What Is Account Reconciliation? And Can It Be Automated?
It's the end of the fiscal month, and finance managers and accountants finally get to account for every transaction made throughout the year. Transactions from financial records, bank accounts, cash accounts, monthly financial statements and more are put under a microscope and harmonised to mitigate account reconciliation discrepancies.
This labour-intensive task is vital to your business and every industry, from travel, telecoms, and recruitment to construction, but is often tedious and time-consuming. Reconciling accounts manually is susceptible to human error, missing or duplicate transactions.
It's time to automate one of your most error-prone processes, but what is account reconciliation, and can it be automated?
What is the account reconciliation process?
Account reconciliation is the process of comparing records from different sources to ensure they agree and are accurate. Your accounting department's Accounts Receivable (AR) section typically focuses on checking financial statements or records.
The purpose of reconciling accounts is to identify and fix any variances between two sets of records. These records often include bank statements, credit card statements, accounting records, reservation systems, supplier statements, supplier confirmations and customer invoices.
Mostly we compare across two sets of data, although 3-way matching is also typical. Ultimately, account reconciliation helps release cash for supplier payments and most other parts of the procure-to-pay (P2P) cycle.
Traditionally, using printouts of the two systems to be compared, an accountant armed with a bright highlighting marker carries out the account reconciliation process.
The task involves an accountant identifying identical transactions across systems and marking them on both printouts. They do this until all records match or until they discover discrepancies that need investigation and resolution, such as balance sheet errors.
That was the old days, and today accounting systems such as Sage, Xero, QuickBooks, and NetSuite have built-in software to match simple transactions.
This matching method generally works well for reconciling bank statements to the accounting systems, but we need another solution for more complex matching tasks. Bespoke solutions can guarantee reliable automation for complex matching.
Overall, a business must get this process right as exemplary account reconciliation is at the heart of managing cash flow, supplier relationships and getting solid control of your accounting processes.
Technical challenges when perform account reconciliations
The account reconciliation process has several pitfalls and solutions, and these are the core ones to be aware of if you are looking to improve your company's financial performance, reduce errors and improve efficiency.
In the best case, you can download and import a statement from the bank to your accounting system. However, if you aim to automate this process fully, you'll require an automation solution. This solution will manage the download, import, and execution of the reconciliation process.
In most cases, complex businesses want to reconcile to their reservation or booking system and then import summary transactional data into their accounting system. Usually, you aim to prevent your accounting software from clogging up with a million booking lines by loading them at the cost code level.
You often receive supplier invoices in your inbox, where they sit among a flood of other emails, typically as attachments. You must match these invoices to your system and post them against the corresponding booking for operational and audit purposes.
Some suppliers don't email invoices to your inbox but require that you download the relevant documentation from their portal. You need to know when to download them and ensure you remember and do not suffer from missing transactions later.
Many suppliers send both guest and agent copies of the customer invoice, and you need to ensure that you forward the correct one to your customer and match the correct one to your system.
Suppose you manage the process manually or only partially automate it. In that case, you may not gather sufficient management information about how long it takes to match invoices, how many errors occur, and their origins. This lack of data can make operational improvements challenging to plan and execute.
The big accounting systems usually have automated solutions, but as large managed service providers host them, they are challenging to update, manage and evolve. Configuration updates are needed to keep up with changes, but a specialist supplier team often does it, so it can take a long time to schedule work and a very long time to realise the needed changes. Often, we build flexible automation solutions on top of supposedly already automated solutions.
Where do errors arise in the accounting process?
Several sources of error typically arise during the account reconciliation process, and these are the most common ones that we see:
Your errors
If you are making "off system" bookings and then copying the confirmations into your core booking system, you may make between 25-60% of transcription errors that need to be fixed downstream by either you or another team, such as operations or finance.
An incorrectly copied Booking Reference, one of the simplest errors, makes automating the match difficult.
