Have you ever run into an issue with errors and irregularities on an invoice?
Then you know how problematic these issues can be. Unfortunately, this can turn into a recurring problem for companies that rely on goods and services from external vendors.
When this does happen, you'll need to go through the invoices and make the necessary adjustments so that it accurately reflects the purchase and total.
This is known as invoice reconciliation and can be rather tedious to perform. However, the potential impact it can have on your income makes it worthwhile.
If you're new to this and are unsure of how to reconcile invoices, then continue reading.
Invoice Reconciliation in a Nutshell
So what exactly is invoice reconciliation? Well, in a nutshell, it's an accounting process that involves the comparison of two or more sets of records.
For example, an invoice and bank statement. The goal is to see if the two match up in regards to payment. In other words, to ensure your business was paid what it was owed (or that you paid what was owed).
There are several scenarios that may arise that calls for invoice reconciliation. Here are a few examples:
- An invoice wasn't paid in full
- Early payment discounts were applied
- Fees charged by the bank for international currency transactions
- Delayed delivery of products causing a payment delay
- Issues with timing when payments and deposits will reflect in statements
- Duplicate or misplaced invoices
When these anomalies rear their head, you can use the reconciliation process to identify whether it's due to fraud or a legit anomaly.
Once you clarify that, you can work on rectifying the problem by correcting the mistake. If it turns out that certain invoices are long overdue, you may have to count them as a loss.
Next, let's take a look at the two types of invoice reconciliation processes.
Manual and Automated Invoice Reconciliation
In the past, everything was done manually document by document, line by line. And as you could imagine, attempting to reconcile invoices this way is a complete nightmare.
This is why modern companies switched over to automated invoice reconciliation processes. This includes integrating procurement system software and online invoicing tools like invoicely.
This allows accountants to waste less time on pinpointing where an error occurred. For example, you can quickly learn whether a vendor paid in full, paid partially, or if the account is past due.
When managing invoice reconciliation manually, accountants typically do so monthly.
With the use of a procurement system, you're able to reduce the amount of work. It automates the matching of purchase orders so you can find any discrepancies in real time.
The system matches POs with invoices, vendor records, payments, and invoices. You'll see flags in the system that you'll need to check manually.
Whatever irregularities the system finds are found and reconciled right away.
This helps to prevent human errors and quickly find payments that are past due. Besides boosting your revenue, it can also help your company save money.
What's the Purpose of Invoice Reconciliation?
Performing invoice reconciliation regularly is recommended. This way, all you have to do is examine specific time periods (e.g., over the past month), and update the status of payments.
If you're using the manual process, then you'll have to use spreadsheets and stacks of financial documents, which can take hours or even days to go through. The point is to find legit reasons for discrepancies you find.
Otherwise, it's likely the financial institution you use or your own organization that's at fault.
Recognizing Fraudulent Behavior
It's not uncommon for employees to attempt to steal money from the company it works in. It's running so rampant that in the U.S. alone, businesses are losing a whopping $50 billion annually.
So this is definitely something you want to be aware of within your own organization.
But this is tough to do when you don't have an organized system to manage and keep track of what's going into and out of your business.
By implementing an accounts payable system, you can reduce the chances of fraud because it becomes more challenging to do without being noticed.
This is because most use a three-way match, so if anything shows up out of whack, then it'll flag it for your review. It matches purchase orders, invoices, and receiving documents automatically before any payments are made.
With your automated system in place, you're able to set well-defined permissions to prevent fraud further.
There's also an issue with check fraud, which is difficult to detect without account reconciliation. Activities like unauthorized checks, checks without invoices, and altered checks are automatically flagged by the system.
So when you're worried about employees theft, fraud, and embezzlement, then automating your accounting is ideal.
Payment Timing Issues
It's not uncommon to run into problems that deal with when payments show up in your balance sheet when you begin reconciling your invoices and accounts.
For instance, a deposit made on Friday may not hit your bank account until Monday. So it won't show up on the bank statement if you do the reconciling prior to then.
Another common problem is waiting for vendors to cash your check. If they wait weeks before doing so, you could end up miscalculating how much money is actually yours.
There are simple ways to resolve this, but you first have to know where to look. Once you identify an unprocessed payment, you can contact your bank to verify deposit dates.
Another option is to reach out to the vendor to ensure they received your payment.
Next, let's take a look at the steps you must take to reconcile invoices.
Step 1: Get Organized
The first thing you want to do in the invoice reconciliation process is to organize all of your invoices. Start by separating all of the invoices by the vendor. Then organize them by date.
Step 2: Begin Matching
Now, it's time to go line by line to match the vendor statement with your invoices. Some companies wait until shipments arrive to do this.
In doing so, you can ensure what you received is reflected in the dollar amount shown on the invoice.
Step 3: Mark Off Each Line
As you check each line of your statements and invoices, place a check mark on the areas that you approve. For instance, if you have an invoice for 12 boxes of wood you received on the 11th, you should see this as a line item on the statement that indicates this is accurate.
Then be sure to look at the invoice number for the statement to ensure they match. If so, you can place a check mark by the item on the statement.
Step 4: Circle the Discrepancies
When you come across items on your statement that are inaccurate, then you'll need to place a circle around it. Just circle the items on the statement that don't have a corresponding invoice to match it.
Then you'll need to reach out to the vendor to ask for a copy of the invoice you're missing. They can send this via fax or email.
If you find the vendor placed the wrong invoice number on the statement, then write a line through it and put a note about the inaccuracy.
When there are extra charges that shouldn't be there, then subtract it from the total and write down the correct subtotal.
Step 5: Add Up Your Invoices
Now, it's time to add up all your invoices for that one vendor and see if the total matches with the total of the statement. If they don't, then you'll need to go back to see if you added each up correctly.
You may have overlooked a line item or added more than you were supposed to.
Quick Tips for Invoice Reconciliation
Make sure you're filing your invoices by date as soon as your office receives them. Put these in chronological order, so it's easy to keep track.
Then when it comes time to reconcile them, you can skip step one.
Also, make it a habit to reconcile invoices as shipments come in to ensure you're not overpaying the vendor or being shorted in goods. It's not uncommon for an invoice to show more items than you received.
Make Reconciling Invoices Simpler
Managing your own finances is tough when you have a business to run. So whatever you can do to automate the process is critical.
This is why we recommend using payment systems to organize and automate this process. Then to help ensure the invoices you send your customers are on point, you can use tools like invoicely.
You get access to a platform that allows you to create professional invoices and track them. You'll see in your dashboard which invoices are still pending, paid, or past due.
Start organizing your payment processes today with payment systems. Then make sure to come back to let us know how it's panning out!