Finance teams lose sleep every accounting period trying to close the company’s books. Accountants spend large amounts of time checking, tracking and poring over balance sheets to make sure the financial figures are correct.
But there’s a faster, more accurate way for small businesses to conduct their expense reconciliation process—and this blog post will tell you how.
Expense reconciliation is the process of making sure a company’s business expenses match what was recorded in its internal accounts—basically a smaller cousin of the financial accounting family.
The goal is to make sure your bank transactions tally with what’s recorded in your financial statements. This lets small business owners like yourself accurately forecast cash flow and budget for future spending.
The most common form of accounting is double-entry accounting. Here’s how it works: every financial transaction made is posted in two account types—the debit and the credit.
The table below illustrates that debit and credit should balance out to zero.
| Account | Debit | Credit |
|---|---|---|
| Cash | $5,000 | |
| Oven | $5,000 | |
| Revenue | $1,000 | |
| Accounts Receivable | $1,000 |
Say your business starts with 5,000 dollars in cash. That’s placed into debit on the balance sheet. You proceed to purchase an oven of the same amount to start producing baked goods and earn a revenue of 1,000 dollars from that sale. That amount is then debited into the accounts receivable column.
An alternative method of expense reconciliation is through account conversion from a single entry, to double-entry accounting.
Here, receipts are compared with past data recorded in your general ledger. Accountants compare a range of financial documents, from receipts and invoices to bank statements and expense claims to the transactions noted on your business records.
Expense reconciliation is an essential part of keeping your business running. While the main goal of reconciling your expenses is to monitor and manage your cash flow, it can also help your company:
Check for fraud: Bank reconciliation is a helpful tool for spotting any suspicious transactions from your company account. Any duplicate charges, unauthorised transfers from your bank account, or missing deposits can be spotted when you go through your monthly financial records and business credit card statements.
Avoid balance errors: Multiple errors in your accounting records might seem like a small issue, but they’ll add up over time. Common balance errors include missed transactions and multiple entries. Keeping an eye out for any discrepancies during your monthly checks is a great way to nip these errors in the bud.
Assess company finances: Running a small business means you probably won’t have much visibility over your company’s finances during the month, especially during peak season. That’s where expense reconciliation comes in. Balancing your books at the end of every month gives you a bird’s eye view of your cash flow, which is extremely important when it comes to forecasting or budgeting for the next business quarter.
| Method | Pros | Cons |
|---|---|---|
| Paper Records | Easily understood | High error rate, manual, time-consuming, not a scalable method |
| Excel | Good for recurring transactions and to compare smaller sets of data | High error rate, manual, not dynamic enough for large data sets, lack of analytics and reporting tools |
| Accounting Software | Easy to implement, able to automate reconciliation workflows | Disparate data sources, limited capabilities with complex asset types |
This is a tried and tested method for small businesses, especially if the majority of your business documents are in hardcopy. Keeping a physical ledger of your transactions is easy to do, and could be a more natural way to do things for some companies.
However, this method has a high error rate. For example, you might miss out on some employee expenses, which are all you need to make reconciliation frustrating for your finance team. Moreover, using physical methods to reconcile your expenses is a time-consuming task. That’s why doing your reconciliation on paper every month is not the best method if you’re looking to scale your business in the long term.
Ah, the old spreadsheet. Using excel to run your monthly reconciliation efforts isn’t new to most small business owners. Although this method is a rite of passage for most young companies, it’s unsustainable as you grow your business.
Just like using pen and paper, the manual workflow of using an excel spreadsheet means it’s prone to numerous errors. Relying on spreadsheets to crunch data is also more of a static strategy, which means any in-depth expense reports or upgrading will take a long while to do.
These days, many accounting software systems in the market can help with reconciliation. Xero and QuickBooks are two popular tools small businesses use to address the lack of adaptability and scalability spreadsheets can’t provide.
Yet, many businesses continue to use a variety of accounting tools. This means that your data is streaming in from different sources. Oftentimes, you’ll need to derive customised algorithms to ensure that the transaction information received and insights reported align.
What throws a wrench in reconciliation is poor data formatting. Whether it’s employee reimbursements, or tracking asset reports, a lack of organisation makes end-of-month reconciliation challenging.
Throw in different data sources and delays in transaction entries and your accountants find themselves in a never-ending reconciliation bind.
How to speed up reconciliation?
If your company has been using a certain method of expense reconciliation, it might be difficult to imagine a better way of doing business. But there are. Account reconciliation is easy with Spenmo:
Cut through the challenges of expense reconciliation with more efficient expense management. By partnering with cloud accounting solutions, you can take the nitty-gritty numbers off the hands of your finance team.