Most other errors are transcription errors in critical fields, such as customer names. These can have significant operational ramifications downstream.
Your supplier's errors
Some supplier systems don't send an invoice, and you must proactively build checks to hunt for them within a specific time.
Sometimes the supplier invoice needs to be corrected because they use an old version of prices from a previous edition or revenue management activity.
Often rates need to be fixed, and in practice, there are many varied ways the invoice can go wrong.
Features of a good automatic solution
It would be best to have an end-to-end automated solution that tackles all these challenges and creates a streamlined back-office reconciliation process that doesn't drain human effort and is manageable and scalable at low error rates. Here are some features to look for in any proposed automation solution.
Can you quickly add new configuration rules to keep up with changes in your environment, such as supplier changes?
If the technology uses machine learning, you need to test that you don't need to spend all your newly "freed up" time training the machine learning model.
How accurately does the solution match, and how many type 1 and 2 errors do you find? You should see almost a 100% matching rate but with a small percentage of false positives and practically zero false negatives.
Is the solution configurable enough to match all the financial and non-financial fields that matter to you, and can new ones be added in the future relatively quickly?
Have you defined your service level agreement regarding allowable downtime and acceptable match times?
Can you quickly investigate and fix errors without putting manual effort into finding the detail? The system should summarise each exception with hyperlinks to any documentation and information on the error.
Is there a good management dashboard with a drill-down into errors and top-level exec-level summary data?
Do you have email alerts and a web exception report where you can manage and review exceptions? Is all this data stored so that data and insight may be extracted from the process so that you can improve it?
Will the solution work in the cloud but also interact with your core systems that are internal but sit behind your firewall?
Rolling out account reconciliation automation
To fully implement an automated solution for account reconciliation can take anywhere from two weeks to three months, depending upon the volume of suppliers, internal system complexity, internal culture, and your objectives. Here are some factors to consider.
Roll out in a phased approach. A few core suppliers first test, embed, and find any process and people issues, ensuring that the payback period of any investment is short.
Make sure that the new solution automates almost all the reconciliation process. You may need some bespoke developments to ensure you get the full benefit.
Initially, you will find many exceptions; over time, these will come down as you work closer with your internal team and suppliers. If you have one, assign a detailed-oriented owner to the project who works on reducing error rates to base levels.
Other considerations
Start to think of your errors systematically and holistically. You will fix them downstream, so you get the most significant impact in cost reduction and efficiency. Here are some ideas to consider.
If any of your errors arise from transcription errors from off-system bookings, the earlier you fix them, the lower the costs. We recommend using a Confirmation Wizard to copy off-system confirmations into your core booking engine automatically, using a bespoke browser with logic built into it to make this process error-free.
If supplier errors are a significant issue, ensure that you use management information from your system to define metrics to measure and ensure that you have a named individual responsible for reducing that metric to target levels. Define some OKRs, manage the system errors in categories, and develop strategies to manage and mitigate them.
Where automated account reconciliation works well
The use cases that work the best are for essentially small numbers of high-volume suppliers. For the travel industry, where we often work, these include:
Cruise lines
Low-cost carriers
Ancillaries
You should be matching to almost 100% accuracy for this type of matching. The only cost-effective solution will use AI extensively for a low volume high number of suppliers. The matching rates will be much poorer, and you need to ensure that any solution uses more than machine learning, such as a blend of tools and heuristic techniques, to ensure the robustness of matching.
Conclusion
In piecing the account reconciliation puzzle together for your organisation, you can start now. Rather than continuing the long and arduous process and making the same errors year after year, seek out an adviser who is both an expert in accounting and automation.
Traverse Automation has years of experience designing and implementing automation solutions to solve our customers' complex and error-prone manual tasks. We specialise in streamlining financial, administration, operations and marketing processes across numerous industries.
You can find Traverse Automation on LinkedIn, be part of our Automation in Travel Business LinkedIn group, and connect with our CTO, John O'Neill, about your automation needs.
