Invoice management is an essential function in every business. This is why and how it can help you.
Why Invoice Reconciliation is Crucial To Your Business
Invoice Reconciliation is essential to a business in tracking who has paid you and which bills you still owe. Find out how you can automate this process.
The invoice reconciliation process is critical in keeping your accounting records up to date and avoiding fraud in your organization.
What is invoice reconciliation?
First, let’s define the terms invoices and reconciliation to better understand invoice reconciliation.
Invoices are legally binding documents that are used to demand payment from clients or consumers. These are widely used by businesses including sellers, small enterprises, and self-employed individuals and are usually integrated into an accounting system.
Meanwhile, reconciliation is defined as an accounting process in which two sets of records are compared to ensure that the values are correct, confirming consistency, accuracy, and completeness of accounts in the general ledger.
The invoice reconciliation process simultaneously tallies the input and output invoices to verify and ensure that all accounts are clear and all the book entries match. Various types of invoices can be generated by businesses to send to their customers.
What are the types of invoices?
Companies receive tons of invoices from different sources. We list down the different types of invoices your business might receive.
1. Supplier invoice
A supplier invoice is a vendor statement that is sent out to a client for purchase orders or services rendered. It details the purchase orders and services sold to a consumer and any applicable sales taxes and shipping expenses.
2. Credit invoice
A credit invoice is sent by a business that wants to provide a discount or refund to a customer or repair an invoicing error from the previous period.
3. Debit invoice
A debit invoice, alternatively referred to as a debit memo, is sent by a firm that wants to increase the amount owed by a client. Debit invoices can be advantageous for small firms that want a minor modification to an existing invoice.
4. Commercial invoice
The commercial invoice is a report provided by a business for items sold mostly to foreign clients. It contains information about the sale that is required to calculate customs charges on cross-border deals.
A timesheet is an invoice used when a business or individual bills by the hour and at a standard rate.
6. Mixed invoices
Mixed invoices incorporate credit and debit charges into a single statement, and the total amount might be represented as a positive or negative number. Although small businesses rarely need to issue mixed invoices, it may be required if you are reducing a client’s debt for one project while raising the debt for another.
7. Interim invoice
Interim invoices are used for large projects for which the client and the firm have agreed to multiple payments. Interim invoices are submitted by businesses when specific project milestones are met. It assists organizations in managing cash flow while working on long-term initiatives.
8. Recurring invoice
Recurring invoices are excellent for organizations that charge the same amount to clients regularly.
A business issues and submits a standard invoice to a client. It is often used among small businesses, as it is adaptable to many industries and billing cycles. A company sends a past due invoice if a client does not pay by the due date. Every aspect of the service and payment is detailed on the final invoice, including any late fees or interest rates that may apply.
After a job is finished, a final invoice is issued to the client for payment. It is frequently more thorough than the pro forma.
9. Pro forma invoice
A Pro forma invoice is an assessment sent to a client before completing services. A pro forma invoice gives the customer an estimate of the work’s cost.
The details that must be legally included in the invoice are the following:
- The contact information
- Identification number
- The date of goods or services were delivered
- The number of their charges such as prices, discounts
- Promotional codes or credits, and taxes
- The total amount owed or paid, and the method of payment used such as credit card
- Cash or other that the customer has
- The date of invoice.
- The registered name and address of the business
- The registered number and address of the Home Company
- The placement must include the names of all directors.
The Accounts Payables Workflow
Manual Invoice Processing is a process in which the supplier manually sends an invoice to the customer for the services or products purchased. In this process, the customer receiving the invoice from a supplier or vendor would typically jump in between ERP systems, accounting, and procurement software to record and reconcile the payment data. Not to mention the use of numerous payment systems needed to pay just one bill. We detail the steps below.
Step 1: Customer sends out a purchase order (PO) to the vendor
The first step requires a business or customer to send out a purchase order to the vendor or supplier as a formal request to order the products and services the customer might need.
Step 2: Vendor or Supplier generates an invoice
As a response to the customer’s PO, the supplier sends an invoice containing the items to be purchased or services to be incurred, unit and total cost, payment terms, and due date – to name a few.
Step 3: Invoice review and approval
Once the invoice from the supplier is received, the customer must review then approve the invoice. Typically, customers inquire from various suppliers or vendors before choosing one that suits their needs. Once an invoice is approved, it should be recorded to an ERP or accounting software.
