Cash Reconciliation: Step-by-Step Process, Best Practices, and How to Automate

Why Cash Reconciliation Is Critical for Finance and Accounting Teams

Cash reconciliation is worth paying attention to largely because of the downstream processes that depend on it.

If you’re a controller, you care about delivering a faster close, reliable statements, pristine audits, and full visibility into the cash flows of your organization. Every one of these deliverables begins with a sound cash reconciliation process.
While bank reconciliation, or “cash in bank” can cover the majority of an organization’s transaction volume, the full suite of cash reconciliation activities actually combine to play the role of sentinel indicator for your organization’s finances. When unaccountable discrepancies arise in the cash reconciliation process, it can indicate deeper issues or flaws in other processes. An investment in cash reconciliation is an investment in your team’s ability to know when something is wrong.

Protecting Financial Statement Integrity and Audit Readiness

So, what does it mean if something isn’t adding up within the cash line item? That’s exactly what your stakeholders will be asking. With a robust cash reconciliation process in place, you’ll have an answer.

In effect, cash reconciliation can act as a safeguard against financial chaos. It validates accurate balance sheet cash balances and income statement revenue and expense recognition. It can lead to fewer late or top-side adjusting entries during the close. You can expect a cleaner audit, with clear evidence for material reconciling items. 

Considering that broad range of benefits, cash reconciliation occupies an indispensable place at the core of your accounting workflows. Streamlining the process with tools that capture audit trails automatically, for instance, is part of how teams leverage tools like Numeric to save time and improve reliability.

Fraud Prevention, Control, and Regulatory Compliance

But what happens when cash reconciliation reveals that something is actually not as it should be?

Unauthorized withdrawals, duplicate payments, or unusual transactions can surface during the cash reconciliation process, but that’s only useful insofar as segregation of duties is enforced. It’s critical that the same person doesn’t perform every part of the reconciliation process, and that separate individuals are tasked with each of the below:

• Custody: The person who receives checks, processes deposits, or has access to petty cash
• Recording: The person who enters transactions into the accounting system, posts deposits to customer accounts, or records expenses
• Reconciliation and Review: The person who reconciles bank statements and investigates discrepancies

Because cash is liquid and is at high risk of being misappropriated, no single person should be able to perpetrate and conceal fraud or error. Baking the above segregation of duties into your cash reconciliation efforts is a simple way to reduce that risk.

Furthermore, such segregations are expected from a compliance standpoint, particularly for large or public companies where it’s standard to maintain clear preparer and reviewer roles for reconciliations. Making sure these controls are reflected in your process at a granular level can protect the integrity of your accounting operations more broadly.

Enabling Better Cash Forecasting and Decisions

In order to do their job, your organization’s CFO needs to know how much cash there is, and where.

Without cash reconciliation, this question is not answerable with much confidence. In addition, the planning activities that CFOs, treasurers, and FP&A teams conduct using cash data (like short-term cash forecasting, liquidity management, vendor payment planning, debt drawdowns, and investment planning) depend on timely, reliable information, which is only attainable through timely, reliable cash reconciliations.

Accurate, reconciled cash is also the foundation for treasury operations and FP&A models. Trying to plan scenarios around burn, runway, growth, or investment is only productive when the underlying numbers are accurate. Tools like Numeric which act as the intelligence layer on top of your general ledger can help to surface cash-related issues and trends in real time, improving the consistency of essential data for downstream workflows.

Step-by-Step Cash Reconciliation Process

The cash reconciliation process is made up of a few steps. At a basic level: accountants gather data, match balances and transactions, identify and investigate discrepancies, record adjustments, and finalize reconciliations.

Additional steps may be needed to complement this basic sequence, or teams may adapt the sequence based on industry- or organization-specific needs. Also, modern tools mean that teams rely less on following a traditional sequence, and instead can use a more continuous, real-time approach. For high-volume or retail businesses (as detailed above), daily or shift-level reconciliations can meaningfully limit fraud or error risk, for instance.

Below are the steps that most teams will follow when performing cash reconciliation.

Step 1 – Define Scope, Frequency, and Ownership

In this preparatory step, your team identifies and ensures access to the accounts and flows that will be reconciled. Common ones include bank accounts, merchant accounts, processor clearing, petty cash, and POS tills.

