Chapter 2

Best Practices for Building a Robust and Efficient Reconciliation Workflow

Best Practices for Building a Robust Account Reconciliation Workflow

It’s not a question that’s always asked — but why reconcile your balance sheet? The simple answer is to make sure you have complete and accurate financial statements. When you have an efficient reconciliation workflow, you can compare your general ledger balance to what it should be. This lets you identify potential reconciling items, which can lead to a discrepancy that requires a journal entry.

If you’re wondering when to build out your reconciliation workflow: It’s now. In fact, Christine Andrews of Mercury sees the reconciliation process as the most critical part of your month-end close. She says, “It's really important to prepare reconciliations during your close and not after —  because then you’re not identifying a problem after the fact.” For her, if you’re not reconciling your books, you’ll never have complete confidence in your balance sheet. And if you haven’t done it already, there’s the potential you’ll have to go back and fix the past.

Andrews also believes that a reconciliation workflow is an important practice for every accounting team — it ensures accuracy. “The purpose of financial statements being complete and accurate is that they can be used by the stakeholders. So often, that's going to be your executives. It's going to be your investors. It's going to be your FP&A team for making decisions on resources. So, if you don't know what your financial state is, then you can't make decisions for the future based on your actual past,” she explains.

Implementing a month-end account reconciliation process

The process of reconciling your balance sheet is a core component of a strong month-end close. Think of it as foundational, a way to set up the future for success. When you’re in the process of developing your own reconciliation workflow, there are best practices you can use, whether you’re a startup or a growing accounting team bringing processes in-house.

Andrews says, “If you're going through a balance sheet reconciliation for the first time, you need to understand the ins and outs of that account and what has been happening.” Ask yourself if it’s correct, and if it isn’t, you have the opportunity to fix the process moving forward.

Best practices for building an account reconciliation process

Accounting teams have become valued partners within organizations. They no longer just function in the background but are asked for information that provides decision-making insights. The faster your team can put processes in place that allow you to play this critical role, the better. Best practices help you build a functional reconciliation workflow from the start. They are:  

Ensure consistent formatting

Make sure your formatting isn’t different for every single account reconciliation because that can get confusing. Instead, create consistency across the company. That doesn’t mean there aren't some minor format differences. For example, a specific format for prepaid or fixed asset subledger might be different from a bank account, accounts payable, or accounts receivable workpaper. But you still want numeric formatting that’s clean — and you want all the checklist items associated with the reconciliations so you can ensure all of the activities related to that rec happened.

Andrews feels a good reconciliation has the right supporting documentation. She also says, “A really good reconciliation shows a roll forward of beginning balance, not just debits and credits. But describing it's an accrual, it's cash received, it’s transfers between accounts — and then what are each of those categories making up that balance. And then having a tickmark with supporting documentation for each one.”

Allocate reconciliations across multiple team members

Divide reconciliations across team members in a way that optimizes the process. You allocate based on strength, whether it’s an interest or their background. It's also important to cross-train across the team in case of absences and to promote learning.

Start account by account

Begin slowly, so you can truly understand the ins and outs of each account. Focus on each account in a detailed manner. Look for things you need to clean up. You may have standard accruals instead of reversing accruals that do not perfectly clear. This will require true-ups to make the balance what it should be, and not just having that difference always be there.

Create or combine general ledger accounts

During the process of starting account by account, you can also create new balance sheet accounts or combine accounts. The way to look at it is as you’re going through an account rec for the first time, you can better understand what’s currently happening. During that time, figure out if it might be cleaner to create a new recurring journal entry or if it makes sense to combine transactions that you don’t need the detail on. Andrews says, “I find that to be really efficient, I need to be able to slice and dice how I want to view the financial statements.”

Use discrepancies to improve the process  

A reconciliation is a control to catch an issue before you release the financial statements. Identifying discrepancies in your financial records can signal a well-executed rec that you created to find a problem. But you have to take the next step and fix the process for how that discrepancy happened to begin with.

Share information throughout the process

Encourage your team to communicate throughout the reconciliation process. Choose a method like Slack for quick questions and have a shared drive to back up saved reconciliations. You can store your supporting documentation, include tickmarks, and color code — anything that gives a full picture to people who need it. It lets people see what needs to happen next.

