Cost Reconciliation: Process, Benefits & Tips

Every individual and business wants to be sure that they are only having to pay for goods and services they’ve used, rather than mistaken costs. Cost reconciliation provides this assurance. While it may be possible to handle manually for individuals and small businesses, cost reconciliation for large and growing businesses is best conducted with the aid of automation software. 

We’re going to explore how to do reconciliation in accounting and understand the steps of cost reconciliation specifically. 

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What is Cost Reconciliation?

Cost reconciliation, or expense reconciliation, is the process of comparing your cost records to actual expenditures. The intention is to make sure that your transactions align with your financial statements. At the same time, you can ensure that all expenses incurred match up with your forecasts or budgets for that financial period. 

Cost reconciliation is a critical finance and accounting function that helps businesses to understand their expenses, improve budgeting, prevent fraud, and establish proper financial management. 

What are the Benefits of Cost Reconciliation?

Having your finances in order and accurately recorded is crucial to be able to make informed business decisions. Along with this fact, here are additional advantages to performing cost reconciliation:

1. Prevent Mistakes

No matter how experienced your finance and accounting team is, mistakes can creep into your books. And, over time, even the smallest blunder can spell disaster. 

By executing cost reconciliation, you can catch mistakes before they pile up. Additionally, by ensuring that you are paying the right amount to your vendors, you can build and protect healthy business relationships. 

2. Understand Cash Flow

With cost reconciliation, you gain a clear view of where your business is spending its money. By reviewing patterns and trends, you can protect cash flow, as well as see where opportunities may lie to cut spending and save more. 

3. Curtail Fraud

Should you notice any duplicate transactions or transactions that were not actually made by an actor in your business, you’ll be able to address it right away. Taking action against fraudulent charges quickly helps to not only protect your cash flow, but also to assess your business’ security measures. 

4. Protect Budgets

Ideally, you’d want your expenditures to align with what you have budgeted. However, if this is not the case, then you can gain clarity as to why not when you conduct cost reconciliation. You may need to reallocate resources or make changes to stay within your budget moving forward. 

What are the Key Techniques of Cost Reconciliation?

There are a few different ways that your business can conduct cost reconciliation, namely:

• Manually: It’s possible to perform cost reconciliation by relying on paper records of transactions. However, it’s important to be aware that not only is this time-consuming, but you also run the risk of missing records. 

• Spreadsheets: Another way is to use spreadsheets. While this is faster than paper-based, manual reconciliation, it can also prove to take a lot of time and suffer from data loss and/or manual data entry mistakes. 

• Automation Software: Last but certainly not least, the most effective and accurate way to perform cost reconciliation is with the aid of automation software. Automation protects and connects your data in real-time, records all actions, and removes key person dependencies, manual errors, and bottlenecks from the picture. 

What are the Steps in the Cost Reconciliation Process?

No matter the techniques or tools you use, the process of cost reconciliation will follow the same basic steps. That being said, the method by which you execute reconciliation will determine its accuracy, speed, and efficiency. 

Here’s a look at the steps to follow:

1. Collect Data

Start by collecting all the documentation that you will need to compare your recorded transactions. This includes internal records, as well as external statements with expenditures. 

2. Compare Transactions

Compare each record side-by-side to ensure the line items in your books reflect what transpired in the statements. You’ll also want to check external statements against receipts to ensure amounts and dates are correct. 

3. Identify and Act Upon Discrepancies

Should you or the software notice any discrepancies, it’s important to take action and investigate the reasoning. 

4. Review and Approve

Typically, the reconciliation process will include more than one set of eyes to review and approve the final outcomes. With the use of automation software, you can trust that the approval process will flow smoothly, so you don’t have to worry about approvals getting stuck on someone’s desk. 

5. Document Records

Keep track of all records for reference and in case of audits. Automation software will inherently store all your records, adjustments, and ensure that an audit trail is readily available. 

What are the Components in Cost Reconciliation Statement?

