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What is payments reconciliation?

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Reconciliation is the process of cross-referencing payment records with accounting books to ensure accuracy and consistency while hunting for any errors and discrepancies along the way. This process is particularly important in the context of global workforce payroll payments.

Why is payment reconciliation important for business?

For any business, financial accuracy and transparency is essential. But changing laws and global transactions can create complexity. Payment reconciliation can guide businesses in correctly reporting financial records, ensure compliance, and make fact-based decisions. Other reasons payment reconciliation are important are:

Identifying errors

Payment reconciliation allows businesses to identify errors or discrepancies between accounting records and transactions. Perhaps a supplier payment wasn’t recorded properly or an invoice wasn’t paid. Payment reconciliation brings such issues to light so companies can resolve them.

Improving cash flow management

Without payment reconciliation, businesses may believe they have more cash than they do leading to overdraw. Or they may have more room to make investments than they initially realized. Knowing their financial situation allows for smarter decision making regarding investments, expenses, and debt management.

Preventing fraud

Continuous account reconciliation can help businesses flag unauthorised transactions or irregularities, which may point towards fraud. Identifying fraudulent activity early on is essential for effective damage control.

Strengthening relationships with stakeholders

Accurate and up to date financial records gives stakeholders, investors, suppliers, and customers more trust in the business. Trust helps foster strong, beneficial relationships.

Compliance with laws and regulations

Compliance regulation is subject to change. Ongoing payment reconciliation is key to keep up with the latest requirements, helping businesses avoid penalties and legal challenges.

What are the types of payment reconciliation?

There are an ever-growing number of ways to conduct payment reconciliation. Adding to the complexity, popular online payment services, such as Venmo, PayPal, and cryptocurrency make payment reconciliation a challenge. A few of the more common payment reconciliation types to know are:

Bank reconciliation

Bank reconciliation matches transactions recorded in the company’s cash account with the transactions on the bank statement. Businesses use bank reconciliation to verify that the cash balance on record is consistent with bank’s reported balance.

Credit card reconciliation

Credit card reconciliation matches the transactions on a monthly credit card statement to the company’s accounting system, as well as the bank statement that indicates if money was deposited or withdrawn to pay credit card bills.

Payroll reconciliation

Payroll reconciliation checks the accuracy of payroll transactions such as wages, deductions, and taxes, by comparing payroll records to bank statements and other supporting documents.

Cash reconciliation

This takes place physically, where an employee matches the amount of money collected in a register with the register’s sales receipts at the end of the business day or before a shift change. If the totals aren’t the same, it may indicate employee theft or an accounting mistake.

Digital wallet reconciliation

Companies may not be able to rely on digital wallet providers sending a statement for reconciliation. Instead, organizations will need to create a strategy to reconciliate digital wallets and overcome the challenge of accessing fiiancial data when crypto is involved.

How does payment reconciliation work

There are three prime steps of payment reconciliation.

Step 1: Reviewing transaction records: The first stage involves reviewing material like accounting records and bank and credit card statements. This is to make sure that all transactions have been properly recorded.

Step 2: Spotting discrepancies: The second stage has to do with spotting discrepancies in the data. This can come in the form of duplicate transactions, discrepancies in account balances, and incorrect payment amounts or dates. Once all the discrepancies are spotted, they need to be solved. This involves reaching out to relevant parties, like banks and payment processors to get the information needed to solve the errors.

Step 3: Verifying accuracy of records: With the discrepancies now solved, the next stage is checking that all transactions have been accounted for – comparing the company’s accounting system against the reconciled transaction records.

Four disadvantages of manual reconciliation

  • Human error: Relying on humans only to carry out the reconciliation process can lead to missed transactions, misinterpretation of data, and data entry errors – in other words, reconciliation gone wrong.
  • Risk for fraud and manipulation: Unfortunately, with human error comes the added risk of fraud, as the people doing the reconciling can either intentionally or inadvertently alter the accounting data or payment records.
  • Lost time: Manual reconciliation input is a huge time drain, and even with time budgeted — delays are a given.
  • Giving up quality for quantity: Companies with a greater number of payments to process will probably suffer most as a result of manual reconciliation, as these businesses’ finance teams may not be able to keep track of all the data.

Speeding up the reconciliation process

Speeding up the reconciliation process really comes down to a few basic actions:

Establishing clear procedures and workflows. Underlining clear procedures and workflows for your financial team to follow will create a smoother overall process and reduce time spent fixing communication problems.

Staying up to date with the latest best practices. Knowledge is constantly evolving and that means a constant stream of new facts and pointers you need to keep in mind concerning your reconciliation to-dos.

Relying on automated reconciliation tools. What’s the best way to decrease human error in reconciliation? Consider software tools specifically designed to automatically reconcile payments and integrate the data into your accounting systems.

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