Take advantage of technology

Technology can streamline the account reconciliation process by automating some of the most the time-consuming tasks. For example, it can do things like integrate with your accounting software and excel, run automations to automatically sign off on certain low-risk account reconciliations, continuously pull bank data to automatically perform bank reconciliations, provide best-practice templates, flag missing transactions, and highlight reconciliation discrepancies. Technology can also play a key role in unifying your data. Andrews says, “The things technology allows you to do are critical for streamlining.”

As you move forward with your reconciliation process, it will get easier as you find the transaction flow that’s needed to reconcile accurately and quickly on a monthly basis.

Set reasonable thresholds for controls

Setting reasonable thresholds is a crucial aspect of the account reconciliation process and for establishing strong internal controls within the financial close process. By defining clear and attainable thresholds for ending balances, accounting teams can efficiently identify which  discrepancies matter and which are immaterial, ensuring a more streamlined workflow. This practice reduces the risk of reconciliation discrepancies and potential misstatements in balance sheet accounts. By aligning thresholds with the overall financial strategy and utilizing automated reconciliation rules, a company ensures that outstanding checks, overdrafts, and other potential issues in bank reconciliations and general ledger balances are identified and addressed in real-time. Such a practice not only contributes to accuracy in financial statements but also fosters excellence in financial reporting, setting a clear audit trail for any future examination.

Balance sheet reconciliation tips

Your reconciliation workflow is a work in progress. You’ll be tweaking and adapting to continuously improve your accuracy and efficiency. Some quick actions you can take include:

  • Measure your efficiency with a close calendar: Create efficiencies that shorten the process, such as software that tracks where you’re behind or ahead of schedule.
  • Be able to filter what’s ready for review: When you’re handling a high volume of recs, use tools that let you filter what’s ready for review. This is where communication is important as well, so you can plan accordingly to avoid a tsunami.
  • Make sure you have enough detail for someone new to the team: Your reconciliations should be documented in a way that makes it easy for someone to take over. For instance, it’s really important to be able to explain in an easy-to-understand way what is happening in an account instead of just having debits and credits.
  • Use details to categorize appropriately: If you don’t have details, go talk to the stakeholders.
  • Educate teams outside the accounting department: Talk to people throughout the company both to gather information and communicate what you’re doing. Let them know what info you need and why — and ask for details from them because answers to those questions could change the accounting impact. A quarterly meeting with different departments can be highly beneficial.
  • Don’t have too many cooks in the kitchen: If there are too many people in the system, it’s easy to assume what somebody else is doing is correct. Instead, make sure if you don’t know what’s happening in an account, that you can trace to see how you got into the system and what should be there along with everyone who was involved in the process.

Final thoughts

Your monthly reconciliation process is a way to do a detailed account-by-account flux analysis. Because when you're reviewing account balances and their reconciliations, it's not just your net activity that's hitting the GL. Andrews says, “It's identifying how it changes month to month and thinking about it from a roll forward perspective. And then, does that make sense? It’s really important that it makes sense.”

Embracing automation in the account reconciliation process is a strategic step to enhance efficiency in financial close processes. By integrating close management software with your existing accounting platforms, including ERP systems and Excel spreadsheets, organizations can automate reconciliations and swiftly address timing differences and missing transactions. Furthermore, systems that pull in transaction-level details in real-time can support monitoring for missing transactions, reduce discrepancies, and provide insights into cash-flow.

This real-time approach aligns with Sarbanes-Oxley requirements for internal controls, fostering consistency across cash accounts, asset and liability accounts, prepaid expenses, and more. Further, the efficient handling of accounts payables, receivables, intercompany transactions, and bank statements and credit card statements promotes an efficient close and detailed financial reporting. This approach enables CPAs to concentrate on more strategic financial planning.

The answers you find during the reconciliation process are what will lead you to have more complete and accurate financial statements, which will benefit your organization as a whole

Continue to 
Chapter 3
Your Guide to Implementing a Flux Analysis Process
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