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One of the largest headaches reported by businesses last year? Chasing up customers who fail to pay on time.
For companies with many customers or supplier invoices, managing these payments can become an ordeal in itself.
But there’s an entire process for businesses to keep a check on invoicing, including who has paid and who’s still yet to pay.
In this blog, we’ll be explaining what invoice reconciliation looks like, as well as how to optimize your workflow to make it as efficient as possible.
What is invoice reconciliation?
Invoice reconciliation means to verify and match invoice documents to your bank statements. In other words, it’s double-checking that the money you were supposed to receive has been collected, and the money you owe on every vendor invoice has been paid.
The invoice reconciliation process exists to help business owners with the mountains of documents and emails they constantly receive. With subscriptions, supplies, and all-important customer communications, it can become easy to lose track of payments.
Reconciling invoices ensures that business owners or their finance teams take the time to verify all of the transactions on their bank statements. This is important in preventing fraudulent expenses and collecting what’s owed on time.
It can become even more complicated when some expenses are paid with cash, and others need card payment reconciliation.
Account reconciliation is also important in order to maintain cash flow sustainably. Ensure that there isn’t a disconnect between when you’re required to pay for outgoing services, and when your clients pay. This fits into the overall business financial planning function.
Invoice reconciliation process
In theory, the invoice reconciliation process can be as simple or complex as you like. However, most businesses (no matter their size) stick to a simple step-by-step checklist in order to reduce mistakes while staying efficient. 86% of SMEs work this way, with a manual invoice reconciliation process.
Since invoice reconciliation does not add value to the business, it’s one of a number of tasks that can be automated so that the finance team can use their time on improving the business.
The classic invoice reconciliation workflow
Separate incoming and outgoing invoices into two separate folders
Select a reporting period (typically one month or one quarter)
Gather a bank statement for the reporting period
Review incoming invoices and match the invoice number and invoice amount to outgoings on the bank statement
Mark each invoice as ‘complete,’ ‘partially paid’ or ‘unpaid’
Pay any incomplete invoices
Review outgoing invoices and match the invoice number and invoice amount to incomings on the bank statement
Mark each invoice as ‘complete,’ ‘partially paid’ or ‘unpaid’
Contact customers for any unpaid invoice and note changes on the balance sheet
Close any remaining open invoice
How to optimize invoice reconciliation
The bank reconciliation process can be quite manual, especially if you have lots of customers and expense invoices to match up. Moreover, this task is typically low priority since it’s considered “admin” work, rather than revenue-generating.
There are ways to optimize the invoice reconciliation process in order to make it more efficient for everybody. The main factors to consider are the time it takes to perform, and the number of mistakes.
Templates
The information you require from customers or other vendors to create invoices is almost always the same:
Name
Address
Contact details like an email address or telephone number
By creating a Google Form or template to collect this information, you save on chasing up customers when it’s time to create invoices. If you need to find missing contact details, you can often find them with online tools. These inputs are necessary parts of invoice reconciliation and will lead to bottlenecks in the wider accounts receivable process if incomplete.
While this is probably obvious, actually requiring clients to use your templates may not be. This simple step ensures that the format is consistent and you have all the information you need.
Automated follow-ups
One clever way to work with software is by introducing automated follow-up messages when an outstanding invoice is left unpaid or incomplete. Not only does it save on awkward emails, but also means that your people don’t have to waste their time on repeated communications time and time again.
For example, it could be useful to set up an automated billing email 14 or 30 days after your invoice was first sent. By connecting the template to software like Zapier, you can ensure that only the incomplete payees receive these reminders.
The software creates a workflow based on inputs from your bank, which means that invoice processing is technology-dependent, rather than reliant on human resources.
Customer incentives
If your company is experiencing frequent problems with on-time invoice payment, it may be beneficial to introduce incentives. Alongside making the process easy for clients, some companies introduce discounts or extra benefits for early payment.
While this decreases overall revenue, early or on-time invoice payments ensure the availability of working cash flow. This may be more important than profits, especially for companies with a focus on growth and scale.
With late payments being the largest threat of bankruptcies, early payment incentives could be a good way to counteract poor cash flow and the consequences it brings.
Software
Finally, accounting software is one of the most conclusive ways to reduce both errors and the time it takes to reconcile invoices. By integrating a software program with your bank, you no longer have to rely on your finance team to find the time for this task.
Moreover, using software to perform invoice reconciliation reduces the chance of errors. It doesn’t matter how much star-quality your finance department holds, invoice-to-payment matching has been listed as the second-largest concern for accounts payable.
By relying on software to perform invoice reconciliation, your team can access real-time insights into its cash flow and make strategic changes as and when they are required. No more waiting for historic data that becomes out-of-date before you can react.
Outsource your invoice reconciliation to Spendesk
With built-in accounting automation, Spendesk can drastically reduce month-end closing time (up to 4 times faster). Moreover, a huge range of integration possibilities means that your banking and follow-up processes don’t require a second thought.
You’ll avoid late fees and streamline the overall accounts payable process to transform how your company operates.
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