Considerations for reconciling the supplier account | Applied

Considerations for reconciling the supplier account

Most organisations have to reconcile supplier accounts as part of their audit processes, which is an arduous task. But is this good for business?

Reconciling the supplier account ensures supplier balances are accurate for financial reporting and profits are maximised by ensuring no credit notes are missing or invoices duplicated.

In principle, the process for reconciling supplier accounts is very straightforward.  The supplier’s credit control department sends a statement of account, which contains the unpaid invoices on the their sales ledger, to the buyer’s accounts payable department.  The accounts payable team at the buying organisation compare the statement to their accounts payable ledger(s) to identify any differences.

Accounts payable time pressures

The challenge arises because accounts payable teams already have a full schedule managing the day-to-day activities of processing invoices through to payment.

This is exacerbated by the fact that supplier statements are in paper or PDF-based formats, and can include thousands of transactions. To identify exceptions, the accounts payable team needs to manually check details on the accounting system of every transaction listed. It can take hours, and sometimes days, to reconcile one vendor.

The result is that organisations do not find it practical or possible to reconcile every supplier, and therefore focus their time on their largest suppliers to ensure that they are paid on time.

This avoids disruption in supply chains and ensures liabilities are accurate for cash flow forecasting and financial reporting.  But, it means they are potentially denting their profits due to errors going unidentified on statements.

Automation offers a partial answer

For some time, technology of some degree has been used by many organisations to automate invoice processing.

Scanning and workflow were initially deployed to remove paper from the process, followed by OCR (Optical Character Recognition) to automate invoice entry.

Then to a lesser degree, supplier portals and e-invoicing networks started to drive further adoption of electronic methods of communication between buyer and supplier.

But if an invoice does not pass the checks and controls organisations have in place to prevent errors, manual intervention will be required to resolve the issue, regardless of how the invoice was received.

Even with the best controls and technology in place, invoice errors can still slip through the net, which reinforces the importance of reconciling supplier accounts by comparing their statement to the accounts payable ledger.

Supplier statement reconciliation is an opportunity for accounts payable to spot invoice discrepancies before they are paid and to make sure the invoice process is complete.

Identifying discrepancies

The key is to identify any invoices or credit notes on the supplier statement that are not on the accounts payable ledger or vice versa.

Identifying incorrect invoice numbers will reduce the risk of duplicate invoices. Other common scenarios that only tend to be spotted through reconciling the supplier’s account include identifying invoices entered with incorrect currency, and invoices on the ledger that are, in reality, credits.

Reconciling supplier accounts ensures supplier liabilities are accurate for financial reporting and profits are maximised. The latter comes partly from ensuring that no credit notes are missed and duplicates are minimised.  Potentially more significant is that it enables the periodic clearing of accruals on the balance sheet from goods being booked in, but no invoice having been received. By reconciling supplier statements to a point in time, more of these liabilities can be cleared and returned to profit.

Technology adopted for ‘heavy lifting’

Accounts payable and shared services are increasingly being required to undertake more statement reconciliation as part of their control processes.

As this needs to be achieved with no increase in headcount, in the drive to reconcile as many supplier accounts as possible, accounts payable are looking for automation technology to do the ‘heavy lifting’.

Cloud benefits

Automating the supplier statement reconciliation process using a cloud-based application solves a problem for the CFO without the need to invest in the software and infrastructure associated with on-premise applications.

It also gives them an opportunity to assess whether other ancillary processes can be moved to the cloud to further evaluate whether it’s a viable option for other core financial applications

Although there is not a wholesale migration of core ERP financial applications to the cloud, CFOs are dipping their toes in the water by trying out bolt-on financial applications for specific processes such as supplier statement reconciliation.

This is backed up by various surveys indicating that CFO intentions are to increase their use of cloud-based technology.

For example, Hackett Group’s recent Purchase to Pay Study (P2P) found that 45% of respondents were leveraging a combination of on-premise and cloud P2P solutions, 18% planned to eventually migrate all P2P solutions to a software-as-a-service or cloud deployment model, while 13% were piloting cloud solutions.

Raising the profile of accounts payable

Technology continues to change the role of shared services.  For the accounts payable team, it removes the manual, repetitive data entry tasks, thereby allowing users to focus on managing exceptions and adding value for internal as well as external stakeholders in the process.  Statement reconciliation also benefits the supplier as it ensures they are paid and that their customer balances are accurate for cash flow forecasting.

Reconciling supplier accounts ensures that supplier liabilities are accurate and profits maximised.  Financial results for the company are therefore accurate, which means that both the CFO and auditors are happy.  This is good news for accounts payable because it raises their profile within the organisation due to the vital, and now visible, role it plays.

Posted by Daniel Kimpton- Statement-Matching.com

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