What is Balance Sheet Reconciliation? Complete Guide

Balance sheet reconciliation is crucial for every business to perform to understand the company’s financial position and make informed decisions accordingly. While a balance sheet reconciliation checklist is a good place to start to ensure nothing gets lost in the shuffle, automation solutions for balance sheet reconciliation streamline the process, recuce errors and free up time.

In this article, we’ll explore what balance sheet reconciliation is, its common challenges, and how automation software can save your business time, money, and help to prevent errors.

Coming Up

1. What is Balance Sheet Reconciliation?

2. What are the Challenges of Financial Close?

3. What are the 4 Key Pillars of the Financial Close Process?

4. What is the Role of Balance Sheet Reconciliation in the Financial Close Process?

5. What are the Key Elements of Balance Sheet Reconciliations?

6. What is the Balance Sheet Reconciliation Checklist?

7. What are the Costs of Manual Reconciliation?

8. What are the Common Pitfalls of Balance Sheet Reconciliation?

9. How to Overcome Challenges of Balance Sheet Reconciliation?

10. Wrap Up

What is Balance Sheet Reconciliation?

Balance sheet reconciliation is the accounting process of reviewing and closing the balance sheet at the end of the month, quarter, and/or year. Balance sheets consist of assets and liabilities. Before you set the balance sheet as final, you want to make sure that every transaction is properly categorised as one or the other.

In order to close the accounts, it’s imperative to check that everything is accurately in order and reflected. Balance sheet reconciliation consists of closing these accounts:

• Accounts payable
• Accounts receivable
• Payroll liabilities
• Accrued liabilities
• Loans and debt
• Cash account
• Prepaid expense
• Inventory

What are the Challenges of Financial Close?

When performed manually, there are countless challenges that come along with the financial close process.

Imagine this scenario - you’re at the end of your fiscal closing quarter and are struggling to keep up with the pace of business. You find yourself manually trying to connect multiple ERPs, bank transactions, and other methods of accounting. Sound familiar?

You’ve experienced something similar. These challenges arise because there’s just so much to get done, especially with a high transaction volume - whether that’s completing checklists, processing balance sheet reconciliations, submitting journal entries, finding unmatched transactions, etc.  

These manual processes are made even harder by outdated technology and disconnected data from multiple ERPs, subledgers, banks, and other sources, requiring extensive use of spreadsheets and a huge amount of manual, repetitive work.

To help overcome the manual challenge of the balance sheet reconciliation process, automation solutions exist to prevent errors, automate the tasklist, and remove key person dependencies, helping to free up your team’s time to spend on high value add responsibilities.

What are the 4 Key Pillars of the Financial Close Process?

Every business has its own way of determining what a financial close looks like. It is basically a set of workflows that must be completed on time to make sure that the financial reporting is accurate.

The financial close process can be quick and painless (with the aid of automation) or long and drawn out (when performed manually). Depending on your schedule, it can occur every month, quarter and year. Once the reconciliation has been completed, the books can be consolidated and used to produce financial statements. These may or may not be passed onto a reporting group or made public (which means compliance is also key).

There are usually four main components of the financial close process:

• Close checklist – This is a checklist of all the processes that need to happen along with the record-to-report (R2R) journey.

• Journal entry – This is the process of posting journals and validating them, which needs to be approved and controlled.

• Intercompany – This can be a ton of work for your finance team, but you don’t need to include it in your results right away (you can put this into the following month). You ideally want your reconciliation to equal zero.

• Balance sheet reconciliation and certification – Making sure the accounts are in order to rectify any discrepancies.

What is the Role of Balance Sheet Reconciliation in the Financial Close Process?

So far, we’ve gone over what balance sheet reconciliation is as well as the challenges and the four key pillars. It’s now time to discover what the role of balance sheet reconciliation is and what it looks like as part of the financial close process.

In order to have a clear view of the company’s financial position, it’s really important to reconcile your company’s balance sheet at the end of an accounting period to make sure it is accurate.

Furthermore, from time to time, this information is often used by other stakeholders such as bankers and insurers to make sure your business continues to be creditworthy. It is also important to disclose these balance sheets when trying to get investors interested in your business.

What are the Key Elements of Balance Sheet Reconciliations?

To perform balance sheet reconciliations properly, it’s vital to understand what the key elements of the process include.

On a high level, balance sheet reconciliation includes:

1. Making sure all your accounts in your balance sheet are checked against other documentation in order to ensure accuracy.

2. Ensuring your balance sheet has the necessary items so it can move through a workflow, which may include the person responsible for preparing the sheet, the approver or reviewer, the due date as well as the category assigned.

3. Applying risk ratings to your accounts so you can focus on the accounts that matter.

What is the Balance Sheet Reconciliation Checklist?

You may be wondering what items you need in your balance sheet reconciliation checklist and here they are:

1. Combine all your accounting documents
   You will want to pull together all your important documentation such as bank statements, receipts, your current account balances, and other accounting and financial records.

