Month-End Reconciliation Explained: Tips and Best Practices
Reconciling transactions at the end of the month can quickly become stressful. Managing multiple transactions, across several platforms, in huge volumes, is a mountain to climb for any financial institution. When every transaction needs to align perfectly, a single slip in record-keeping can end up drowning you in compliance risks, inaccurate reports, cash flow disruptions, and regulatory penalties.
It’s impossible not to be daunted by reconciliation as the calendar flips to the next month. Month-end reconciliation is the process of comparing and matching internal financial records against external sources, and with such a task at hand, there is no room for mistakes. With a good month-end reconciliation strategy ready to fire, you’ll be able to breeze through this period with half the worries.
Here, we’ll explore what month-end reconciliation is, why it matters, steps to automate the process, and the best practices for monthly reconciliations at your financial institution.
What are Monthly Reconciliations?
Monthly, or month-end reconciliation, is the detailed process of comparing your financial records, such as your bank and credit card statements, to your accounting records to ensure that they match.
Depending on the use case, data can come from different sources. For instance, a loan reconciliation will need data from internal loan databases and external payment rails. Similarly, data for insurance reconciliation will come from settlement records, policy records, and premium payment records. For payment reconciliation, we will require bank statements, invoices, and receipts as source data.
For financial institutions, this can mean matching general ledger entries with documents like bank statements, payment gateway records, loan disbursement records, customer ledgers, and clearing accounts and avoiding discrepancies at all costs.
The grind of month-end reconciliations comes with its rewards. Despite its troubles, monthly reconciliations are about accuracy and accountability. Coordination within the operations team, attention-to-detail, and regularly scheduled reconciliations can save you from regulatory non-compliance down the road.
How Month-End Reconciliation Works
Financial statements need to be balanced between the internal data sources, like ledgers and subledgers, and external sources and operational systems like payment processors, CBS vendor loan management systems, or more. Once the monthly reconciliation is completed and a reconciliation record has been made, it can be passed on to key stakeholders in your company. You can be sure of your overall financial integrity, and further decisions can be made based on the reconciliation report. Finally, you can rest assured that you’re keeping up with compliance requirements.
Here’s the steps involved in a typical month-end reconciliation.
1. Data Collection
Month-end reconciliations start by collecting all relevant data for the month. This relevant data will change, depending on the type reconciliation being done.
For example, when doing a month-end loan reconciliation, data will likely be fetched from:
- The payment processor, such as a third party provider, a bank, or an internal company service, providing data on payment rails, Loan Management Systems, and Loan Origination Systems.
For an insurance reconciliation, these external data sources change:
- Data from policy management systems, CRMs, third-party administrators.
And for a payment reconciliation, such as credit card or bank reconciliation, your data can include:
- Bank statements, invoices, receipts, records in the accounting system.
For all reconciliations, your internal data sources will likely include the internal ledger, where all internal records of transactions are stored.
2. Data Standardization
Once this data is collected, cleaned, and transferred to a secure location, reconciliation can begin. Data usually comes in multiple formats and file types, such as CSV, JSON, XML, and more. This is influenced by what ecosystem partner you are getting the data from, too, such as payment gateways or loan servicing systems. This means they first have to be converted and standardized before the reconciliation process can begin.
Doing this manually can be quite time consuming. However, with a platform like Osfin.ai, the standardization process is taken care of automatically and files are auto-matched and cleaned to remove discrepancies and duplicate entries.
2. Matching Transactions
With the data foundation now established, the operations team will reconcile internal data with the external statements, aligning the transactions across their amounts, timestamps, and more. Challenges are apparent at this stage, as timing differences, aggregated payments, and currency differences can all add to the chaos. This process can be carried out manually, where each transaction is compared, or with an automation tool. The latter is definitely more efficient for larger institutions, with even larger volumes of data.
CTA: Schedule a demo with Osfin.ai and find out how your reconciliation time can be shortened extraordinarily!
3. Checking for Discrepancies
When transactions are being reconciled, some discrepancies may be flagged–mismatched amounts, duplicate or missing entries. Maybe a customer payment has been recorded but not settled in the bank account. The operations team will look into these discrepancies further, investigating them, and making sure they’re addressed before they become too big to handle.
Automation tools like Osfin.ai can be useful here. Not only can Osfin flag such discrepancies, but also label them appropriately with an accurate reason showing why they are still unreconciled, which helps the team address the issue and makes your records audit-ready.
At this stage, the team may need to double-check data sources, communicate with internal departments, correct errors, and review transaction histories, but it all builds up to the perfect month-end reconciliation report.
4. Document Preparation
With the discrepancies resolved and the data reconciled, all supporting documents are organized and compiled, creating a ready reference for the month's financial activities. This should include all matched transactions, discrepancies and their solutions, and additional comments for context.
This audit trail keeps you prepared for internal reviews and regulation checks, making it stress-free for everyone involved.
5. Final Review
The final step in the monthly reconciliation process is the review of all reconciled transactions, usually by senior operations staff. At this stage, the operations team is busy ensuring every discrepancy has been resolved, and that the financial statement meets the requirements of central banks and financial regulators. Once validated, these documents are locked and can be used for future decision-making.
Importance of Month End Reconciliation
An organized month-end account reconciliations process is a strategic move that impacts multiple areas of your organization.
