Automating Reconciliation: 7 must-haves and the #1 most common mistake to avoid

FinLync | March 25, 2022

A necessary evil. That’s how most finance teams think about the reconciliation process. But, thanks to advances in technology and computing, the days of a manual, tedious matching process between bank account transactions and a company’s general ledger are in our rearview mirror.

For companies who haven’t yet advanced to automated reconciliation or are considering a reconciliation process improvement project, the first step is to build an unshakeable business case for new financial technology.

With your business case in mind, these are the 7 key things to know about reconciliation solutions in 2022:

  1. Rules are obsolete. Creating and maintaining a rats’ nest of if/then statements and countless inter-dependent reconciliation rules was once considered the height of innovation. Brilliant minds developed intricate maps of instructions and their work is admirable. But the time saved by rules-based automation is often cancelled out by the time needed to maintain these complicated rules. It also adds the challenge of a single point of failure in the one or two people who know the intricacies of the rules by heart. Now that technology has advanced, it’s time to advance beyond these admirable, yet outdated, rule systems.

The better solution: Toss the book of rules out the window with a one-two punch: machine learning AND artificial intelligence.  When done right, an artificial intelligence engine will automatically match your incoming transactions PLUS it will learn as you resolve exceptions, applying the characteristics of the now-resolved exception to future transactions. This means the number of future exceptions is dramatically reduced. All recon tools tout some form of matching technology, but only when matching technology is paired with machine learning will you be able to escape the dreaded list of rules. Think of it as cruise control for your reconciliation process.

  1. Disconnected systems impede accuracy and increase vulnerability to fraud. The very nature of reconciliation involves two sources of information: your ERP, and your bank(s). Nearly every reconciliation solution on the market requires introducing a third source to perform the transaction matching, and then the reconciled data must be returned to the ERP for additional processing. This third source introduces the worst of both worlds: it does not leverage all the data in your ERP so the matching will never be as accurate as it ought to be, and it creates more work – exactly what automation is supposed to fix. Software providers will swear their ERP bridges or connectors are seamless but, in reality, these integrations are constantly breaking or do not deliver the level integration needed to get the job done properly.

The better solution: Seek out reconciliation software that embeds right inside your ERP. Just like an Apple or Android app embeds into your smartphone, reconciliation apps are tailor-made to install into your ERP. Matching accuracy is unrivaled because the ERP-native app can access the ocean of invoices in your ERP and combines with payment remittance and acquirer statements to expedite next steps. Plus, your IT team will love it, too.

Embedded reconciliation tools vs. legacy

  1. Delayed data obstructs speed. Most reconciliation offerings don’t begin working until a human being kicks off the process. Bank transactions hit your account around the clock, yet legacy reconciliation tools wait until a day-old (or more) statement is manually imported, and then can never catch up. Finance teams run like a hamster in a wheel – always beginning a day behind and never catching up because they’re spending valuable time manually importing data from one source to another. For those who pay a princely sum to get multiple bank statements per day, the data is still stale because it is hours old and doesn’t keep up with the real-time nature of transactions.

The better solution: With the ubiquity of bank APIs, there are no reasonable excuses to accept anything less than real-time bank data. More than 80+ bank APIs are live and being used today and APIs delivering transaction data are available from a variety of financial institutions around the globe, including household names like Wells Fargo, HSBC and JPMorgan as well as boutique and regional banks. Because bank APIs deliver your bank data as transactions happen, your reconciliation process can also begin instantly – not just automating the process but speeding it up.

  1. Process improvements are undermined. AP teams are so busy chasing down exceptions that they barely have time to close the books, much less do the deep analysis required to group and categorize exceptions, and even less time to plan an initiative aimed at fixing the persistent culprits. Most reconciliation tools stop at reconciling your data, they don’t help you address the cause of repeat exceptions.

The better solution: Smart reconciliation tools will automatically bucket your exceptions by reason so you can prioritize your process improvements. Identifying the most-common sources of exceptions means your organization is a giant leap closer to fixing these persistent issues.

Learn how to close the book on manual reconciliation and accelerate the process

  1. More systems = more maintenance. In #2, we described how adding a third system, beyond your ERP and your bank(s), to your reconciliation puzzle creates vulnerabilities to fraud and inhibits match accuracy. Adding in this third system also creates more maintenance for the finance team and your IT team because two sets of internal controls and authorization levels must be maintained. Every time an access level is changed, a new employee starts, or a team member leaves, the job of editing their authorizations must be done twice: once in the ERP and once in the reconciliation middleware.

The better solution: Here again, embedding your reconciliation tool inside your ERP is the optimal approach. Embedded tools simply adopt the existing authorizations and controls already established in your ERP. Any time the ERP controls are updated, it flows immediately and automatically to your embedded tools. No need to maintain a second set of authorizations, no need for extra security measures since it lives safely within your ERP.