While the steps of reconciliation are straightforward, the entirety of the process doesn’t end there. To ensure your cost reconciliation statement is accurate and complete, these components and needs must be met: 

1. Data Collection

Make sure to collect all expense data. This includes: receipts, employee expense reports, invoices, and credit card statements. 

In some cases, especially when documentation is stored across computers or personnel, this step can be harder than it should be. Consider leveraging automation software that connects all your data systems in a centralized repository. 

2. Data Verification

Your reconciliation process is only as accurate as your data. Review the data you have in hand to make sure there are no inconsistencies, redundancies, or missing pieces. 

3. Analysis

After finishing up the reconciliation process, you can utilize the workflow to make informed decisions through analysis. Review and analyze data to spot trends and seek cost-cutting opportunities. The best automation software includes detailed analytics, so you don’t have to worry about another to-do on your list! 

How to Streamline Expense Reconciliation?

No one will debate the importance of expense reconciliation, but most would ask how their team can streamline the workflow given its naturally time-consuming and repetitive nature. 

We’ve mentioned it a few times throughout this article, and we will again because it’s the tried and true way to save time, reduce errors, and save money– use technology! 

Automation Software 

Automation software that is equipped with a reconciliation software will connect, cleanse, and compare your records in seconds. You can cut your reconciliation processes and spend a fraction of the time. 

As a result, your team members have more time to allocate to high-level and value add tasks that require human thought and strategy. Additionally, automation software can provide customizable reports and dashboards so that each relevant stakeholder can glean the insights they need from reviewing cost reconciliation reports. 

Digital Receipts

Another useful technology to leverage are digital receipts. Expense management systems provide your business with this feature, so you never have to worry about collecting, filing, or finding a paper receipt again. 

What are the Challenges of Reconciling Costs?

Creating a cost reconciliation report is doable by following the steps outlined above, yet many companies face challenges in the process. Some hurdles faced may be:

1. Manual Errors

One of the most common challenges for companies is manual data entry errors. They are inevitable, and the only way to fully avoid them is to utilize automation software. 

2. Dispersed Data

The number of expense payers your business has will impact how much time it will take for cost reconciliation, if being done manually. This is because it means you’ll have more records to go through, as well as more sources for the records in the first place. 

3. Data Format

It’s also difficult to collect and combine data when it comes from multiple sources in different formats. Even if you use a spreadsheet, this process can become time-consuming as the number of transactions grows. Automation software scales with your business’ data. 

How to Handle Cost Reconciliation Disputes?

While no one likes it to happen, it may be the case that you’ll run into cost reconciliation disputes with your suppliers and contractors. Should this happen, the best resolution is a quick and effective one where both parties can agree. 

Follow these steps to make this outcome a reality:

1. Prepare Cost Reports

Prepare and review cost reports in a timely manner. This document should spell out the category, phase, activity, and contract and be based on trustworthy data. 

2. Communicate with Suppliers

Keep open lines of communication with your suppliers and contractors so that you can review cost reports together and negotiate an agreed upon solution. 

3. Leverage Software

To avoid delays in spotting or resolving discrepancies, it’s recommended to use reconciliation software to automate the process. This way, you can collect, organize, and analyze records in real-time and with the confidence of having a single source of truth. 

4. Document Everything

Document and save cost reconciliation records. Have a clear procedure and outline by which your company is expected to do so. It’s also important to standardize this process and secure the data. 

5. Follow Up

As the final step, be sure to follow up on reconciliation issues and disputes to ensure you can close it out as a finalized matter with an agreed upon action. By following up, you can also maintain healthy relationships with your vendors. 

Wrap Up 

The cost reconciliation process used to take a lot of time and effort when companies had to rely on manual efforts. Luckily, technology innovation and the intuitive nature of automation software has made it second nature for businesses to perform cost reconciliation without much human intervention. 

As a result, business leaders gain access to better internal control, most trustworthy financial statements, improved compliance, reduced errors, streamlined processes and cost savings. What more could you ask for?!