Do you want to make sure that your small business budget is on point? Here's how invoice reconciliation actually works in practice.

How Invoice Reconciliation Actually Works in Practice

About 39% of all invoices sent in the US are paid late.

Invoices are a staple for most businesses, ensuring seamless payments from your clients and to suppliers. But as much as we send and receive invoices every day, invoicing isn’t as straightforward as it seems on the surface; it’s more than just sending out payments and receiving cash, and vice-versa.

Processes like invoice reconciliation ensure that all incoming and outgoing invoices achieve their intended purpose. But what exactly is invoice reconciliation, and how do you reconcile invoices? Well, keep reading and find out.

Today, we’ll be looking at what invoice reconciliation is, how it works and why it’s important for your business.

What Is Invoice Reconciliation?

Invoice reconciliation is the process where businesses make sure that all incoming and outgoing invoices align with their transactions. It entails looking at all invoices and checking whether they match with their respective bank statements. This ensures that all accounts are balanced and that you’re not paying for goods you never received.

In essence, reconciliation means using more than one record to make sure financial figures match across the board. It’s a crucial process for balancing invoice accounts and ensuring all account payables are in check.

Although invoice reconciliation should be routine in business, most businesses only reconcile their invoice under specific circumstances. Here are a few scenarios that may warrant invoice reconciliation:

  • You didn’t receive full payment for an invoice
  • A delay in product delivery delayed the invoice
  • International currency transactions leading to unanticipated charges by the bank
  • Miswritten or misplaced invoices
  • Timing issues regarding when deposits and payments reflect

Most companies reconcile their invoices because of delayed payments. New data shows that approximately 13% of invoices delay. This is especially true for small and medium enterprises.

How Do You Reconcile Your Invoices

As a small business owner, reconciling your invoices might seem like a daunting task. However, given you only see a handful of transactions every week, you don’t have much to worry about.

Here are a couple of tips for reconciling your invoice correctly.

Software Is Your Friend

The modern age has no space for pen and paper activities, so unless you’re stuck in the past, you’ll need proper software to reconcile your invoices. There are tons of software to choose from, but the most basic one is spreadsheet software. 

Microsoft Excel will help you reconcile your invoices, but it may be cumbersome and time-consuming. A way better alternative is to use accounting software to reconcile invoices in a snap. There are lots of accounting software to choose from, so pick the one that suits your specific needs.

The right accounting software will match your bank statements to invoices automatically. This is much better than manually linking bank statements to invoices. Software like Suretax accounting will make reconciling your invoices a cakewalk.

Create a Solid Invoice Reconciliation Process 

While software helps take a huge load off the entire process, it won’t do everything. You have to create a systematic process for reconciling your invoices. An example of a proper reconciliation process is:

  • List your suppliers’ invoice by month
  • Run reports to show paid and overdue payments
  • Use software to separate paid invoices from unpaid ones

Just like that, you’ll be able to reconcile your invoices in no more than half an hour. It’s worth noting that different suppliers have different invoices. Where one supplier places, specific information won’t be the same as where another does.

To avoid any confusion, it’s important to look through information to see where suppliers place crucial information on their invoices. Examples of information to be keen on include the due date, invoice number, amount payable, and so on.

Develop an Invoice Checklist

An invoice checklist should be a crucial part of your invoice reconciliation process. The checklist ensures that you cover all bases when reconciling your invoices. A few touchpoints your checklist should cover include:

  • The date you or the client will pay the remaining balance
  • Whether you have a discount for early payment
  • What amount the client has rolled over from the previous balance
  • How much transaction or currency fees did the bank charge
  • Did you pay too much or too little for a particular product

The checklist should cover elements of your invoice process that are beyond accounting software. If everything checks out, you’re good to go.

What Are the Benefits of Invoice Reconciliation?

Reconciling invoices is important to settle any discrepancies in financial data. This process is incredibly beneficial to businesses of all sizes. Here are a few benefits of invoice reconciliation.

Helps Detect Fraudulent Activity

As a business operator, you need to keep your eyes peeled for any fraudulent activity. Reconciling fraud can help identify fraud so you can take the right steps. Without proper invoice reconciliation, financial fraud can happen right under your nose, and you’ll be completely oblivious.

Keeps Track of Payments

Steady cash flow is necessary to ensure your business stays afloat and grows. Reconciling your invoice helps monitor all payments to ensure you have enough working capital for your business. It’s also important for maintaining the credibility of your business by ensuring you pay whatever you owe to vendors.

Keeps Your Book of Accounts Up-to-Date

An integral part of reconciling invoices is tracking financial statements. The domino effect is that this ensures that all your book of accounts are up-to-date. However, you’ll need to find the best accountant you can find to ensure everything lines up across the board.

Adopt Invoice Reconciliation and Keep Your Finances in Check

Payments and cash flow form the backbone of any business. Adopting invoice reconciliation ensures that your company’s financial data lines up to maintain a proper relationship with your clients and suppliers. Adopt a proper strategy for reconciling your invoices for your company’s benefit.

For more informative content, be sure to check out the other articles on the site.

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