  1. Middleware increases vulnerability to fraud. IT teams are allergic to new software for a reason: it means they are now responsible for keeping the system and the data it holds safe. Adding another link in the chain of data custody invites cybersecurity attacks on the highly sensitive information of reconciliation.

The better solution: Account reconciliation solutions that live inside your ERP are safe behind the existing firewall that your IT team has already painstakingly built. IT teams are also much more likely to sign off on these types of solutions because they consolidate systems and enables your ERP to do more – increasing the value of your ERP – rather than detracting from it.

Fraud risk in embedded vs. legacy reconciliation tools

  1. Buying a bread truck when you need a breadbasket. The era of one-size-fits-all platforms is a relic of the past.  With finance team resources and budget already tight, there’s nothing more painful than paying for functionality you won’t use and don’t need. Several of the most common reconciliation offerings come with more features than most companies actually need, yet they won’t allow you to de-couple the capabilities important to your use cases – leaving finance teams in a tough spot: pay for more than they need or continue their existing inefficient processes.

The better solution: As the pendulum of technology corrects itself away from one-size-fits-all behemoths, Lego stacks of specialized apps have emerged as the better way to serve reconciliation needs. A simple solution for a simple, yet time-consuming, process.

As you’re shopping for the right fit to solve your reconciliation challenges, keep in mind these 7 points. But most of all, avoid the #1 most common mistake that companies make when automating their reconciliation.

Learn how to close the book on manual reconciliation and accelerate the process

The #1 Most Common Mistake Companies Make when Automating Reconciliation: Don’t just automate, accelerate the reconciliation process.

The search for account reconciliation software is not for the faint of heart. Though you may follow all the recommended best practices  and cover every last detail, you can easily miss the forest from the trees, because the most common mistake is having a goal of only to automate reconciliation. In 2022, the goal for reconciliation should not be to simply automate.

Today’s technology is plenty advanced to go beyond automation and speed up the entire process from start to finish. Yet too many companies make the mistake of aiming just for automation because they aren’t aware that both automation and speed can be achieved, one in the same.

What are the benefits of automating and accelerating the process?

The promised benefits of automated reconciliation are known to most finance professionals. All kinds of reconciliation software will promise to reduce the number of hours spent on this important yet mundane task. But as we’ve discussed, most of the options on the market today come accompanied by extra manual work, increased exposure to fraud, add new maintenance needs to teams that are already stretched thin, require endless lists of rules or they over-solve your problem.

 

When your goal is to automate and accelerate the process, you can reconcile transactions in real-time, instantly.  Clearing open items in real-time achieves complete reconciliation accounting and means your company can close the books significantly faster. All of this also allows for credit limits to be freed up as payments are received, deliveries released and more sales orders to be taken. What would closing the books faster mean for your company?

How can you achieve automation and acceleration?

The essential ingredients to achieving automated and accelerated reconciliation are:

  1. Receiving bank data in real-time. The only way to obtain bank data in real-time is via bank API connectivity. Most companies will tell you “bank APIs are just not there yet.” But in reality, most banks’ corporate APIs are already in use, or the bank is actively building APIs to comply with open banking regulations. View a list of banks whose transaction APIs are live with clients via the Bank API Catalog. Without bank API connectivity, you are at the mercy of your bank’s schedule – working from stale data means your reconciliation process always starts on the back foot. With real-time bank data, your system can be reconciling transactions while you sleep.
  2. A tool that embeds inside your ERP. Integrations do not go far enough – seek out a tool that is native to your ERP. Because integrations always have limits, these workaround connections cannot access the ocean of all the data in your ERP. Without access to all your ERP data, accuracy and speed are both reduced. Apps that are embedded inside your company’s system of record are superior because they live inside the four walls of your ERP and as such, have total access to your ERP data.
  3. Not just AI, machine learning, too. Any automated reconciliation offering will have a matching mechanism that’s powered by some form of artificial intelligence. But if the matching engine doesn’t also learn from how your team resolves exceptions, applying those learnings to future matching processes, you are leaving the opportunity to accelerate your reconciliation on the table. Evaluate solutions that offer smart matching techniques and a system that learns from you as you go along.
  4. Automatic exception grouping. To escape the monthly hamster wheel and take steps to decrease the overall number of exceptions, hunt for reconciliation software that groups exceptions by reason. This analysis can be done automatically which allows you to prioritize fixing the most common exception culprits and reduce the overall quantity of exceptions – resulting in – you guessed it, a faster reconciliation process.

 

The bottom line for Treasury is that reconciliation doesn’t have to be the dreaded time-consuming manual process many feel it is. By implementing an integrated reconciliation solution that automates and accelerates operational activities with a direct data connection between your ERP and banks, treasurers can achieve a real-time reconciliation process that eliminates data lag times, streamlines data entry, lowers fraud risk, and achieves a higher level of data accuracy and more quickly– all at a lower cost. Before you begin your search for the ideal reconciliation tool, be sure your goal is building for the future, not for yesterday.