There’s more than one way an organized month-end reconciliation can benefit your organization. Let’s break it down:
1. Maintain Your Financial Data
Accurate reconciliation ensures every transaction is accounted for. Balanced amounts in internal records align with external records, ensuring that your financial data is a true reflection of your position.
2. Make Informed Decisions
With reconciled data at your fingertips, your decisions become better in a domino effect. Solid reconciliation gives executive teams a dependable foundation for budgeting and capital allocation, improving the quality of decisions made for the company.
3. Stay Compliant
If you work for a financial institution, you are well acquainted with the list of rules and regulations to be complied with. Month-end reconciliation helps meet these regulatory requirements on time and accurately. In the US, Sarbanes-Oxley Act (SOX) and Bank Secrecy Act (BSA) regulations define their requirement for financial monitoring, while Basel III and IFRS 9 are international frameworks. A month-end reconciliation reduces the risk of compliance breaches for these regulatory frameworks
4. Maintain Stakeholder Relations
Investors, board members, and partners want transparency and reliability. Month-end reconciliation shows that you’ve got things under control, building confidence with your stakeholders.
5. Stay Ahead of Problems
What if there are discrepancies in your records, duplicate entries, or unmatched trade settlements? Reconciling regularly helps catch these anomalies early, letting you soften the blow early on. This early detection contributes to the effectiveness of your financial operations, and prevents compliance issues.
Another factor to consider is the rapid evolution of the financial industries. With new products or account types ready to be introduced at any point, make sure that your ledger documentation is adaptive to new changes.
Steps to Automate Month End Reconciliation
Automating reconciliations can transform the month-end close process. Accelerate the process, reduce the pressure on your accounting and finance departments, and shift your focus to the results. Here’s how you can automate the reconciliation process:
Step 1: Identify Data Sources
Start by mapping out all the systems your institution uses. These include your core banking, payment platforms, loan servicing software, crypto wallets, etc. Knowing where your data lives is crucial for setting up automated data flows. Osfin.ai integrates with multiple data sources via API, automatches varied file types and creates a unified view of your records, making this step painless.
Step 2: Choose The Right Automation Tool
Look for a platform that meets your requirements. Pick a platform that aligns with your data volumes, integration needs, and the level of customization your workflows demand. You’ll also want something that supports real-time visibility, audit trails, and exception handling.
Osfin.ai offers intelligent automation built for scale, capable of processing millions of entries in a matter of minutes, with customizable workflows and real-time dashboards for your operations team.
Step 3: Match Records
Most automation tools offer some level of transaction matching. These can include rule-based logic, fuzzy matching, or AI-assisted suggestions.
Once connected, Osfin.ai automatically matches transactions across systems using advanced analytics. Such matching can handle most entries automatically, minimizing the chances of human error in the process.
Step 4: Detect Discrepancies
Your system should automatically catch mismatches, missing entries, or abnormal patterns in real time. Flagging these early helps teams act before the month-end close is delayed. Discrepancies can then be routed for review or escalated to dispute resolution workflows.
Step 5: Train Your Team
When using an automation system, it’s best to have your team on the same page. Equip your accounting and operations teams with the knowledge to work with the new system. Provide training to interpret results, fine-tune rules, and check for discrepancies wherever possible
CTA: Get started with Osfin.ai and discover the wonders automation can do for your month-end reconciliations!
How Osfin Helps in Month End Reconciliation
As technology develops at an exponential rate, keeping pace is our best option. AI-based automation will completely transform your reconciliation process, letting your finance and accounting teams to move away from repetitive tasks and focus on high-value, strategic operations that drive business growth.
Osfin.ai can step in here and take the load off your shoulders. It provides cutting-edge reconciliation software that guarantees 100% accuracy. With seamless multi-source data integration, intelligent matching algorithms, and advanced anomaly detection, Osfin.ai empowers you to efficiently streamline your month-end reconciliation.
CTA: Are you ready to take your first step towards effortless reconciliation? Book a demo with Osfin.ai now!
FAQs
1. What do you mean by reconciliation?
Reconciliation is the process of matching and verifying financial transactions between two records. For financial institutions, it’s ideal to reconcile large volumes of transactions quickly and correctly to maintain trust, comply with regulations, and close the books each month without surprises.
2. Where Does the Month End Close Process Begin?
The month-end close begins with gathering all financial data, such as invoices, receipts, and bank statements, to prepare for reconciliation and record all transactions accurately. This first step underpins the importance of clean, organized data in maintaining your company’s financial health.
3. How Long Does a Month-End Close Take?
Depending on how big your company is and how many transactions are recorded on a monthly basis, the time for a month-end close can vary. Typically, this process can take from a few days to a week.
4. What is the Month End Close Checklist?
A month-end close checklist includes steps like gathering financial data, reconciling accounts, reviewing discrepancies, preparing financial statements, and conducting analysis for accurate reporting. With a close checklist, your teams can stay consistent and avoid missing steps.
5. How does Osfin.ai help with reconciliation?
Osfin.ai can automate reconciliation for your institution from end-to-end. Even a small selection of Osfin.ai’s solutions includes data integration and validation, real-time insights, and handling millions of entries in minutes. Using Osfin.ai for your reconciliation needs ensures fast, smart, and accurate financial management.
