Financial Management - Reconciliation

Background:
For a business receiving or paying many transactions it is very important to consider how automated they can make the reconciliation process. The costs to a business in transactions falling out of auto reconciliation can be expensive leading to delays in sending goods, answering customer queries as well as the pure costs of operational colleagues confirming what the transaction relates to and updating the account payable/ receivable ledger. In addition, in the correct market of higher interest rates, unapplied funds sitting in internal suspense accounts can result in inefficient use of the funds to pay down working capital/debt or investing in allowed instruments generating increased returns on spare cash.

Why is this important to businesses and corporates?

Reconciliation of Payments - This should be part of all payables processing and should result in a high reconciliation % by ensuring the transaction and file generated have the right internal reference generated by the internal paying system which can be reconciled when the cash transaction is debited to the Bank Account. Whilst this generally results in a high match rate for auto-reconcilement, issues can be seen from non-standard or one off items following ad-hoc processes rather than the standard payables model./ systems. Other complication can arise from cross currency payments where the FX rate and transaction costs taken at point of execution can result in mis matches between the cash ledger and payables system.

Reconciliation of Receivables - Reconciliation of incoming receipts is harder than payables due to the common process of such transactions usually being generated by the paying party, meaning the collecting company has to rely on provision of sufficient data in the incoming message to try to auto reconcile in the internal system/s. Clarity of "how to pay" can be stated on invoices issued to try to ensure adequate reference data is attached to the incoming receipt. However, that relies on the paying party accurately transferring this data to the correct field in their payment message.
More and more receivables are now being generated through online / real time sales. This adds to the complexity for reconciliation as there is a potential need to reconcile immediately on receipt of the payment. Business should spend time on how they obtain funds for goods they sell online as each payment type can provide different pay reference data enabling the real time updates to internal systems required.
Some examples to consider include:
• Collecting by Direct Debit enables auto reconciliation as the collecting party can add the required reference as they initiate the transaction
• Asking sending party to remit funds direct to the business Bank Account is reliant on the payment instrument used and the inclusion of reference text by the paying party
• Collection by Cards allows an immediate funds check for the transaction meaning there is a near certainty of payment allowing goods to be despatched. However you need to understand the card reconciliation and settlement process to map the internal processes required to map the cash received to the multitude of card transactions generated
• In addition, as for payables, the challenge of FX and associated charges can add complexity to the reconciliation process and will need detailed analysis on how best to set up rules and process to auto-reconcile.
• Improvement in reconciliation will be an ongoing topic needing regular review. Other influencing factors will include:
o Use of ISO20022, as this data format allows the richest set of data to accompany a payment. The format includes the ability to agree "structured references" which can aid reconciliation. However, the ability to use such references remain fairly immature across the payment types
o More and more services provided to consumers and clients require "embedded payments" to aid the end to end execution of the service. the payment aspect may seem like a commodity but unless thought through carefully can cause issues and unnecessary work for staff in completing transactions and reconciling data
o Use of local payment types in cross border payments

Questions a business need to consider include:
• How quickly do transactions need to be reconciled - what is the costs in delay in completing the reconciliation?
• What internal systems need to receive payment data? - think end to end for the transaction the payment relates to
• What payment types does the business use and do the formats allow the processing of data allowing you and the recipient to reconcile? Remember - BACS only allows 18 characters!
• What is the key master data to use internally and does the data map correctly to fields in the payment message?
• How to use your ERP/ core systems standard capability?
• Does your business unit know when a payment is completed, and do they receive all the data needed for their processes? Do they know how to generate the right data in a payment message?
• What is your ISO20022 strategy for data?