Then, you’ll determine the frequency of reconciliation, based on risk and volume. High-risk or high-volume accounts may merit daily or weekly reconciliations, while other accounts can be reconciled monthly.

It’s also important, at this stage, to clarify RACI (Responsible, Accountable, Consulted, Informed) roles for each task. Who will do the actual work? Who will own the task? Who provides input? And who will be kept up-to-date? Establishing these roles is critical to achieving a speedy and efficient reconciliation process.

Note that this step doesn’t need to be completed every time you reconcile accounts; it’s included here because it will meaningfully benefit the later steps in your reconciliation process.

Step 2 – Gather and Normalize Internal and External Data

Now, it’s time to get to work!

To gather your internal data, you’ll want to export it from whichever system it lives in. For example:

• General ledger cash account transactions: exported from ERP/accounting system
• Cash subledgers: export transaction logs that feed into general ledger cash accounts
• AR/AP subledgers: export payment transactions (customer payments received, vendor payments made)

For external data, you’ll want to download bank statements, export processor settlement files (e.g., from Stripe, Paypal, or Square), and obtain transaction activity reports from other sources like investment custodians or POS systems (depending on what your organization does).

Finally, once the internal and external data has been pulled, you’ll normalize it. This means standardizing dates, currencies, reference fields, transaction types, and other relevant fields. The goal is to convert the data from all its different source formats into one consistent, comparable format. Unless it's normalized, your data will be impossible to match and your accounts will be impossible to reconcile.

Step 3 – Match Balances and Transactions

Now that your internal and external data is ready, start with top-level balance comparisons. For instance, compare your general ledger ending balance against the ending balance on record with your bank, processor, or custodian.

Then, it’s time to start matching at the transaction level. Deposits, payouts, and batched settlements don’t always match up 1:1, so you’ll need to look at the following:

• One-to-one: A single transaction in the general ledger matches a single transaction in the external evidence with the same amount, date, and identifier.
  
• One-to-many: A single transaction in the general ledger corresponds to multiple transactions in the external evidence, such as a batched deposit made up of several individual payments.
  
• Many-to-many: Multiple transactions in the general ledger correspond to multiple transactions in the external evidence, often requiring aggregation on both sides to reach a matching total.

Match the transaction using identifiers (e.g., transaction IDs or invoice numbers), amounts, and dates.

Your primary goal is to match as many transactions as possible between internal records and external evidence. There are clear matches, where the data lines up, and discrepancies, where it doesn’t. Matches can often be processed automatically, while discrepancies require additional attention.

Step 4 – Identify, Categorize, and Investigate Discrepancies

When you investigate a discrepancy, you’re trying to get to the bottom of why internal and external records don’t match. There are some common reasons for this:

• Timing differences: lags due to deposits in transit, outstanding checks, and transaction settlement
  
• Missing or duplicated entries: items that either don’t appear or appear twice on the GL or in external documents
  
• Amount differences: partial payments, fees netted from payouts, or FX impacts

When a discrepancy is easily understood and cleared, it’s known as “benign”. It’s common to see benign discrepancies, and oftentimes, standard rules are enough to help you clear them. However, discrepancies that aren’t easily cleared can suggest process breakdowns or even fraud. These are known as exceptions, and they require even deeper investigation.

Tracing exceptions back to their source documents (whether those are invoices, remittance advices, contracts, or bank memos) can reveal the cause of the discrepancy. Software can help you automatically classify and clear these exceptions, and connect them to expected resolutions.

Step 5 – Record Adjustments and Finalize Reconciliations

Next, you’ll record new journal entries that update the general ledger to match external evidence. If you find discrepancies that correspond to bank and processor fees, interest, FX adjustments, or errors, for instance, you can record a journal entry that corrects the GL accordingly.

Then, you can produce a formal reconciliation: a documented, structured summary that demonstrates alignment between internal and external records. The following formula captures it in simple terms: 

Beginning balance + internal activity − external activity ± reconciling items = ending balance (with tie-out).

It’s best practice to document reconciling items thoroughly, complete with dates, descriptions, and expected clearance timelines. Based on the RACI framework established in Step 1, you’ll submit your reconciliations for review and approval by the designated team member, with a clear audit trail attached.