Step 4: Bill Payment
Once approved, Accounts payable (AP) teams are now in charge of paying the invoice or bill. Modes of payment vary from bank transfer, card payments, and cheques to name a few. Now, are also payment systems and software, like Spenmo, that handle the payments for your business.
Step 5: Invoice reconciliation
Once payment has been made, accountants need to reconcile the bills and invoices by manually lining them up in spreadsheets or accounting software. This can be a long and tedious process, which usually happens during month-end. Paying your bills with Spenmo automates process with it’s latest integration with Xero.
How do you reconcile an invoice?
When reconciling invoices, Accountants need to line up the unpaid or open invoices with the billed receipts once the invoices are paid. This ensures that all payments and invoices are properly accounted for in the books and financial statements.
Finance teams typically jump in between ERP systems, accounting, and procurement software to reconcile their invoices. To start this process, one must first input the data from the invoice to match the bank account statement payments to the ERP or accounting software. Once the invoice is paid, the accounting teams then line up the receipts with the unpaid invoices to reconcile them every month-end. This way, you can ensure that the accounting books are balanced and money leaving an account meets the money coming in at the end of the reporting month.
This is a long and tedious process that requires a lot of attention to detail and it is also prone to error. Some accounting software tries to line up payments with unpaid bills but accountants still need to ensure accuracy due to the lack of integrations in between software.
With Spenmo’s enhanced integration with Xero, invoice payments and reconciliation into the accounting software are now automated for a seamless experience. Doing so reduces the amount of work needed to close the books each month and reduces errors from lining up the data. The infographic below further explains the process in detail.
The benefits of automated invoice reconciliation
Automating invoice payments and reconciliation offers many benefits not only to finance teams but also to the company as a whole. Take a look at the numerous benefits below
1. Save time and cost in processing invoices
With payments automation, the time and effort it takes to process a single invoice is reduced by about 90% therefore, reducing the overall cost of processing an invoice payment. Moreover, scheduling payments in advance would avoid delayed or late payments that may save you money from incurring any fees and penalties.
2. Paper-free and unlimited data storage
Automation software, like Spenmo, scans, extracts and records each bill and invoice into the cloud. Now, AP teams can enjoy a fully digital and secure payment and reconciliation experience.
3. Secure and real-time payment
Companies that use payment software can securely send out payments to suppliers and vendors without the nuisance of jumping in-between platforms and banking apps from different financial institutions. All bills are paid in a single platform with real-time payment updates.
4. Instant reconciliation
Find a payments software that fully integrates your accounts payables to your accounting software. Spenmo is fully integrated with Xero to ensure 100% automated and error-free reconciliation of your AP.
Invoice Reconciliation Best Practices
Business owners may be saddled with several responsibilities but one of your vital tasks is to provide proper invoices to obtain payment for goods and services you provided to them. This is crucial to reduce disputes through the help of detailed and accurate information provided, including the product, pricing, and terms of sale thus may encourage early payment.
Here are some best practices to ensure invoice payments and reconciliation are properly managed.
- Prioritize invoices according to payment due dates: Ensure to prioritize fees based not just on the due date but also on the type of bill.
- Check data regularly: Ensures that you keep track of your cash flow to help in enhancing cash flow analysis and tracking the volume and value of invoices.
- Avoid having one person manage the entire AP workflow: Implement Separation of Roles to decrease your risk of company fraud.
- Check for Duplicate Payments: Check for duplicates regularly reduces any leaks in the cash flow and keeps books organized.
- Track Invoice and Resolution Conflicts: Regularly monitoring any invoice inconsistencies can help you maintain your cash flow on track, ensure that your operations are effective, keep your records orderly, and preserve the relationships of vendors.
- Track Uncashed Checks: Establish standard follow-up procedures to ensure the right course of action and avoid future cash flow issues or late fees for your business.
- Perform account reconciliation daily: The business account is a day-to-day task for your business. This will deliver timely and accurate financial intelligence needs to make strategic business decisions.
Using a payments software that integrates with your accounting system ensures that proper bookkeeping practices are followed. Doing so keeps your business afloat and helps in avoiding any discrepancies in your cashflow and financial statements.
Spenmo is your partner in scaling your business to massive growth. Try payments automation today!