline the invoice reconciliation process for better efficiency in completing this necessary task.
Within the platform, you can digitize invoices and integrate BILL with your accounting software for easy access to the necessary information you need for invoice reconciliation.
With BILL, accounts reconcile faster because automated accounting updates occur after each transaction is recorded, significantly reducing your reliance on manual data entry.
If you want to see how automation can transform your invoice reconciliation process, find out how BILL can help.
