Account reconciliation is one of those necessary but often tedious tasks in finance. Due to the accrual method of accounting and the volume of transactions, your business bank records may not match your internal records, such as your ledger. This is where account reconciliation comes in.

Whether you run a small business or manage a large organization, reconciliation ensures that your financial records match what’s happening in your bank or payment systems. It’s all about ensuring your numbers are accurate and that there’s no mismatch between what’s on paper (or in spreadsheets) and what’s happening with your cash flow.

There are two common ways to conduct account reconciliation: manual or automatic. In this article, we will examine what both entail and the differences between them. This will help you choose the most suitable one for your business type.

What is Manual Account Reconciliation?

Manual account reconciliation is the traditional process of matching a company’s financial records with external sources, like bank statements or invoices, to ensure accuracy. This method requires significant human intervention, as accountants or finance teams manually gather financial data, compare transactions, and identify any discrepancies that may need to be resolved.

The process typically involves several key steps, such as:

1. Gathering financial data includes collecting bank statements, ledgers, and other transaction records.
2. Manually comparing transactions: Each transaction is reviewed, matched, and verified to ensure consistency between internal records and external reports.
3. Identifying discrepancies: Any mismatches between records are flagged for investigation. Common errors include duplicate entries, transposed figures, or unrecorded transactions.
4. Resolving discrepancies: Once discrepancies are found, they are investigated and corrected before the accounts can be finalized.
5. Recording reconciled accounts: The final, balanced accounts are recorded after discrepancies are resolved.

Manual reconciliation often relies on spreadsheets and essential accounting software, with human oversight at every stage. While this method can work, it is time-consuming and error-prone and, as such, cannot be suitable for large companies or companies with frequent transactions. However, you can rely on manual reconciliation if your business is small and you don’t have frequent transactions.

One limitation of manual reconciliation is that it is labour-intensive. As such, many companies are shifting towards automation, especially as transaction volumes grow, to minimize cost and ensure accuracy.

What is Automated Bank Reconciliation?

Automated account reconciliation uses software and automation tools to simplify the reconciliation process. Unlike manual methods, where finance teams manually compare transactions, automatic reconciliation relies on software to pull financial data from various sources (bank statements, ledgers, etc.), match transactions, and flag discrepancies with minimal human intervention.

Automation tools can swiftly handle large datasets, significantly reducing the time it takes to reconcile accounts. With AI and machine learning features, these systems can learn from past reconciliations, improving accuracy over time by identifying patterns and reducing error rates. For example, machine learning can help detect anomalies that may go unnoticed in manual processes, ensuring greater precision and compliance with financial regulations.

Popular tools like BlackLine, Adra by Trintech, and Xero are widely used for automatic reconciliation. These tools offer features such as real-time data processing, transaction matching, and detailed audit trails. These tools are particularly beneficial for larger organizations with high transaction volumes, where manual reconciliation would be too slow and error-prone.

As businesses scale and transaction complexity increases, the adoption of automated reconciliation is growing rapidly, with more companies recognizing its benefits in terms of time savings, error reduction, and cost efficiency.​

Benefits of Automated bank Reconciliation

1. Efficiency and Speed: Automation significantly reduces the time and effort needed to reconcile accounts. What might take days with manual methods can be completed in hours or even minutes using software. For example, automated systems can cut reconciliation times from days to just a few hours.
2. Accuracy: By minimizing human intervention, automation significantly reduces errors, such as data entry mistakes or transposed numbers, common in manual reconciliation​. This leads to more reliable financial reporting and fewer discrepancies.
3. Scalability: Automatic systems easily handle larger transaction volumes. As businesses grow, automation ensures that financial operations keep up with the increased complexity, processing more data without added manual labor.
4. Data Integration: Automated reconciliation tools often integrate seamlessly with other financial systems, such as ERP or CRM platforms. This enables real-time updates and improved financial visibility across the organization.
5. Audit Trail: Automated tools maintain detailed records of every action taken during the reconciliation process, improving audit readiness and compliance by providing clear, accessible trails for regulators and auditors​

The Risk Associated with Automated Bank Reconciliation

Due to the accuracy and effectiveness of automated bank reconciliation, there are risks. Here are some of the limitations of automated bank reconciliation that are worth looking into:

1. Initial Costs: Adopting automated bank reconciliation software programs can be expensive. It requires significant monetary investment to cover purchase costs, setup costs, software maintenance costs, and training employees to use it. These initial investments may be a big hurdle​ for smaller businesses and can cause financial stress.
2. Dependency on Technology: Relying heavily on automation exposes the business to the risk of technical failures or system glitches, which could delay reconciliation processes if not correctly managed. To remediate this, you must have an excellent technical team to ensure technical issues are resolved quickly.
3. Customization Issues: Off-the-shelf automated solutions may not fully meet the needs of businesses with unique or complex reconciliation requirements​. The company might need to pay extra for unique customization.
4. Data Security Risks: With the rise of automation, there’s an increased risk of data breaches. Sensitive financial data stored in automated systems could be vulnerable to cyberattacks, making security measures a top priority.

Differences Between Manual and Automated Bank Reconciliation

1. Process Involvement: Manual reconciliation relies a lot on human effort. Accountants gather data, compare transactions, and resolve discrepancies manually, which can be tedious. In contrast, automatic reconciliation uses software to pull data, match transactions, and highlight issues with minimal human input. This shift reduces human labor and frees up time for more strategic tasks.
2. Speed and Efficiency: Manual reconciliation can take days, sometimes up to 8 days, depending on the complexity​ , while automated systems can cut that down to 3 days or even hours. Automation requires less time and fewer resources, allowing businesses to close their books faster.
3. Accuracy: Human error is a big risk in manual reconciliation, from simple data entry mistakes to overlooked discrepancies. Automation, however, systematically processes data, reducing the chances of error and increasing the accuracy of your financial reports​.
4. Cost: Manual reconciliation has ongoing labor costs, requiring continuous human involvement. Automation, while requiring an upfront investment in software and training, saves money over time by reducing labor costs and improving efficiency.
5. Flexibility and Customization: Manual processes can be more flexible for businesses with unique or highly specific reconciliation needs, as they allow for hands-on adjustments. However, automated systems may lack the same level of customization, though many tools offer a variety of integration and configuration options.
6. Risk Management: Manual reconciliation is prone to human error, resulting in financial discrepancies and audit issues. Automation minimizes these risks but introduces potential tech-related risks, such as system failures or security breaches.
7. Scalability: Automation excels at scalability. As your business grows and transaction volumes increase, automated systems can handle the added workload without extra labor. In contrast, manual methods become more cumbersome and time-consuming as transaction volume increases.

To decide which reconciliation process to adopt, carefully evaluate your business needs, considering factors like transaction volume and the potential for human error. Automation may be the way to go if saving time and improving accuracy are priorities.

Final Words

Contact MacAdebowale Professional Services today at emails@macadebowale.com or macadebowaleadvisory@gmail.com to discuss how we can help streamline your account reconciliation process and enhance your financial management. Let’s work together to achieve financial clarity and success!