How to run accounts receivable reconciliation

Maintaining a healthy cash flow is essential for any company. To achieve this, finance managers must master accounts receivable reconciliation (ARR)—matching the figures of unpaid customer billings to the accounts receivable total reported in the general ledger. With ARR, also known as Cash Application, your business can produce accurate financial reporting, enhance cash management, and make informed strategic decisions.ARR also helps businesses with:

• Error detection
• Fraud prevention
• Customer relations  
• Audit readiness 

Here’s how to execute accounts receivable reconciliation. 

Step-by-Step Accounts Receivable Reconciliation Process

Step 1: Gather Necessary Records

Begin by collecting all relevant financial records (e.g. customer invoices, payment records, credit notes, and bank statements).  During the collection stage, we suggest storing records systematically, whether digitally or in physical files, for quick access.

It's also good practice to categorize your records by customer or time period. This lends a more streamlined reconciliation process, and reduces the likelihood of overlooking important data. Modern accounting software can further simplify this task with automated record-keeping and easy retrieval.

Step 2: Compare Customer Payments with Invoices

Next, compare customer payments with issued invoices to identify mismatches between what customers owe and what they have paid.  Match each payment with its corresponding invoice, aligning the amounts with the dates. 

During this stage, you might encounter discrepancies such as partial payments, overpayments, or missing payments. Highlight or note these so you know what to investigate later on. Whichever method you use to flag variances,  using a consistent method makes the reconciliation process easier and ensures it’s up to date. 

Step 3. Reconcile Ageing Reports

Next, reconcile the accounts receivable aging reports, matching the periods up with the outstanding balances. You’ll first review the aging report, which categorizes receivables based on how long they have been outstanding. Verify that the totals on the aging report match the general ledger’s accounts receivable balance. You may notice discrepancies due to transactions not recorded or categorized in earlier steps—this will require further investigation and adjustments. In this stage, you’ll also flag overdue accounts that need follow-up or corrective actions.

Adjustments or write-offs may be necessary for balances deemed uncollectible, requiring formal documentation and approval. The purpose of reviewing aged receivables is to shed insight into customer payment patterns and potential cash flow challenges.

Step 3: Investigate and Resolve Discrepancies

In step three, you’ll address all discrepancies. Begin by investigating the cause of each discrepancy, looking into factors such as data entry errors, incorrect invoice amounts, or communication lapses with customers. Utilize your team members’ knowledge to understand discrepancies that aren't clear from the records. You can also reach out to customers for clarification to resolve misunderstandings and facilitate payment adjustments.

Once you ascertain the causes, rectify the discrepancies by  updating records and communicating changes to stakeholders. This not only resolves immediate issues, but helps prevent similar discrepancies in future reconciliations.

Step 4: Adjust Ledger Entries

Make any necessary adjustments to your accounting records. This could be posting journal entries to correct amounts or adjusting balances in your general ledger. 

Double-check calculations and that all adjustments follow the company's financial policies and procedures. Once you’ve affirmed the adjustments, carefully document and authorize them by the appropriate personnel to maintain transparency. 

Step 5: Reconcile Regularly

The final step is regular reconciliations. Conducting regular reconciliation ensures that your accounts receivable records stay accurate, up-to-date, and reflective of your company's financial health. Establish a consistent schedule for reconciliation, whether monthly, quarterly, or as needed based on your business's transaction volume.

Regularly reviewing and reconciling accounts receivable allows you to identify potential issues early on, minimizing the risk of financial misstatements and cash flow disruptions. It also provides valuable insights into customer payment behaviors, aiding in better cash flow management and strategic planning.

By incorporating regular reconciliation into your financial processes, you maintain financial integrity and build trust with stakeholders.

Tips & Best Practices in Accounts Receivable Reconciliation

1. Leverage Technology: Invest in ARR software that automates reconciliation tasks and provides real-time updates on payment statuses. Technology streamlines the process and reduces the likelihood of errors.

2. Foster Collaboration: Encourage communication between your finance team and other departments involved in the reconciliation process for smoother collaboration.

3. Prioritize Training: Provide ongoing training for your finance team to stay up-to-date with industry trends, software tools, and accounting standards.

4. Reduce Key Personnel Dependency: Train multiple team members on reconciling accounts receivable to minimize the impact of any single person's absence.

5. Standardize and Document Procedures: Establish consistent procedures for reconciliation, including documentation and approval processes. This ensures consistency in the process and provides a reference for future reconciliations.

6. Regularly Review Aged Receivables: Consistently review aging reports to identify potential issues early on, such as late-paying customers or high-risk accounts.

7. Utilize Checklists: Checklists are a valuable tool for keeping track of completed reconciliation steps, from verifying invoice details to posting adjustments. Checklists can also help to delegate responsibilities within the team.

How Automation Improves Accounts Receivable Reconciliation 

Automation can significantly organize and consolidate the accounts receivable reconciliation/ cash application process by automating manual tasks and reducing errors. Here's how it works:

Easy integrations: Effortlessly connecting all your company’s financial institutions around the globe to one centralized platform provides a real-time view of where cash is going and shows updates across all financial software. 

Automated ERP matching: Some solutions such as Panax connect to your ERP, map your general ledger to cash, and automatically categorize your inflows and outflows, making collecting relevant data painless.

Automated reporting: Auto-generated reports can answer cash-related questions quickly and shed light on discrepancies. 

Proactive messaging: Proactive alerts keep reconciliation top of mind and help you stay on track while completing the checklist. Alerts also encourage more transparency, as financial teams can notify leadership as soon as they’ve completed a task or made a change.‍‍

Master Accounts Receivable Reconciliation

Accounts receivable reconciliation is a crucial function for a finance department. By following a structured process, addressing common challenges, and implementing best practices, you can ensure an accurate ARR. Regular reconciliation not only enhances cash flow management but also supports strategic decision-making, giving your company a competitive edge in today's dynamic business landscape.

Make Accounts Receivable Reconciliation more efficient with Panax  

Panax’s Cash Application makes AR Reconciliation easy. Panax’s proactive, automated matching uses AI driven algorithms to take the workload off, but leaves you full control over the final approval. You can see all finalized matched pairs of transactions, making it easy to run a final review. All records are automatically created back in the ERP, so your books are up to date. Get in contact to find our more