Though some business owners view it as a “housekeeping” task, small businesses should treat invoice reconciliation as a critical component of their accounting process. When done properly, it can provide valuable insights for spending and inventory control, uncover errors in accounting and bookkeeping entries, and ensure that quarterly financial reports are accurate.
In this article, we’re going to define what invoice reconciliation is and how it affects your business. We’ll also talk about some common pitfalls that small business owners run into when reconciling invoices and discuss how Ramp's finance automation tools can help you avoid those.
What is invoice reconciliation?
Invoice reconciliation is a business process that protects businesses from overspending. It’s a checks and balances system that matches up invoices with accounting entries in the general ledger. When done properly, it eliminates duplicate entries and/or extra payouts and keeps the books in proper balance.
Invoice reconciliation is also a client retention tool. Solid vendor and supplier relationships are dependent upon accurate numbers and mutual trust. Far too many business partnerships have been brought down by a “feeling” of impropriety or “sense” of inaccuracy. Reconciled numbers can help you achieve the clarity you need to ensure all of your numbers are accurate.
What are the high-level benefits of invoice reconciliation?
Once properly implemented, invoice reconciliation saves businesses money, promotes a reliable and responsible professional image, and removes the legwork from the accounting process.
More specifically, invoice reconciliation helps you:
- Spot billing mistakes and keep on top of vendor invoice management
- Catch and combat fraud
- Maintain and monitor spend controls
The typical invoice reconciliation process
Invoice reconciliation and invoice processing are not the same, but the two processes can be combined with automation. Unfortunately, many small business owners are either unaware or resistant to making the switch, leaving them with manual processes, complex spreadsheets, and high potential for human error.
This is a step-by-step breakdown of what the invoice reconciliation process looks like without automation:
1. Gather all invoices for the period being reconciled
Ideally, you’d like to have an organized digital archive of all your invoices that can be sorted by invoice number, date, payment date, vendor, and amount. If that’s not the case for your business, grab that pile of paper invoices and check the files to make sure none of them fell through the cracks. Leave them separated by vendor for now if that’s the way you organized them.
2. Compile a general ledger transaction record from the period
The point of this is to reconcile your invoices with any payments you made to their respective vendors. To do that, you’ll need an accurate transaction ledger from the period you’re evaluating. Don’t limit it to just outgoing payments. Errors can often be found in the categorization of transactions, so pull deposits and payouts.
3. Sort, organize, and add invoices and transactions
If XYZ Corp invoiced your company for $10,000 in Q1 and you paid them $10,000, your books are probably in order. But you should go through the reconciliation process anyway. Sorting, organizing, and adding up transactions and invoices is a good first step, but it’s rare for vendor accounts to “zero out” at the end of a reporting period. You’ll want to dig a little deeper on that.
4. Match invoice payments with recorded transactions
This is where errors are first detected. Use the general ledger as a guide and check off each payment made on invoices during the period. Invoices that are paid in full can be put aside and marked as processed. Partially paid invoices need to be revisited for additional payments. Unpaid invoices carry over as accounts payable for the new reporting period.
5. Check for duplication and report on any discrepancies
Did your company double-pay any invoices or make any early payments? Were there overpays as a result, or unnecessary payments made on supplier invoices? Are you still paying vendors you no longer do business with? These are just a few of the many problems that invoice reconciliation can uncover. Treat them as a sign that you need to make some changes.
How automation can help streamline the invoice reconciliation process
Complexity is a small business owner’s worst nightmare. Manual processes, especially with invoicing and accounting, can create complex problems that get more difficult to unravel as the company grows. That paper invoicing system you used when you had four vendors and less than ten employees won’t work when you start expanding your business.
Automation can prevent complexity, even in the early stages of a business. Imagine an invoice reconciliation process that happens automatically when you make an invoice payment. By attaching those two together in real time, you can save yourself countless hours reconciling payments and searching for dodgy transactions.
Automating the invoice reconciliation process eliminates the possibility of paying extra or double paying an invoice that’s already been processed. Implementing a system like this is also an opportunity to examine existing auto payments going out on vendor invoices. You might just find out you’re paying for products or services you’re no longer receiving or using, otherwise known as zombie spend.
Without automation or accounting software, your company will experience slow data input, increase the potential for human errors, and face continuity problems during the invoice reconciliation process. With automation, those problems are much less likely. Data input can be done by scanning invoices and unpaid invoices will carry seamlessly into the next billing period.
Additional strategies for speeding up your invoice reconciliation
Automation is a key strategy here, but there are other improvements you can make to invoice reconciliation without upgrading your software. The keys to speeding up the process are organization and efficiency:
Create a single point of accountability for all outgoing invoice payments
A common mistake that many small business owners make is taking control of their own checkbook when it suits them. This can lead to confusion in the accounting department. Assign one person or a single department to receive and pay all invoices. Reconciliation is simpler when everything is in one place.
Get everyone on the same page
Vendor management is often handled by sales or marketing reps, not accountants. That means purchase orders and sales agreements can be made without financial oversight. Placing a bulk order to secure a lower unit price is a good example of this. Does the company need that many units? Can it afford them? Centralize the decision making process on this and create an expense policy so everyone is on the same page.
Incorporate spend controls and automated invoice processing
Accounting operations grind to a halt when invoices come in over budget or get flagged as unauthorized expenses. Having one person or even a small department handling the payouts can make the resolution process faster, but it doesn’t solve the root issue. That requires spend control and automated invoice processing.
How Ramp can help simplify the invoice reconciliation process
Using Ramp’s Bill Pay feature can significantly speed up invoice reconciliation because our platform automatically reconciles vendor invoicing when payments are made. For even greater ease of use, Ramp has direct integrations with NetSuite, QuickBooks, Sage, Xero, and a dozen other accounting providers and apps via Universal CSV.
The other side of this is spend controls. Let’s go back to the bulk order scenario we presented above. With Ramp’s powerful business charge cards and spend management tools, that deal never would have happened. Employees and department heads are assigned spending limits and deals are flagged when they come in over budget. That simplifies everything.
Visit Ramp.com to learn more about creating invoices, invoice reconciliation, spend controls, and our full suite of finance automation tools.