Nov 24, 2022
Invoice reconciliation is a critical process in your accounting operations. When you start out as a small business, manual processes are to be expected because the number of vendors, buyers, and invoices you have to manage are reasonable. However, as you grow, manual processes becomes cumbersome and time-consuming. This is where automated invoice reconciliation comes in.
But, before you can begin automating invoice reconciliation, start by understanding the current accounting process of your team and how invoice payments in your organization. From there, you’ll be able to determine the right tools and methods for automating your invoice reconciliation and freeing up your time.
What is invoice reconciliation?
At its core, invoice reconciliation from the revenue side and accounts receivable lens is the process of matching your company’s sales with the corresponding payments.
In other words, it’s a way for you to confirm that the invoices that were sent out to customers have been paid. You’ll also want to ensure that the amount on the invoice matches the amount on the your credit card statement, check, or bank deposit.
Similarly, this happens on your vendor side as well, the expenses and accounts payable side. You must reconcile invoices from your vendors to ensure you paid the right amount to the right vendor.
Essentially, you compare two sets of records: the bank statement and your ERP/accounting records. You must ensure they are consistent, accurate, and complete. Both the inflow and outflow of payments (accounts receivable and accounts payable respectively) should reflect and balance in your accounting books and bank statements. This is the ultimate purpose of invoice reconciliation.
Types of invoice reconciliation
Depending on the nature of your business, you might be dealing with one or more types of invoices.
1. Customer invoices require accounts receivable reconciliation
Customer invoices are generated by your business for your customers so they can pay for your goods or services. These invoices are commonly referred to as accounts receivable invoices.
When an invoice is generated, it is recorded under your accounts receivable sub-ledger with a due date. Your AR team or collections team tracks these open invoices and follow-ups for payments when they are due.
Generally, accounts receivable software helps track unpaid invoices and gives an overview of the payment status. When the customer pays off the invoice, their payment is reflected and reconciled in your books as paid.
At the end of the month, a reconciliation is done during month-end to to match the paid invoices in your accounting and ERP system to the cash deposit in your bank account statement.
2. Vendor invoices require accounts payable reconciliation
A vendor invoice is what you receive from your vendors for the procurement of raw materials or services. Your team compares the amount on the invoice with the purchase order to check the accuracy.
Once you verify the accuracy of the invoice, your team can add it to your accounting software to process the payment.
Accounting software and apps can keep track of all invoices and respective due dates of your account payables for different vendors. In this way, you can plan to pay your dues in a streamlined way once or twice a month to prevent unpredictable cash flow and working capital issues.
Similar to accounts receivable reconciliation, you need to match your bank statement and paid invoices in your accounting software.
Curious about invoice automation? Also check out our article on the 12 Best Invoice Automation Software.
What are the benefits of automated invoice reconciliation?
1. Reduced human error
When you have a few people verifying and reconciling hundreds of invoices every month in Excel spreadsheets, there is a high risk of manual error. You might be paying for goods that never came, or your customers might have paid the wrong amount to you. Automating the process makes it easy to cross-check the two records and immediately point out errors when the amounts don't match with respect to a particular invoice, customer, or in any business cycle (weekly, monthly, quarterly, or annually).
2. Time savings
Automating invoice processing saves hours for your team. A manual process involves multiple steps involving data entry, categorizing, reformatting, cross-checking, and sorting, etc. According to a study by Ardent Partners, an average invoice can take 10 days to process. Automatic account reconciliation will ensure that the process is completed in a timely manner without needing to hire additional staff.
3. Fraud detection and minimization
As your business grows, the risk of error and fraud also rise. According to a 2018 report by the Association of Certified Fraud Examiners (ACFE), nearly half of all fraud is committed due to the lack of strong internal controls. A strong and reliable automated process can prevent and minimize payment fraud with greater accuracy.
Want to learn more about AR fraud? Read our article on Accounts Receivable Fraud: What to Look For
4. Improved experience for customers and vendors
Errors in invoices can cause payment delays to vendors. They can also result in the issuance of the wrong invoices for your customers. When you find these errors later, it results in frustration for both parties involved. Having automated invoice processing software will help you identify discrepancies at the beginning itself. This ensures a smooth experience for customers and vendors.
5. Transparent and accurate bookkeeping
Keeping your genereal ledger and account books clean is essential to maintaining long-term business health. Inaccurate records and information in your balance sheet can hurt your financial health in the future. They can cloud your ability to make sound business decisions or secure financing from investors in the future. Having an automated system will help you keep your record books clean and accurate.
