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  • 07 Dec 2023

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Everything You Need to Know About Payment Reconciliation | Guide

Everything You Need to Know About Payment Reconciliation | Guide

Tracking income and expenses is a necessary process for any business. Frequently updated and well-documented financial transactions help companies make the right accounting decisions. The best way to ensure the sound financial health of your firm is by establishing a strong payment reconciliation process.

But what exactly is payment reconciliation, and how is it beneficial for your business? That's what we're going to learn today. Here in this blog, we'll discuss everything necessary about payment reconciliation. By the end of this blog, you'll be an expert on this topic. So without any further ado, let's jump to our first topic!

What is Payment Reconciliation/Reconciling Your Payments?

Payment reconciliation is an accounting process that ensures verification of every business transaction. In other words, it makes sure that every record - from the balance sheet to the bank statement - is timely updated and correct.  Every company these days manages more than one digital payment gateway across various partners and touchpoints. With multiple gateways into work, tracking and recording every penny that goes out or comes into your accounts is essential. 

Reconciliation helps companies match two different data records. With payment reconciliation, your business can ensure that the total money collected or earned matches the net sales amount. The other popular definition of payment reconciliation is - "A method of bookkeeping which consists of the comparison of financial records - those internally logged with bank statements and maintained by accountants". 

The major goal of a reconciliation process is to make your company's accounts accurate. The best example of a payment reconciliation is - "When your company's bank statement arrives, the accountants compare 'payments' and 'income' against each other". 

The principal objective behind the comparison is to identify if records tallies or not. If differences are reflected, it signifies hidden or unrecorded transactions. Such transactions must be recorded in the books of accounts as soon as possible. 

There's a settlement cycle for every payment gateway. The settlement cycle is the time frame inbetween, For example -  " When the customer makes the payment through the gateway, via Paytm, and funds being credited to the merchant's accounts". So, settlement refers to when the payment gateway credits the funds in a merchant account. Suppose you have an eCommerce store, and someone purchased one of your products through UPI. When you receive the payment for that product in your bank account, it'll be known as “Payment Settlement”.

When it comes to payment reconciliation it's a different concept than payment settlement. It starts when the payment settlement process ends. Payment reconciliation can be said to be a process of reviewing business transactions. If transactions' records match, your business books are accurate and updated. 

On the other hand, if any transaction doesn't match, it's a clear indication that there's something wrong with the accounts. In most cases, it's due to unrecorded transactions or errors in the amount recorded. Such errors must be identified and resolved before the end of the financial year.

How Does Payment Reconciliation Work and What Are Its Components?

The payment reconciliation process consists of two stages - internal and external. To have an overall understanding of payment reconciliation, it's crucial to learn about these two aspects. Let's see what they are all about:

1. Internal 

The company records these activities when transactions such as payments or bills are scheduled or made. The method of recording these transactions varies from company to company. Some of the popular techniques include:

  • Accounting Software

There are dedicated software like Xero that businesses use to record their transactions. If you want to follow this method, make sure to choose software that integrates well with your current systems (direct debit processors, e.g.)

  • Tracking Billing Paperwork And Saving Receipts

This method of recording transactions involves high levels of risk because manual paperwork is easy to misplace and prone to errors. Even if you are a sole proprietor or have a small business, using this method should be last on your list. 

  • Maintain Spreadsheets For Outbound And Inbound Money

You can also opt to maintain the records of your transactions using Excel or Google spreadsheets. It's another manual data entry technique and requires more time utilization than accounting software. 

2. External

When a transaction is processed, your bank records its settlement activities. After monthly statements are available, accountants check the statement of records. Under this statement, every transaction is listed, including the vendor payment methods, sales and income as well. 

Both internal and external activities (the above ones) are matched for payment reconciliation. If there are any discrepancies, the financial team determines the source of errors - internal or external. Whatever the case, as soon as the discrepancy is discovered, it's essential to take necessary actions as soon as possible. 

What are the 3 Types of Reconciliation?

There are three common types of reconciliation:

Types of Payment Reconciliation

1. Bank Reconciliation

Bank reconciliation is one of the most common and complex forms of reconciliation. The sheer number of ways money flows out and inside the bank accounts makes this process complex.

The disbursements (payouts) and deposits are compared against the company's bank statements and books in bank reconciliation.

2. Credit Card Reconciliation

Both companies and customers use credit cards for making purchases. In this reconciliation type, the transactions listed in the monthly credit card statement are compared with the internal records maintained by the company. In addition, the transactions are compared with the bank statements that tell money was deposited or withdrawn to pay credit card bills.

