Invoicing

Invoice Reconciliation: How to Reconcile Invoices

Before we discuss how to reconcile invoices, it’s important to have a clear understanding of what invoice reconciliation is. So, what is billing reconciliation? And what is invoice reconciliation? Let’s dive in.

What is Invoice Reconciliation?

Invoice reconciliation and billing reconciliation refer to two sides of the same process. Before we continue, check out this article for the difference between an invoice and a bill.

invoice reconciliation

Billing reconciliation is the process of matching the invoices you’ve sent to customers to the corresponding payments received. Invoice reconciliation, on the other hand, is the process of matching the invoices you have received from vendors to the corresponding charge on your bank statement. 

Reconciling invoices and bills is a way to check that the amounts were correct and verify that you weren’t underpaid or over-billed.

Why is Reconciling Invoices Important?

Reconciling invoices may not seem important, but it’s one of the few ways to find and correct billing errors. 82% of businesses that fail end up failing because of cash flow problems. One of the overlooked ways to stay on top of your working capital is to reconcile bills, reconcile receipts, and watch your cash that flows in and out closely.

Detect errors

As we touched on, billing reconciliation is the only thing that stands between you and accidental over-payment to vendors. It can also help you catch issues with your customer billing process and make quick corrections.

While most billing issues are benign mistakes, there is also the potential to catch fraud through invoice reconciliation. Unfortunately, small businesses are 2x more likely to see billing fraud, and 4x more likely to be victimized by payment and check tampering than large organizations due to a lack of internal controls*. 

When you reconcile bills, you’re able to review your bill against your contract and make sure your vendors are charging you appropriately. Conversely, you’ll be able to catch and correct an employee that has gone rogue before it creates a bigger and more expensive problem.

Fix payment timing issues

A second benefit to invoice reconciliation is that it will allow you to correct any payment timing issues you experience. For example, if your customers pay their invoices an average of 30 days from the date they’re sent, but your vendor bills come due during that window, you can adjust your billing schedule to correct potential cash flow snags.

Another timing issue you may experience is inconsistent billing schedules or scheduling errors – i.e., accidentally receiving two invoices within the same time period by mistake – essentially doubling the amount you pay if left unchecked.

Improve the experience for vendors and customers

reconcile invoices

Finally, invoice reconciliation will help you improve the experience for both your vendors and customers. No business is completely perfect, but your customers will appreciate you correcting a mistake before they need to ask. 

Similarly, your vendors will make mistakes too that you can get corrected quickly. It’s worth noting that many of your vendors may have a 90-day window for corrections. This means that billing issues found outside of that window are no longer correctable. This is why staying on top of your invoice and billing reconciliation is crucial.

Types of Invoice Reconciliation

The good news is that not all invoice reconciliation is manual. There are some automated systems that can help you stay on top of this process without an enormous time commitment. Let’s discuss the different methods for invoice reconciliation.

Manual

A manual invoice reconciliation is what we’ve discussed – the process of looking at your bank statement and comparing each debit and credit to the corresponding bill or invoice. 

The problem with manual invoice reconciliation is that not all business owners have the time or patience to reconcile bills manually. Especially when you run into a discrepancy.

Automated

Automated invoice reconciliation, on the other hand, is when you use accounting software to help you match bills and payments. When the amounts and customer or vendor match, the software can close the bills out for you automatically – flagging your attention only when there’s a mismatch.

How to Reconcile Invoices in your Business

When deciding how to reconcile receipts and invoices, you’ll want to create a process that allows you to catch as much as possible in the smallest amount of time. 

If you catch an issue, it’s also useful to have a checklist of common causes, so you can quickly rule out legitimate discrepancies.

Let’s discuss how to reconcile invoices in your business.

For vendor invoices:

When you receive a bill from a vendor, quickly flow through the following process:

  1. Check packing list to confirm received items
    • Did you get everything they said you should have received in this box/order?
  2. Compare packing list to purchase order form
    • Is the packing list correct based on what you ordered?
  3. Compare the purchase order form to the invoice
    • Is the billing reflective of both what you ordered and what you received
  4. Compare invoice(s) to the vendor statement
    • Did the company bill you what they said they would bill you for this order? Are there more bills on the statement than you expected/outstanding bills you don’t recognize?

For customer invoices:

When you send a bill to a customer, quickly flow through the following process:

  1. Create an invoice to match the customer’s purchase order
    • Did you bill the customer correctly based on what they ordered?
  2. Create a record of the payment
    • Save when, where, and the amount of the payment received.
  3. Compare invoices to your monthly bank statements
    • Did they pay what they should have for this order? Or did they over/underpay?

Checklist for an Invoice Reconciliation Discrepancy:

​​If you run into a billing issue, create a checklist of common scenarios that could cause a legitimate discrepancy. It could include things like:

  • Did I offer a discount?
  • Did they make a legitimate partial payment or have a billing plan?
  • Was I charged a fee by my bank or the vendor?
  • Have they have rolled a prior balance over into this invoice?
  • Did my customer have a credit on their account that was applied?
  • Is there a currency conversion fee?
  • Etc.

Benefits of Invoice Reconciliation

There are many tangible benefits of invoice reconciliation. These benefits include:

  • Having a better grasp of and control over your cash flow
  • Catching fraud or errors that otherwise could have cost your business thousands of dollars
  • Maintaining more streamlined billing processes
  • Improving communications both internally and externally
  • Better vendor and customer relationships

Now that you understand the benefits of invoice reconciliation, let’s discuss how to streamline your process.

Utilize Invoicing Software to Streamline Reconciliation

Now that you know what billing reconciliation and invoice reconciliation are, let’s discuss how to use invoicing software to streamline billing reconciliation.

Many accounting software programs allow you to directly connect to your business bank account. In this case, your reconciliation process will be more streamlined, as it automatically connects matching debits and credits to your open invoices and bills to reconcile receipts with ease. Take your cash flow into your own hands with ease, using invoicing software to streamline reconciliation.

Final Thoughts

If you’re looking for ways to streamline your billing reconciliation process, invoicing software is a great option. It can save you time and money while making your reconciliation process run quickly. Consider software like paysley to take control of your cash flow.

*Sources: Report to the Nations