6. Reduced invoice disputes
Customers may dispute their purchases for a variety of reasons, such as a misunderstanding over product or service delivery or damages that occurred during shipment. In the event of an invoice dispute, you’ll have to deal with the headache of either refunding payments or convincing the other side to withdraw their dispute. Automatic reconciliation will allow you to immediately identify and correct any invoice issues in real time.
7. Improved cash flow
If you’re waiting on customers to pay your AR invoices, cash flow will be negatively impacted. If you’re only accepting payments after you’ve shipped products, you’re likely losing out on interest that could have been earned on those funds.
The best automated invoice reconciliation software of 2023
1. Spendesk
Spendesk is an expense management platform focused on accounts payable invoice reconciliation and expenditures. Companies use Spendesk to manage expenses and supplier invoices in your accounts payable workflow.
Spendesk allows employees to upload receipts of company expenses and supplier invoices for approval. It offers 100% visibility of the entire spend in the company and has built-in automation and approval process functionality.
Spendesk also has easy reconciliation features and makes the month-end close process smoother with smart automation and management of supplier invoices.
2. Quadrant AP by Beanworks
Beanworks is focused on empowering accounting teams to simplify and automate their accounts payable workflow. It automates all steps involved in vendor invoice processing such as data verification, reconciliation with purchase orders, and assignments to the right team.
You can build smart approval workflows for different steps in the payment process such as raising Purchase Orders, invoices, payments, and requests to relevant staff members.
For reconciliation, Beanworks can easily connect to your ERP which makes the overall process efficient. You can also do a quick manual search for multiple invoices and create reports based on different parameters. It also detects duplicate invoices so that you don't have to approve any invoice twice.
3. Tipalti
Tipalti is a new AP invoice reconciliation company that offers a cloud-based accounting management solution. They offer multiple features like invoice automation, compliance management, reporting, and payment reconciliation.
It can combine multiple payment methods, currencies, subsidiaries, and regions so you don't need to download multiple files from different systems. It is a great option if you have a global supply chain and need to deal with contractors in multiple geographies.
Tipalti also offers an integrated money transfer solution that enables you to make payments on a scale to suppliers all over the world. They also claims to have more than 26,000 built-in banking rules to reduce payment errors.
4. Resolve
Resolve Pay is a one-of-its-kind accounts receivable invoice reconciliation solution that helps you get paid faster while allowing you to also provide net terms as a payment option to customers.
Resolve is a net terms and credit management solution with a multitude of benefits.
Resolve:
- Improves your cash flow and financial velocity through advanced payment options on your invoices.
- Offers a 'quiet' credit check process, automates your accounts receivable process, and speeds up payment processing
- Has an integration with QuickBooks Online for hassle-free invoice reconciliation processing. When you sync your QuickBooks Online account with your bank account, you can reconcile invoices automatically within a given time period. You can also manually check the invoices that are not automatically verified by QBO.
3 best practices for efficient invoice reconciliation
There are some key points to keep in mind when reconciling all your invoices even if you are using automated software:
- If possible, assign different individuals to reconcile invoices and make payments. This segregation of duties helps identify fraud and makes the process more effective.
- File your invoices in chronological order so it is easy to sort, track, and find the relevant invoice in case of any issue.
- Build a reconciliation checklist. Go through a series of questions and steps to identify any anomalies. For example:
- Were there discounts involved for early payments?
- Has the customer only paid a partial amount and the balance is to be paid later?
- Do the amounts match the invoice and purchase order?
- Is there a rollover amount from a previous balance?
- Are there any remaining credits?
The bottom line: invoice reconciliation saves time
Reconciliation is critical, not only for audits, but also helps with making smart business decisions. With clearer visibility of your finances through fast, clean and clear accounting books, you’ll be make to make critical decisions in a shorter time-period.
If you’re manually reconciling invoices, you’re not able to keep up with the ever-changing demands of the modern business landscape. Automating invoice reconciliation will allow you to quickly identify any discrepancies and correct them before they become an issue.
It will also allow you to focus on more important aspects of your business and free up valuable time that would otherwise be spent on manual processes. If you’re interested in learning more about automated your accounts receivable invoice reconciliation, learn more about Resolve’s accounts receivable solution (or as some people call it, “their AR team on tap”).
