How automated banking reconciliation can improve financial decision making

The automated banking reconciliation represents a revolution in contemporary financial management, providing companies with essential tools to optimise their financial decision-making.

This process, that traditionally has been done manually, has always been laborious and error-prone. However, thanks to technology, it has become efficient, accurate and, of course, strategic.

Throughout this article, we will explore in depth how automated bank reconciliation can significantly improve financial decision making in today’s business environment.

What is banking reconciliation?

Banking reconciliation is the process by which the figures in a company’s accounting records are compared and adjusted with the corresponding bank statements.

This practice is fundamental to ensure the accuracy and integrity of an organisation’s financial records. By identifying discrepancies, such as unrecorded transactions, errors in amounts, or potential fraud, companies can maintain accurate and reliable accounting.

The importance of banking reconciliation lies in its ability to validate the financial health of a company. It provides an independent verification of the effectiveness of internal controls related to cash transactions, a critical asset for any business.

In addition, it complies with auditing requirements and financial regulations, thus avoiding potential sanctions or legal problems.

How is the bank reconciliation carried out?

The process of manual banking reconciliation is meticulous and requires detailed attention to ensure the accuracy of financial and bank records. Traditionally, is carried out in a series of structured steps that may vary slightly depending on a company’s specific practices, but in essence, involve the following key elements:

1. Collection of documents: The first step is to collect all bank statements and accounting records of the company for the periods to be reconciled, including general ledger, cash receipts, and payment records, among others.
2. Opening balance check: Before proceeding, it is essential to ensure that the opening balance in the company’s book matches the opening balance on the bank statement. And, furthermore, that these also match the closing balance on the previous day’s statement.
3. Transaction reconciliation: Transactions in the company’s accounting records are reviewed line by line against movements on the bank statement. This includes cheques issued, deposits, withdrawals and bank charges. Matching transactions are flagged and discrepancies are noted for investigation and adjustment
4. Identification of mismatches: Mismatches commonly arise from transactions recorded in the company’s books that have not yet appeared in the bank statement (such as unchased cheques) and vice versa (e.g. bank interest or overdraft charges not recorded in the books)
5. Adjustments and journal entries: Once identified, discrepancies must be adjusted by journal entries in the company’s accounting records to reflect actual cash movements
6. Closing balance check: Finally, the closing balance in the company’s books is adjusted to match the closing balance on the bank statement, ensuring that all mismatches have been resolved

As we see, banking reconciliation is a complicated process and, worst of all, susceptible to many errors if done manually, due to wrong data entry, transaction omission or simply due to a high volume of data to be reconciled.

However, reconciling takes up significant time for human resources, which could be used for tasks that generate greater added value for the company

Example of banking reconciliation

Business ‘X’ is completing its banking reconciliation for the month of September. The accounting records show a cash balance of €10,000, while the bank statement shows a balance of €9500, so it is important to detect errors.

In the process of reconciliation, a cheque issued for €600 is discovered which has not yet been deducted by the bank (recorded in the books but not reflected in the bank). Also, a bank charge of €100 for services is identified which has not yet been recorded in the company’s books.

In other words, an outstanding account credit of €600 and an unrecorded bank debit of €100 have been found. On completion of the bank reconciliation, the following entries are recorded:

•   Balance on books after adjustment: 10,000 (opening balance) - 100 (bank charge) = €9900
• Balance on the bank adjusted for the undiscounted cheque: 9500 + 600= €10,100

In this case, talking into account the two movements, the bank reconciliation is completed and the bank and accounting account balances are matched.

The necessity of automating the banking reconciliation process

Faced with all these challenges, bank reconciliation, far from being an added value, is a necessity for companies seeking to optimise their financial operations, especially in everything to do with their treasury

This automation is interesting for several reasons:

• Automating transaction matching: Automated solutions quickly and agilely compare a huge number of transactions, identifying matches and mismatches accurately and efficiently. In addition, sometimes generative artificial intelligence, such as the one we have implemented in our Embat accounting and reconciliation functionality, further improves this accuracy by matching these receipts and payments with previous forecasts of account movements, automatically accounting for these movements in the ERP. 

• Proactive identification of errors and mismatches: Automated systems can alert users about discrepancies in real time, allowing a quick resolution before they affect financial reporting.
• Integration with banking and accounting systems: The capacity to integrate directly with banking and accounting platforms reduce the need to enter data manually, decreasing the risk of human errors. This allows near real-time integrity to be maintained in all of a company’s systems, including its ERP. 
• Improved processing speed: What once could take several days to complete can now be accomplished in a few hours and minutes or even in real time, freeing up valuable resources for other tasks. Instant information allows for improved financial decision making, especially in a department as important as treasury 

In the previous example, in a scenario where banking reconciliation is automated, the platform would have automatically imported and compared the transactions from the accounting records and the bank statement. The system would immediately identify both the undiscounted cheque and the unrecorded bank charge, alerting to these discrepancies without the need for detailed manual review.

In addition, the bank reconciliation functionality could have notified about the final discrepancy before completing the process, allowing for a quick and efficient correction. This approach not only saves significant time but also improves the accuracy of financial records, contributing to more effective financial management and informed decision making based on accurate and up-to-date data.

Banking reconciliation and decision making

The adoption of automated bank reconciliation has a direct and significant impact on the capacity of a business to make informed financial decisions.

Some of the more significant benefits include:

• Better visibility: Automated reconciliation promotes a clear vision and up-to-date view of the company’s cash position, enabling trends to be identified and cash flow to be proactively managed. 
• Early detection of problems: The immediate identification of discrepancies allows the problems to be addressed rapidly, from internal errors to fraudulent activities, thus protecting the company’s assets. 
• Compliance and audit: Automation facilitates compliance with accounting regulations and simplifies the audit process, reducing the risk of penalties and improving investor confidence. 
• Resource optimisation:  By freeing up time and resources previously spent on manual tasks, companies can focus on higher-value activities such as strategic analysis and financial planning
• Integration of financial data: The automated solutions can integrate with other business management systems, providing a comprehensive view of the company’s financial and operational situation

Conclusions

In short, automated bank reconciliation is more than just an operational improvement for modern businesses, it is a strategic necessity in today’s complex financial environment. The ability to identify discrepancies in real time and seamless integration with other financial and accounting systems provides a global and up-to-date view of a company’s financial health, which is essential for strategic decision making.

At Embat, we offer specific solutions to automate such as important process as bank reconciliation. With all the potential offered by new technologies and as artificial intelligence. So that the bank reconciliation process, far from being a headache, ends up being an agile and simple process.

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