Balance sheet reconciliation best practices

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What we're going to talk about

  • Balance sheet account reconciliation using spreadsheets is time-consuming, complicated, and inaccurate
  • Getting the process right saves time and money, and reduces the risk of fraud and errors
  • Automation, standardisation, and the right financial software will free up your people’s time to concentrate on value-adding activities
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Balance sheet reconciliation typically involves collecting and applying vast quantities of information. While reconciliation software can help simplify the process, companies that use deadline-driven, manual processes can end up making fatal errors.

Horror stories abound. In 2012, for example, JP Morgan lost around $6bn in the ‘London Whale’ scandal, partly caused by copy-and-pasting information between spreadsheets. The error meant that their risk model had vastly understated the company’s risk. As James Kwak wrote in his reaction to the scandal: “Excel the program is reasonably robust, the spreadsheets that people create with Excel are incredibly fragile.”

This example alone demonstrates the fact that spreadsheets run, in many cases, on trust and assumptions. However, gathering information for reconciliation is not the only spreadsheet problem. Collaboration, for example, can also be clunky. Sending information pertaining to journal entries, bank accounts, account balances, transactions, or general ledger entries via email is a recipe for disaster. Or else coding mistakes, resulting from manual process and differences in process, can mean that a bank statement or an income statement will contain insufficient information to identify a transaction or an expenses claim.

Balance sheets, intercompany reconciliation, and the challenge of the financial close

The account reconciliation process has never been simple, and the amount of information required for accounting records has become ever-more complex. In many cases, the process has become even more convoluted with the number of different systems, different geographies, and varying “in-house” processes involved.

A recent study of 336 finance and IT leaders found that organisations operated in complex ERP environments, using an average of nine different vendors and 18 instances across the enterprise globally. This leads to “disconnects in collaboration and communication among the C-Suite and other leadership stakeholders, and trouble with data availability and accuracy.”

In addition, that same study found that nine out of ten organisations experienced challenges with the financial close process. The top three challenges were: the amount of time spent doing it, the risk of manual errors and finally, being under-supported to achieve their goals.

Instead of acting as a boost to performance, the close becomes a drag on it. Mary Driscoll, senior research fellow in financial management at APQC, calculates that the 224 top-performing organisations out of a sample of 896 spent 47 cents or less per $1,000 in revenue to perform the general accounting process. That’s a quarter of what the bottom 224 performers spend ($1.98 or more per $1,000 in revenue.)

But streamline the process and the time rewards are huge. APQC’s General Accounting Open Standards Benchmarking survey found that the top performing 25% of organisations closed in 4.8 days or less. The bottom 25%, on the other hand, needed ten or more days for the entire process. That’s a lot of days per month for finance leaders and decision-makers to be in the dark.

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Best practices for balance sheet reconciliation

There are certain underlying principles which should govern your reconciliation process:

  • Define the process: The reconciliation process must be well-defined and clear. Standardise software, policies, templates and procedures across the entire company to minimise the risk of error and to save time.
  • Gather information: Keep key financial information which will feed into the general ledger and balance sheet – including bank statements, liabilities, transactions, assets, loans, debt, cash, accounts payable, income statements, accounts receivable, balances and inventory – up to date, and note any anomalies and adjustments.
  • Follow a risk-based approach: Finance team members should reconcile the usually small number of high-risk accounts which will affect the balance sheet the most before the financial close, rather than wasting time on reconciling low-risk items which don’t have a significant effect on the financial position.
  • Review: Design the process to allow for the time pressures of the financial close and the accounting period, with built-in time for review before accounts are closed, to ensure the accounting team can correct errors in a timely manner.
  • Monitor the process: Like any company metrics, the efficiency of the balance sheet reconciliation process should be monitored on an ongoing basis and tracked over time. Managers should identify key metrics – for example, number of errors, or time of completeness by person or department – and track them. This enables department leaders or business owners to identify what’s working and what isn’t, and identify where changes – such as new and more efficient software – could be made.

Improving and streamlining the reconciliation process

So how can you improve your balance sheet reconciliation processes? Automation will be key. Spreadsheets still have their uses, but they should no longer be the only way to gather information for your balance sheet reconciliation process and records. The risks of fraud and error plus the time and efficiency costs are simply too high, while the rewards of automation and accounting software are too great to ignore.

Automation reduces errors and fraud by enabling better internal controls and financial reporting, and allows your teams to focus on adding value to your business. It can also record every step of the process, tracking changes and providing a full audit trail. The right accounting software will enable smooth communication and collaboration across your business. It allows your finance departments to achieve rapid and accurate reconciliation of intercompany accounts, track and monitor the process, and create real-time financial reports and financial statements.

Technology alone will not be enough, though. The 2019-2020 PwC Finance Benchmarking Report, estimated that 30% to 40% of time can be reduced with finance automation – plus behavioural change. Getting buy-in from your teams when overhauling processes will be crucial to the success of any changes. Keep your balance sheet reconciliation under constant review: there’s always room for improvement and everyone can be part of it.

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Be aware too that persistent problems around the financial close can be a sign that other processes are failing as well, and call for re-examination. Robert Kugel, from Ventana Research, points out that “Fixing the close process issue can be an excellent diagnostic tool for assessing anything else that might be ailing Finance.”

Following balance sheet reconciliation best practices helps create a cascade of benefits. Today’s high-performance financial software eliminates the majority of its pain points, allowing time for training, feedback, monitoring, and review. Balance sheet reconciliation will no longer be a drag on your company’s efficiency. Rather, it will improve performance: freeing up time for strategic thinking and allowing for more efficient collection and dissemination of vital financial data to drive your business forward.

Are you interested in automating your intercompany reconciliation? If so, please get in touch. We have a team of experts who will be happy to discuss your specific needs and what our intercompany reconciliation software can do for you.