What Is Balance Sheet Reconciliation?

While the detailed financial close will undoubtedly mean different things to different people, in its broadest sense, it relates to the set of paths or workflows that must be completed in a timely manner to ensure the complete accuracy of financial reporting.

Typically condensed into a 10-day timeframe, the financial close happens every month, quarter and year to varying degrees of complexity. The financial close is the process of taking those individual entities, closing their books and rolling the numbers up to a group level where they can consolidate and produce group financial statements before the information is passed over to a reporting group for disclosure.

There are four main components of the close:

• Close checklist – a checklist of all the processes that need to be executed along the record-to-report (R2R) journey, typically varying from 300 to 1,200. They need to occur within a tight timeframe and there are lots of dependencies, working across geographies and timeframes – requiring sophisticated project management capabilities to manage that checklist.
• Journal entry – the process of posting journals and validating them. What you enter must be approved and controlled.
• Intercompany – intercompany trade can represent a lot of transactions and a huge amount of work for the finance team, but you need to eliminate it from the results. Reconcile and accrue into the next month. The ideal situation is where the reconciliation is zero.
• Balance sheet reconciliation and certification – it used to be the auditor’s job to ensure the accounts are in order and identify discrepancies, but today it’s an essential part of an organization’s financial checks and balances.

For this article we will focus on balance sheet reconciliation – what it is and its role in the close.

Properly reconciling a balance sheet account involves making sure you have recorded and accounted for every transaction in your business and applied the proper classification in the process. Your balance sheet lists Assets and Liabilities as well as Owner’s Equity. Assets are items such as cash, receivables, inventory, prepaid expenses and fixed assets. Liabilities include amounts owed to vendors, customers, employees, debtors and others. Accounts that include liabilities are typically accounts payable, payroll and taxes payable, notes payable, deferred revenue and customer deposits.

The broad framework for balance sheet reconciliation includes:

• Ensuring every account in your balance sheet is certified/reconciled.
• Making sure it has proper assignments so they can be put through a workflow. That should include who is responsible for the preparation, the approval or the review; when is it due and the type of balance sheet category it falls into.
• The ability to apply risk ratings to accounts so you know which ones to focus on. Risk ratings could also drive the frequency of balance sheet reconciliation.
  Applying auto certification rules.
• Passing on any accounts that come out at the bottom of the funnel for manual investigation.

Remove the manual burden

Manual posting is the biggest bottlenecks of the closing process; between 60% and 70% of reconciliation work is performed by the preparers. Therefore, the key to removing the manual burden is auto-certification. Hackett Group analysis suggests the superior efficiency of top performing companies is down to greater use of process and technology-related best practices and automation of many traditionally manual tasks.

Automation cuts out costly, tedious and error-prone processes, freeing up accounting teams to focus on value-added activities. Use automation to match transactions and balances automatically and identify and report any discrepancies to be investigated by accounting staff. This focused approach will save valuable time by minimizing manual intervention but – and just as importantly – play a huge role in preventing errors and eliminating fraud.

Use pre-configured reconciliation routines

There’s no point in reinventing the wheel. Pre-configured financial tasks across standard areas including journal entry, balance sheet certification, intercompany and close task and checklist management simplify the process of comparing account balances between external sources and identifying and reporting any discrepancies. This frees up the time and resources of your finance team so they can spend less time on repetitive manual tasks and more time on value-adding analysis and investigation.

Automate review and approval workflows

Many organizations don’t have structured account reconciliation workflows. But leaving the process to chance can lead to certifications falling through the gaps. Some form of automated review and approval workflow ensures all steps of the reconciliation process are completed. It also provides a full audit trail that captures every decision, whether robotic or manual, and piece of evidence used for decision-making throughout the entire process.

Validate with underlying applications such as ERP or other systems of record

Despite the promise of automation, companies still devote significant resources – human and otherwise – to validating numbers against their ERP and other business systems to optimize the close process. Live integration with ERP systems, bank statements, other source systems and business applications ensure that you always have access to the most accurate data for reconciliation purposes. This improves the accuracy of financial statements and eliminates errors and risks. The solution underpins your balance sheet integrity process with fully auditable automation and builds trust to ensure reconciliations are thorough, accurate and on time.

Keep track with a progress and risk dashboard

Visibility into the reconciliation process is vital to track progress and minimize risk. A dashboard enables finance professionals to easily see the status and current risk of their balance sheet integrity. That includes monitoring reconciling items to understand ageing and potential write-offs, as well as categorizing items to understand the root cause and fix upstream problems.

Empower your people

A training plan must be a part of the ongoing activities to make your finance and accounting team a gold standard for your organization. Skimping on this element is a false economy. Make sure you have the right people in the right jobs. Identify talent gaps and look to make those strategic hires.

Commit to continuous improvement

Meaningful attempts to increase efficiency demand examination of the entire month-end close process, as focusing solely on the final mile risks missing the causes of bottlenecks, with the likelihood of creating even more issues down the line.

Having full visibility over the full financial close – versus simply closing the books – gives a holistic view that allows you to measure and continuously improve your month-end processes to make the finance and accounting team valued by the entire business and help everyone understand the contribution that the finance and accounting team is making to the overall business goals.

Despite progress in accelerating closing cycle times and submission dates, further opportunities for improving the end-to-end account-to-report process remain. Hackett Group warns that the financial close marks the end of a process that goes on throughout the year and meaningful improvements require it to be addressed in a holistic way. The analyst highlights reconciliations and manual tasks as offering ample room for improvement.

Hackett Group’s research also suggests that the combination of greater use of best practices, a focus on eliminating process bottlenecks, spreading out workloads more evenly over the month, and process improvements using technology solutions, could go a long way to achieving efficiency gains. The research states: “Putting all of these practices in place eliminates the focus on pure speed in the close, emphasizing instead a more efficient, productive and better experience for all stakeholders.”