Payment reconciliation: Understand its purpose and how you can do better

Payment reconciliation

5 min read

People are the heart of every business, but it’s cash flow and accounts management that keeps operations humming. Like most good things in life, money management doesn’t always come easy — given that 46% of Australia's business owners have been in a financial situation that puts their ability to pay employees at risk.

So what’s the solution? Accurate record-keeping and regular payment reconciliation can go a long way toward protecting your business against costly, time-consuming tasks. We’re going to take you through the basics of payment reconciliation, the common pitfalls to avoid, and ultimately — what you can do to improve it.

What is payment reconciliation?

Payment reconciliation is an accounting process that verifies account balances to ensure all sets of records are true, consistent, and up-to-date. Businesses can reconcile their accounts daily, weekly, or monthly. It’s ideal to do it as often as you can (once a week), but if that’s not possible, you should aim to do it monthly at a minimum.

Discrepancies are not unusual, and many are harmless. Payment timing, deposits, and pending transactions can affect bottom lines across bank accounts. However, businesses can use the reconciliation process to detect and avoid balance sheet errors, identify fraud, follow-up failed payments, and chase overdue invoices.

How does the payment reconciliation process work?

The reconciliation process unfolds in two stages: internal and external.

First, internal. The business records a transaction – such as a payment or billing – in its accounting software, spreadsheet or using its preferred record retention system. Businesses may also save receipts, invoices, and billing paperwork (though this method can be prone to human error).

Second, external. The bank records the transactions as they are processed. It then makes a statement available to the business, detailing crucial information like payer, payee, amount, date and payment method.

Finally, internal and external records are reconciled. The business checks that both internal and external activity matches. In other words, the total funds coming in and out according to internal records should be the same as the total funds coming in and out according to the bank.

If the figures don’t match, the business can investigate the cause of the inconsistency. In most cases, errors are internal. But in some rarer instances, the bank is at fault.

Security breaches in financial institutions may be uncommon, but they do happen. In early 2020, several Australian banks were threatened with denial-of-service attacks by unnamed hackers. Later that same year, the Council of Financial Regulators ordered banks to hire independent ‘red teams’ to utilise real-life hackers’ latest infiltration techniques to expose vulnerabilities. In short, banks must now cyberattack themselves before genuine bad guys have the chance.


Read more: Top reasons payment disputes occur and how to prevent them


Why does your business need to reconcile transactions regularly?

Reconciliation is not just another chore on your to-do list; it’s a crucial process that protects your business, maintains compliances, and benefits your cash flow.

Here are three benefits of payment reconciliation:

1. Reconciliation uncovers errors and unauthorised payments

Reconciliation keeps you in-tune with your business’ finances. By comparing internal and external records, you can catch errors sooner rather than later, ensuring a faster resolution and improved cash flow. What’s more, you can identify unauthorised payments or a security breach at your banking institution.

2. Reconciliation helps you chase unpaid or late invoices

You sent the invoice out, but you didn’t get the funds in return – it’s a scenario familiar to businesses large and small. By regularly reconciling your accounts, you can make sure every missed or late invoice is followed-up and settled.


Read more: What timing should I set on payment reminders?


3. Reconciliation ensures your business’ financial records are accurate

Without accurate financial records, you cannot keep on top of your business’ health, make informed business decisions, or easily demonstrate your financial standing to banks, investors and lenders.

Plus, some industries and sectors are subjected to record-keeping requirements and regulations. In these instances, accuracy is crucial to maintaining compliance and protecting your business against penalties.

Common reconciliation pitfalls

Even if you have the best intentions, the following pitfalls might be your reconciliation Achilles' heel:

  • You’re always chasing late payments, which means your internal and external accounts are not aligned from the outset. This complicates the reconciliation process and leads to inaccuracies;

  • You don’t know which customers, clients or vendors have and have not paid you, meaning you can’t pinpoint the cause of discrepancies;

  • You don’t have a single source of truth. Instead, you jump between systems and spreadsheets, scrambling to puzzle together disjointed snippets of information;

  • You don’t reconcile your accounts regularly. When you finally sit down to it, you are overwhelmed by the sheer quantity of transactions to work through.


Payment reconciliation best practices

Reconciliation is an accounting process that should contribute to – not detract from – your business’ profitability. Here are the two best practices to follow to reconcile your accounts with minimal labour to maximise cash flow:


Best practice #1: High frequency is important

Do not wait until the end of the financial year to reconcile your accounts. By then, you’ll have truckloads of statements to trawl through. Instead, do it once a week. If that’s not possible, aim for fortnightly or at a minimum, once a month.

Best practice #2: Automate your reconciliation

Manual processes are subject to human error, and if your team members approach reconciliation in different ways, it will lead to inconsistencies.

A question you should be thinking about; how does any business have time to reconcile accounts weekly? By automating the process. A reliable inbound payment process is key to unlocking greater profitability and financial growth. And with automation, you can cut the price of payments administration, too.


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Automate your payment reconciliation

Ezidebit offers automatic reconciliation on all transactions, across multiple payment methods into one single dashboard. Automating these processes means less time spent on manual accounts and more time dedicated to growing your business.

Plus, the EziOnline portal equips you with a powerful suite of tools: customisable reporting, real time payments, and customer account management. Access your easy-to-use dashboard anytime from any device. Contact us today to learn more.

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