If you're a business owner or part of your company's financial team, you know how important financial reconciliation is. It is as crucial for your business as a medical check-up is for your body. Making sure that everything is in order and catching any irregularities early in the process may be the difference between a thriving company and one that goes under.
What is Financial Reconciliation and Why is it Important?
Financial reconciliation is the process of comparing documents to support and verify financial transactions. The most common way to perform an account reconciliation is double entry accounting. Every financial transaction is entered into the general ledger in two places - the credit account and the debit account.
Let us take a business owner who buys a laptop worth Rs.85,000 for their company. The company’s electronic resource account would be credited for Rs.85,000 for the new asset. The company’s cash account would be debited for Rs.85,000 as they spent the money on the laptop.
Transaction reconciliation can also be performed through the account conversion method. Records such as receipts or cancelled cheques are compared with entries made in the general ledger. You should reconcile your accounts to prevent balance sheet errors and check for fraud. Balance sheet reconciliation are usually prepared at the end of each month, and involve reviewing all accounts to make sure that transactions were appropriately booked into the correct general ledger account. Journal entries can be adjusted if they are booked incorrectly.
How do Companies Perform Reconciliation?
As necessary as it is for companies to perform reconciliation, the process can be time-consuming, expensive and prone to errors.
For example, Alana Cosmetics is a medium-sized company that sells products online through Amazon and Flipkart. They receive hundreds of orders every day and process payments through various payment gateways. They maintain a separate account for each payment gateway, and at the end of each day, they perform marketplace settlement reconciliation manually. They reconcile the transactions from each account to ensure that all the payments have been received and recorded accurately.
However, due to the large volume of transactions, the accountant misses a transaction and does not accurately record the transactions. This leads to inaccurate financial statements, which can have serious legal consequences. If the company does not record a payment from a customer, the sales figure will not be accurate. This can affect the company's financial forecasts and business decisions. Similarly, if the company fails to reconcile the accounts correctly, they may not pay their taxes correctly, resulting in penalties and fines.
Therefore, it is important for companies like Alana Cosmetics to automate their account reconciliation processes to ensure accuracy and efficiency. For larger organisations with complex financial transactions, it can take up weeks of the whole team’s time per month. This can result in delays that impact decision-making and financial planning. As the volume of transactions increases, the manual reconciliation process becomes increasingly difficult to manage. This can limit the scalability of your business and hinder growth. More people will also be needed to manage the process, leading to increased costs.
How Can You Avoid these Problems?
By opting for a modern accounting process, you can choose to automate account reconciliation. You can increase the speed and efficiency while reducing the number of errors. Transactions can be reconciled almost instantly, compared to manual reconciliation that may even take weeks. This improved efficiency can help your company stay on top of your financial operations and allow employees to dedicate their time towards making business decisions.
Automated reconciliation can help reduce the risk of human error by quickly identifying discrepancies and ensuring accuracy in the financial data. This can help prevent costly mistakes and improve the quality of your financial reporting.
You can identify fraudulent transactions almost immediately by analysing large volumes of data quickly. Unusual patterns or transactions that require further investigation can be recognised. You also receive greater security than a manual process would provide. You can restrict access to financial data and monitor user activities closely. This can reduce the risk of data breaches and unauthorised access. Automated systems can also provide an audit trail of all transactions, making it easier to track and investigate any suspicious activity.
Automated reconciliation tools provide real-time reporting and alerts, enabling your organisation to respond quickly to any issues or discrepancies. Potential problems can be prevented and you can be up to date on your financial operations. By reducing the need for labour and minimising errors, costs associated with reconciliation and financial reporting can be reduced. With account automation, you can save time and resources that would otherwise be spent on manual reconciliation. The financial team can instead focus on forecasting and analysis instead of spending their time on grunt work.
Which Platform Should You Choose for Automating Reconciliation?
With an autonomous system like Osfin.ai, your company can reconcile millions of entries immediately. You can manage large and complicated transactions with ease by importing data from payment service providers and banks. Seamlessly integrate multiple file formats from different sources for multi way reconciliation. The completely automated workflow can help prevent revenue leakages. Use the dispute and settlement management system to track mismatches and delays and quickly correct them.
Osfin.ai can help automate your exception management system to identify and manage exceptions causing accounting close delays. The highly configurable rule engine and custom dashboards help you create and manage your accounting system with minimal effort. Secure your company and keep your data safe with role based access control. Osfin.ai's highly customised platform helps you keep your business ready for an audit at any time without having to rush at the last moment.
Osfin.ai’s superior support team is always available to help your business prosper. Automate your company’s financial process, so you can spend your time on what’s truly important - making profitable decisions and growing your business.