Step 6 – Monitor and clear outstanding items over time

With your reconciliations and adjustments submitted, the final step is to ensure you have an aging schedule in place for discrepancies. This schedule consists of a few different buckets for items of different types and ages. 

For instance, items can be grouped by days outstanding: 0-30, 31-60, 61-90, or 90+. They can also be grouped by reason for exception, priority/materiality, or payment status. The purpose of these classifications is to help track your reconciliations, and to establish thresholds for escalation or action (like further investigation or write-off). The aging schedule is one example of how organizations are enacting continuous accounting principles; by monitoring reconciliations or even implementing a weekly or daily cadence for high-volume cash reconciliations, you can keep tighter financial controls and generate better insights for planning and forecasting.

As with step 1, this step is an ongoing, supporting structure that helps the overall cash reconciliation process function more smoothly. The modern approach to cash reconciliation means leveraging technology to automate and streamline parts of the process, improving the efficiency of your month-end close along the way.

Best Practices for Efficient, High-Quality Cash Reconciliation

A best-in-class cash reconciliation process builds on the basic steps above by applying a set of practical, repeatable habits that improve speed, accuracy, and control over time. Think of the following as principles to guide your optimization journey.

Standardize Policies, Templates, and Materiality

The month-end close, along with the weekly or daily cash reconciliations that your organization may need, can be repetitious and time-consuming. You can automate workflows where possible, but don’t forget to also introduce standardized, centralized protocols that help your team accomplish routine tasks faster.

Reconciliation templates, for example, can help enforce the same fields, naming conventions, and categories each time you reconcile accounts. It can also help to have documented policies where team members can observe standards around frequency or materiality, for instance. Centralized, visible policies help reap the benefits of standardized processes, and expectations can be made even more visible if you maintain a shared checklist.

Strengthen Segregation of Duties and Controls

No matter the size of your organization, certain tasks need to be segregated from others to ensure integrity and compliance. Individuals who handle cash shouldn't be the sole preparers of cash reconciliations, for example. In addition, the review cycle is a priority and should be conducted by more senior staff.

You can also identify high-risk or high-volume accounts and apply scrutiny accordingly, in the form of periodic spot checks or managerial reviews.

Increase accountability even further by implementing a system that attaches documentation to each formal action in the process. If a reviewer signs off on a reconciliation, your system can document it. Commentary on reconciliations or approvals can also be documented for posterity. Critically, this supporting information should reside in one centralized place, rather than scattered across inboxes or data drives.

Expand Beyond Bank-to-GL: System-to-System Reconciliation

Bank reconciliation is a core piece of any cash reconciliation, but some firms choose to reconcile systems upstream of the bank account as well. Subscription or marketplace businesses, for instance, can trace and reconcile flows through the following sequence:

• Billing/CRM systems: what you invoiced customers for
  
• Payments processor: what customers actually paid, net of fees
  
• General ledger: what you recorded as cash in your books
  
• Bank statement: what actually landed in your bank

Visualising the flows between these steps can help you identify potential points of failure.

In a similar vein, some teams reconcile AP and AR subledgers to the general ledger as part of their cash reconciliation strategy. This tightens the operational relationship between the two ledgers, so that, for example, your collections team doesn’t waste time chasing payments from customers who have already paid.

Track Metrics and KPIs for Reconciliation Health

Reconciliation health can be measured objectively with the help of hard metrics and KPIs.

Given that reconciliation benchmarks vary based on organization size, industry, and complexity, it’s not necessary to target benchmarks right away. Instead, begin by measuring and documenting these KPIs, and improving iteratively month-over-month relative to your own performance.

Here are a few KPIs to start tracking:

• Days to close
• % of accounts reconciled on time
• Average age of reconciling items
• Match rate (manual vs. automated)
• Number of post-close adjustments related to cash
  

You can also use project management tools to track how much time your team is spending per account each reconciliation cycle, in order to uncover pain points where automation might have greater impact.

And, keep in mind: cash reconciliations are the most time-consuming part of your month-end close. The month-end close, which is essential to the functioning of so many aspects of your organization, is only effective insofar as it reflects recent data. Time is of the essence, and a speedy close can’t happen without speedy reconciliations. So it may be sensible to integrate reconciliation KPIs into your broader month-end close KPI framework.

