Payment reconciliation involves ensuring that balances are correct against payments that have been processed. When handled manually, payment reconciliation can be time-consuming and error prone as it involves navigating multiple platforms and payment types. This challenge increases even more as a business expands and payment volumes rise or fluctuate.
Here we cover the ins and outs of payment reconciliation in accounts payable departments, as well as how modern platforms and automation can help streamline the AP process and reduce errors.
What is Payment Reconciliation in Accounts Payable?
In accounts payable, the payment reconciliation process involves verifying that bank account balances are accurate against the latest payment information (or transactions). The frequency of this process depends upon the organization and its transaction cadence, but daily, weekly, and monthly routines are typical. Often the process is slightly different for each payment type as well, with ACH payments requiring a different reconciliation process than check payments, and so on.
Examples of Payment Reconciliation
The process of payment reconciliation begins with open bills and invoices in a business’s Accounts Payable (AP) system that indicate the need to pay suppliers for services or products. Those businesses then execute payments against the open bills from suppliers. When those payments are processed, the AP department must ensure their records are accurate in order to prevent any under payments or over payments.
The bills are then marked as paid within the ERP system, and the designated bank account will reflect the associated payment transactions. Payment reconciliation involves double-checking that all the numbers come out right in the end, and it is critical to maintain the correct bank balances, and account for all payments.
The exact process of payment reconciliation varies depending upon the type of payments made. For example, ACH payments may be reconciled soon after they are made since they show up on the bank record after they are initiated. Meanwhile, check payments take longer to reconcile since they don’t appear until the payee has received and deposited the check. In fact, there are often slightly different processes needed for each type of payment, including:
- Credit Cards
- Virtual Cards
- International Transactions
Using a platform such as MineralTree’s TotalAP, which processes all domestic transactions as a batch payment, can streamline the reconciliation process. This is because it withdraws all the payment funds via ACH ahead of time, then handles the implementation of payments on the organization’s behalf to suppliers across their preferred formats.
The Payment Reconciliation Process
The basic process of payment reconciliation requires connecting and comparing numbers from the ERP system with the bank ledger. Finance teams can use a bank feed to verify and track payments against accounts.
Broken down step-by-step, the process is as follows:
- The business identifies the open bills that need to be paid, typically based on payment terms and supplier contracts.
- The business can then group multiple bills for a supplier into one payment or process a separate payment for each bill.
- The business then initiates payment by writing a check, sending an ePayment (ACH, credit, debit, virtual card or Wire).
- After processing payments, the business needs to mark each bill in the ERP as paid.
- Lastly, the business must check their bank feed to tie the payments back to their ERP transactions.
AP platforms like MineralTree can simplify reconciliation by automating the AP process from invoice capture all the way through payment execution. For example, MineralTree’s TotalAP initiates a single debit transaction for a payment batch, and automatically closes all the bills upon successful payment processing, syncing information automatically between the AP and ERP systems.
Advantages of Payment Reconciliation
Payment reconciliation is a vital part of the AP process because it helps ensure books remain in order. There are many benefits of payment reconciliation, including:
- Saves time overall for accounting and finance teams.
- Reduces errors and fraud.
- Simplifies cash flow management and financial closes.
- Provides greater visibility into supplier payments.
Companies that perform manual payment reconciliation are more likely to suffer from errors. Additionally, manual processes require much more time and energy to maintain as AP teams must navigate multiple platforms to track invoice payments and bills. Meanwhile, automating the accounts payable workflow streamlines this process, saving companies significant time and valuable resources.
Challenges in Payment Reconciliation
Payment reconciliation is often a heavy pain point for organizations, particularly those that handle more than 500 payments per month. Recent supply chain disruptions have aggravated the process even more due to resulting delivery and payment delays. Unfortunately, these challenges compound when reconciliation is handled manually.
Manual payment reconciliation leads to the following additional challenges:
Payment remittance is a slow process that depends on human labor. Additionally, AP teams commonly have to answer questions from their suppliers, resulting in more time spent answering questions than focusing on improving the AP process. Remittance questions are the third most common AP-related inquiries that respondents receive from their suppliers.
Prone to Mistakes
Human errors are common, causing duplicative work. Getting the right information spread across multiple platforms can lead to mistakes, which may negatively impact supplier relationships.
Audits can be time-consuming if the payment reconciliation is not done correctly. An audit is often done by a third party or internal team to check the financial statements of a company. A time-consuming audit can mean higher costs for your organization, since auditors have to go beyond their budgeted hours.
Increased Fraud Risk:
Suspicious activity is more difficult to detect across a manual payment reconciliation process, increasing the risk of fraud.
Manual payment reconciliation leads to cash management problems since the business may not have an accurate record of how much cash is available on hand.
Payment Reconciliation Best Practices and Tips
To improve your payment reconciliation process, we recommend the following best practices and tips:
Invest in an AP Automation Platform:
Remove Manual Processes:
If full automation isn’t feasible for your organization, then remove as many manual processes as possible in order to increase the efficiency of payments. This will lead to easier reconciliation.
Set a Schedule:
Set a clear payment reconciliation schedule with strict guidelines for your organization.
Review the Process:
Review the reconciliation process within your organization and assess for opportunities to increase efficiency.
Payment Reconciliation Case Studies
Many organizations are already reaping the benefits of AP automation when it comes to payment reconciliation. Here are just a few examples how organizations have benefited from an automated payment reconciliation process.
Quartzy No Longer Manually Performs Credit Card Reconciliations
When leading life-science product distributor Quartzy adopted MineralTree’s SilverPay virtual card payment option, they experienced fully-automated payments with seamless reconciliation. They no longer have to manually perform monthly credit card reconciliations, which is a huge boon considering their high payment volume. Now, instead, they can devote more time to higher-value initiatives.
cCare Saves 80% of the Time Spent on Manual Processes
California Cancer Associates for Research and Excellence (cCare), the largest full-service private oncology and hematology practice in California, recently turned to MineralTree for help addressing AP challenges. By adopting MineralTree Classic, AP staff members were able to save 80% of the time they used to spend on manual processes, making handling reconciliations that much easier.
The great thing about an AP automation solution like MineralTree is that it goes beyond the capabilities of a typical ERP system. MineralTree feeds the ERPs directly and closes all the bills with the associated payments. It syncs directly with the ERP system, updating the AP platform anytime the ERP system updates and vice versa. In other words, businesses no longer need to navigate their ERP to track open bills and close paid bills, which significantly streamlines reconciliation, making it easier to effectively manage your AP process.
Frequently Asked Questions
Why Do Companies Need a Process for Reconciling Payments?
Companies need to verify that the account balances match against the executed payments and tie these back to the ERP system.
Why Is Payment Reconciliation Important?
Payment reconciliation can help companies identify errors or fraudulent activity. By incorporating payment reconciliation into the AP workflow, companies can ensure their balances are correct against the payments processed.
How Often Should Payment Reconciliation Occur?
Payment reconciliation is dependent on a business’ internal payment processes. Typically, it occurs daily, weekly or monthly.
How Does MineralTree Go Beyond the Capabilities of a Typical ERP System?
MineralTree has the capability to feed information back and forth between any ERP system, resulting in our automation platform directly closing any relevant bills. With our automation tool in place, customers no longer need to navigate their ERP to track open bills and pay closed bills.