What is invoice reconciliation?
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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 an accounting procedure where a business verifies invoices with purchase orders, delivery receipts, and other paperwork to confirm that they’re accurate and consistent. This process helps businesses check that their received goods and services match what was ordered and that the billing details are correct.
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 make sure all of your numbers are accurate.
Invoices vs. reconciliation
An invoice is a financial document issued by a seller to a buyer that lists goods or services provided, their prices, and the total amount owed. It's a formal request for payment and serves as a legal document that can be used in accounting and tax filings.
Invoice reconciliation is the process of comparing invoices to other financial records, such as bank statements or purchase orders, to guarantee accuracy and consistency in financial reporting. This practice is also known as billing reconciliation.
Similar to invoice reconciliation is account reconciliation. While invoice reconciliation is specific to tracking invoice payments, account reconciliation is the process of verifying that your general ledger entries match your bank statements.
What are the 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:
Maintain financial accuracy
By regularly comparing invoices to bank statements and other financial records, discrepancies can be identified and corrected promptly. This process maintains the integrity of your financial reporting, guaranteeing that all transactions are accurately accounted for and reflected in your financial statements.
Manage cash flow
Monitoring payments due and received helps your company understand its financial position. This allows you to forecast future cash flow, plan for expenses, and make informed financial decisions, maintaining a healthy balance between your income and expenditures.
Thorough record-keeping and invoice reconciliation are vital to keep your business compliant with regulatory standards, helping you avoid legal penalties and fines. Regular reconciliation also prepares your business for any potential audits by keeping its financial and accounting records in up-to-date.
Invoice reconciliation acts as a vital checkpoint in the prevention of fraud. By cross-verifying invoices with actual transactions, it helps identify any unauthorized or fraudulent activity. Regular reconciliation makes it difficult for such activities to go unnoticed and thus acts as a deterrent to potential fraud within your company.
The reconciliation process streamlines financial management by identifying billing errors, preventing late payments, and making sure that all financial obligations are met on time. It relieves administrative burdens and improves your operating efficiency, allowing your business to focus more on growth and development.
Accurate billing and on-time invoices lead to fewer billing errors and disputes, fostering trust with vendors and suppliers. When vendors are confident that they’ll be paid by the due date, with any discrepancies resolved quickly, this promotes a better relationship that can lead to better pricing and payment terms.
How to reconcile an invoice
To reconcile invoices with purchase orders, contracts, and receiving notes, you’ll compare details across these documents to make sure that information like quantities, prices, and terms match. You can do this manually or leverage automated software to streamline the process, flagging any inconsistencies.
Invoice reconciliation is still often done completely manually, leaving business owners with complex spreadsheets and a high potential for human error.
Here’s a step-by-step breakdown of what the invoice reconciliation procedure looks like without an automated system:
1. Gather the 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 you use spend management or procurement software, your purchase order information should be available in the platform, sortable by invoice number, date, payment date, vendor, and amount. If this isn’t the case for your business, gather your paper invoices and separate them by vendor.
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 to use automated invoice reconciliation software
Manual processes can create complex systems that get more difficult to manage as your 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 avoid the time-consuming practice of reconciling payments and searching for dodgy transactions.
Automating the invoice reconciliation process removes 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.
Implement an expense policy
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? You can centralize the decision-making process by creating an expense policy so everyone is on the same page.
Use spend management tools
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. To prevent over-budget transactions before they happen, consider using company cards with automated spend management tools.
Simplify the invoice reconciliation process with Ramp
Ramp’s accounts payable software can significantly speed up invoice reconciliation by automatically reconciling vendor invoicing when payments are made. For even greater ease of use, Ramp has direct integrations with NetSuite, QuickBooks, Sage, Xero, and many other accounting providers and apps via Universal CSV.
With Ramp’s business charge cards and spend management tools, you can also set spending limits and flag over-budget transactions when they happen—simplifying the reconciliation process later.
Watch our product demo to learn how Ramp can help you create and reconcile invoices, set spend controls, and access a full suite of finance automation tools.