Ways to Automate Cash Reconciliation

Realistically, automation and AI tools aren’t ready to carry your cash reconciliation process from start to finish. However, this technology can be applied to specific activities or pain points, and implemented gradually across your stack to deliver incremental improvements.

Here’s where to start looking for automation opportunities.

Automating Data Ingestion With Bank and System Integrations

If you’re pulling the same information from the same data sources each time you reconcile, why not automate the exports and downloads each month?

Bank statements and balances can be pulled automatically via integrations, eliminating the need for manual downloads or CSV exports. Further integrating with your ERP and subledgers (via Numeric) can give you the data to start reconciling right away, and can actually be more accurate than the manual copy-paste process. It also creates near real-time visibility into cash positions.

Rule-Based and AI-Assisted Matching Engines

Rule-based matching is the practice of setting up rules so that your system can automatically match transactions. For example, you can create a rule that says, “if you find two transactions that match on both amount and date, then match them automatically”. In addition to amount and date, you can build rules based on reference numbers, known variance rates (e.g., due to fees), date ranges, or other patterns.

AI tools build on this capability by actually learning from your manual match activity and suggesting new rules. Over time, AI and rules-based matching can eventually cover the majority of matches in your cash reconciliation process, which gives your team more time to investigate exceptions and otherwise close the books.

Exception Management, Workflows, and Automated Journal Entries

Even the best automated matching system can’t match every transaction. The exception queue is a list of exceptions generated by your automated matching platform once it’s done matching everything it could. 

With exception management, your team can deal with exceptions based on a predetermined priority framework. High dollar items, items belonging to a particular age bucket, or exceptions that follow a specific pattern can be scored or prioritized, sometimes following a tiered system. You can also set up rules to create recurring journal entries automatically, if routine factors like bank fees, FX changes, or recurring transfers are leading to recurring exceptions. However, this depends on tight integration between your ERP and an accounting platform like Numeric.

Moving From Monthly Recs to Continuous Cash Reconciliation

Some organizations need to reconcile cash daily or even intra-day. But even for organizations that don’t find it strictly necessary, more frequent reconciliation offers considerable benefits. Automated data feeds allow you to reconcile up to multiple times a day, enabling you to catch fraud or errors earlier and enjoy fewer surprises at month-end.

The “continuous close” is an approach that involves spreading out closing activities throughout the month, rather than concentrating them into a few days. Closing the March books, for instance, involves a few days of concentrated work at the beginning of April. The continuous close distributes this work throughout the month of March itself, which lightens the load during those first days of April. 

If one of your objectives is a faster month-end close, then every cash reconciliation task that your team can complete before the end of the month is an easy win.

Implementation and Change Management Considerations

Automation isn’t a fix-all. If your processes are broken or don’t accomplish what you want them to, then automating them will only make the problem worse. Fix your policies and data flows first, then layer in automation where it demonstrably saves time and resources.

Looking for a starting point? Find proof of concept by automating transaction matching for a single high-volume account or payment processor. Refine your rules and troubleshoot your integrations based on this single pilot, and calculate ROI for implementing similar automations across your workflow.

Finally, address the elephant in the room: automation and AI are here to augment your processes, not to replace your employees. New tools have their own learning curve, but the shift in responsibilities that results from their implementation brings a learning curve of its own. Your team will dedicate less time to spreadsheet wrangling and more time to exception investigation, for example; to take full advantage of this benefit, invest in preparation and training for the team members involved.

Taking Steps Towards Better Cash Recs

Cash reconciliation isn’t the most complex accounting workflow, but it’s one of the most important. Cash is essential to the functioning of any organization, and unless you understand how it moves across accounts, it’s impossible to gain a sense of your organization’s financial position.

That’s why it’s worth investing in. Financial integrity, fraud prevention, liquidity management, and other essential processes like the month-end close depend on it.

Modern tools like Numeric can help you build a cash reconciliation process that leverages AI and automation to deliver faster, more accurate outputs. You can go from burdensome month-end reconciliations to continuous, integrated workflows that give you visibility into your organization’s cash whenever you or your stakeholders need it.

If you want to audit your current cash reconciliation process and explore how Numeric can help modernize it, request a demo today.