2. Compare your documents
   While you check information on your accounting documents, make sure you keep an eye out for inconsistencies.
   
   
3. Make changes (if you need to)
   During your reconciliation process, if you happen to locate any inconsistencies, be sure to make the necessary changes.
   
   
4. Check to see if your sheet is balanced
   You need to make sure your total assets equal your total liabilities and total equity in order for your sheet to be balanced.

What are the Costs of Manual Reconciliation?

Despite the advent of automation solutions that maximise productivity,  many businesses still rely on performing manual reconciliation.

However, this method can be ineffective for many reasons. Here’s a look at what it can cost your business:

1. Time

The time spent pulling together data from disparate systems and manually cross-checking records is time that could be better spent making strategic plans. The data collection phase, while it should be the easiest, can oftentimes end up wasting the most time and being the most stressful because of the sheer amount of data needed.  

2. Cost

Not only does manual balance sheet reconciliation cost your business time, but it can also cost it mistakes. Mistakes from the inevitable manual errors can lead to fines and/or reputational damage.

It can also cause poor decision-making if financial statements are inaccurate, which could end up costing the business more than you could imagine.

3. Risk

If your business is still doing manual balance sheet reconciliations, there’s a higher chance of the numbers being inaccurate. This can lead to fraud risk, compliance risk, strategic risk, operational risk, and reputational risk.

4. Audit & Compliance

You will usually see some of the most common accounting incidents stem from compliance personnel and auditors. If financial statements are inaccurate, it can lead to bigger issues in the short and long-term when it comes to audits.

5. Decreasing Value of Employees

Having a manual process for your business can impact your business because it results in your employees being less productive, which decreases the overall value that the employees bring to your business.

Using automation can help curb this so your employees can add more value to your organisation and spend their time more wisely providing valuable insights to the business, as opposed to conducting repetitive and tedious manual labour.

What are the Common Pitfalls of Balance Sheet Reconciliation?

While we have spoken about how balance sheet reconciliations can be useful for your business, you will also want to be aware of the common pitfalls of balance sheet reconciliations.

For a long time, businesses have been heavily reliant on Excel spreadsheets along with email and workflow systems or platforms to help with the process of balance sheet reconciliations. However, this approach doesn't solve the underlying issues at hand. A lot of errors can occur such as miscoding or misallocations.

While spreadsheets are easy to operate, they also require finance teams to make sure that the spreadsheets are configured correctly and manually populated. If there is any (even minor) mistake, the errors and risk increase as the amount of data to be processed and complexity of calculations in the spreadsheets increases as well.

On the other hand, some applications can help businesses gain control over their balance sheets but don’t really offer efficient ways around the manual efforts required for preparing for reconciliation. Not every solution can address your business, so it requires adequate research when picking the tool that’s right for you.  Here’s a complete guide on how to choose the best reconciliation software.

Lastly, making sure the integrity of your balance sheet is intact is fundamentally necessary. For example, if your balance sheet is picked up by external auditors then that would be a huge red flag for your business.

How to Overcome Challenges of Balance Sheet Reconciliation?

While it may seem like you’re riding uphill when trying to figure out how to complete these balance sheet reconciliations for your business, try to remember there are multiple ways to overcome these challenges.

Here are ways to overcome the challenges of balance sheet reconciliations:

1. Get rid of manual processes

You can use automation solutions to ensure that your transactions and balance sheets are matched and there are no discrepancies. You will be able to save your employee’s time because they won’t have to manually look over your finances. This is especially useful when you have a high volume of transactions.

2. Have a systemised reconciliation process

Having a specific system in place where your financial tasks are already set up can help free up your time as well as your employees’ time and resources so the focus shifts to adding value to your organisation in other ways.

3. Automate workflows

If you decide to implement an automated workflow for your business, you can ensure that each step in the reconciliation process is completed correctly and can trace discrepancies later on, if there are any. It provides you with a historical record of all data that is stored safely and securely.

4. Check your financial statements against other business systems

You can integrate your financial data with other applications and business systems so that you have the most accurate reconciliation statements. This will help get rid of unnecessary risk.

5. Track your progress with a dashboard

A dashboard lets finance employees and stakeholders easily see where the business currently stands.

6. Implement a training plan

It would be a good idea to implement a training plan for your team so that your employees can continue to perform at a high level. This is especially relevant when you introduce a new software system to ease their burdens.

7. Continue to improve

As you attempt to increase efficiency in your business, having an overall view of your workflows and finances will help you to continuously perform process improvement.

Wrap Up

Balance sheet reconciliation can be tricky and challenging when performed manually, waste time and can result in critical errors. When you implement a finance automation solution, the workflows become standardised and streamlined.

This not only prevents errors, and saves both time and money, but it also reduces key person dependencies and adds an unprecedented level of visibility into your most important processes.