Table of Contents
Key Takeaways
- Manual reconciliation is a tedious process that results in errors, guesswork, and low transparency.
- Manual reconciliation makes it difficult to scale or identify growth opportunities.
- Automating the reconciliation process accelerates cash flow, reduces or eliminates errors, and offers granular reporting.
No business can adequately function, much less remain in compliance, without reconciling their accounts.
Reconciliation has long been a manual process, requiring hours upon hours of tedious data entry each month. Even today, with emerging technologies designed for this function, an average of six in ten finance organizations still rely heavily on manual reconciliation.
At the same time, manual data entry enables human error. A recent survey of accounting professionals from Gartner found that 18% of respondents admit to making mistakes daily. Meanwhile companies that leverage technology to automate manual tasks see a 75% reduction in errors.
But, we are getting ahead of ourselves.
Manual reconciliation has several other pitfalls that magnify with each passing month. So, before surveying yet another spreadsheet, check out these six problems with manual reconciliations, so you can solve them and improve your reconciliation process in the future.
What Is a Manual Reconciliation?
Manual reconciliation is when an accounting professional compares general ledger and payable ledger to ensure the books are balanced. It’s important to note that manual reconciliation isn’t limited to paper statements. Transactions that must be recorded and reconciled by hand in digital platforms are also considered manual.
What Are The 3 Stages to Reconciliation?
The stages of reconciliation are fairly straightward. However, they can be time-consuming to do manually, especially when you have a high volume of transactions. Below is the basic, three-step formula all reconciliations tend to follow:
- Comparing international records
- Identifying open payments and invoices
- Make adjustments
What Are The Types of Reconciliation?
Reconciliation—whether manual or automatic—follow the same general processes. However, each of these reconciliation types, if completed manually, will require multiple accounting professionals and approvals to ensure accuracy and month-end deadlines.
Below are brief descriptions of the main types of reconciliation.
One-Step vs. Multi-step Reconciliation
The most basic form of manual reconciliation is the one-step process. This approach involves matching an internal transaction record with a bank statement. Multi-step reconciliation, however, requires three or more records. For example, you may use your ERP record, a bank statement, and a credit card or online wallet record.
Bank vs. Non-bank Reconciliation
Manual bank reconciliation ensures that your bank statements match your internal systems. A non-bank reconciliation deals with other transaction statements, such as credit card accounts, PayPal, and similar services.
Cash vs. Non-cash Reconciliation
Cash reconciliation is when you confirm payments through matching expected cash flow and actual cash flow. Comparing these two categories makes it easier to identify unexpected expenses.
Non-cash reconciliation deals with alternative payment methods like customer loyalty points, referrals, and rewards. This would require both an internal ledger that lists customer points and usage, as well as a bank statement or another external ledger.
6 Problems With Manual Reconciliation
1. It’s Error-Prone
Be it an entry made to the wrong account, omission, compensating error, or another kind of inaccuracy, manual reconciliation is prone to human error. This results in either additional time spent fixing mistakes or producing inaccurate books.
Beyond simply providing inaccurate information, errors can also be a barrier to catching fraud. According to a global fraud study, the typical organization loses 5% of annual revenue as a result of fraud.
How to Solve: Automate data entry and limit financial account permissions to drastically reduce errors and opportunities for fraud.
2. There’s Guesswork Involved
In addition to manual human error are the inaccuracies that result from best guess accounting. Accountants often receive incomplete information and fragmented data, which means there’s quite a bit of guesswork involved in the reconciliation process.
As the number of accounts, transactions, and data increases with company growth, reconciliation becomes more complex. This results in even more guesswork and errors, as well as more open items with missing information in your accounts.
How to Solve: Leverage real-time data, enhanced reporting, and automated reconciliation to minimize guesswork and forecast accurate budgets.
3. There’s No Control
Discrepancies often emerge between the company’s books and transactional records, whether due to an incorrect product delivery, a project that runs over, or simply different operating structures within different departments of your organization.
Without real-time visibility into transactions, finance teams are left flying blind. They lack the context necessary to accurately align different data points, formulas, and records. To keep pace in today’s business world, accountants need access to real-time, error-free data—something that is virtually impossible with manual reconciliation.
How to Solve: Use a comprehensive AP solution that seamlessly plugs into your ERP.
4. It Frustrates Your Finance Team
The reliance on manual reconciliation means that employees are caught between delivering reports in a timely manner and being 100% accurate. It can be difficult to strike a balance, which can cause employee stress.
Furthermore, your accountants likely enjoy tasks that allow them to exercise their analytic skills and grow in their career. When manual reconciliation takes up much of their time, they can feel frustrated, stuck in their role, and lacking growth opportunities, which can negatively impact talent retention.
How to Solve: Empower accounting automation professionals to use their analytical skills and develop professionally by eliminating manual tasks.
5. International Transactions Complicate The Process
A company may cater its processes to its native currency, while maintaining vendors using different currencies. This creates imbalances between company systems and the corresponding bank documents.
Fees will often modify the transactions themselves, as banks and other intermediaries may record and output the data as a lump sum. Manually sifting through which financial institutions are lumping together ABC fees on top of XYZ transactions is laborious and error-prone.
Time differences are not always reflected in the transactional data. Because the balance sheet reflects a specific moment in time, manually adjusting for this can impact the timeline and accuracy of a company’s reconciliations.
How to Solve: Ensure your AP/AR solutions easily process international transactions.
6. It’s Inefficient
Manually entering, sharpshooting, importing, and exporting data take time—time that could be spent on other more strategic tasks that could impact the future of the business. You hired your finance for their strategic know-how and analytical skills, so wasting their energies on data entry drains valuable talent resources.
We touched on this before, but it’s worth mentioning again. Given that tools exist to automate this tedious process, it is simply inefficient to rely on manual reconciliation.
How to Solve: Upgrade legacy systems and manual processes with automated tools to reduce your workload and find opportunities to scale.
Ready To Ditch Manual Reconciliation?
Automating reconciliation with accounting automation tools improves control and empowers employees to remain in compliance. Leveraging finance automation software will free up your accountants’ time to focus on more strategic tasks, which will positively impact employee motivation, team productivity, and the business’ bottom line.
Try Teampay and discover how you can transform your reconciliation process for efficiency, compliance, and accurate reporting.