3. Cash Reconciliation

This reconciliation happens at a physical store or shop. All the cash, cards, or checks collected in a register are compared with the sales receipts at the end of the day or before the shift changes. If the totals don't match, it could indicate an accounting error or an employee theft.  

Disadvantages of Not Having a Payment Reconciliation Solution

Not having an effective reconciliation process or process can lead to the following consequences:

Disadvantages of not having payment reconciliation solution

1. Inaccuracy in Cash Balances

Without a reconciliation solution in place, your bank accounts may have less than the expected balance leading to bounced cheques or overdraft fees.

2. Fraud May Go Undetected

Reconciliation helps you identify and tackle any financial discrepancy. Without a reconciliation solution, you won't know which payments have been actually disbursed, leading to undetected attempts of fraud.

3. Cash Flow Disruptions

Not performing payment reconciliation will hamper your ability to identify delayed deposits and outstanding payments. And this can lead to cash shortages or even surpluses making it hard to meet financial obligations.

4. Poor Decision Making

Not having a reconciliation solution means you don't have an accurate estimate of how much cash you will have in your account. And this can lead to poor decision-making, further impacting your business's bottom line.

5. Unpaid Bills or Invoices

If you don't reconcile payments, you'd have no way of knowing whether all the issued invoices have been paid for. 

Advantages of Having a Payment Reconciliation Solution

Here are the advantages of having a payment reconciliation solution:  
Advantages of Having a Payment Reconciliation Solution

1. Accurate Financial Records

Having a payment reconciliation solution means you can compare the financial records from multiple sources and ensure accuracy. This way, you can ensure not even a single penny goes unaccounted for.

2. Fraud Detection and Prevention

A reconciliation solution can help you identify suspicious attempts to loot money from the organization. This way, you can be more vigilant, prevent fraud and thus save money.

3. Effective Cashflow Management

Cashflow management is essential for any business to keep operations running and meet unexpected expenses. And reconciliation makes it easy. With payment reconciliation, you can identify discrepancies and accurately predict and manage cash flow.

4. Efficient Financial Reporting

As stated earlier, payment reconciliation can help improve the accuracy of your financial records. When you have accurate financial records, financial reporting also becomes more accurate. In addition, automated solutions help reduce the time and effort required to create financial reports, making the process more efficient.

5. Payment Optimization

Payment reconciliation offers insights into your cash flow and overall transactions allowing you to monitor your payments easily. Plus, you can reduce the likelihood of manual errors, detect any, and mitigate the same. This way, you can effectively optimize your payments.

What are the Common Challenges Businesses Face with Reconciliation?

Several businesses practice reconciliation, but instead of leveraging an automated solution, they rely on human elements. And this leads to several challenges, such as:

1. Error Prone and Inefficient:

Manual reconciliation processes are often time-consuming and prone to errors leading to inefficient results. Employees have to manually compare the statements and records, which often results in delays and inaccuracies, making the entire process a mess.

2. Complex Transactions and Multiple Payment Channels:

If the transactions are as simple as credit and debit and a single payment channel is involved, reconciliation can be done quickly. However, if there are complex transactions (involving multiple parties and payment methods such as credit cards, banks, and wallets) involved, manual reconciliation can be a painstaking process.

3. International Transactions:

International transactions have numerous factors in play. For instance, there are different banking practices, engagement rates, differences in currencies, and what not. And considering all these factors manually with 100% accuracy is not possible, leading to inefficient reconciliation.

However, businesses can address these challenges by opting for an automated reconciliation solution. Let's learn more about such tools below.

4. Size of Files

Performing reconciliation with multiple large files results in unnecessary time and a waste of dedicated resources. This increases the risk of manual errors, making the reconciliation process more complex.

5. Date of Refunds

Refunds are generally scheduled on different dates than when the actual transaction is made. This makes the reconciliation complex because it becomes hard for the financial team to match the transaction. 

Takeaway

Payment reconciliation is an essential accounting process for comparing internal (company's records) and external (bank or card) records to identify any discrepancies. With such a process in place, you can maintain accurate financial records, manage cash flow better, improve financial reporting, detect and prevent fraud and optimize payments.

So, if you don't have a payment reconciliation solution in place, get one now. Otherwise, issues such as cash flow disruptions, unpaid bills, fraud, and inaccurate cash balances might creep up in your business.

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