Manual vs. automated payment reconciliation – a comparative guide

Payment reconciliation is one of the most critical workflows in any accounting department. Companies often deal with thousands of daily transactions and multiple payment service providers (PSPs), which makes it crucial to ensure the accuracy of your payment records and ledger. However, with a manual reconciliation process, that's easier said than done. 

In this digital guide, we'll compare manual and automated payment reconciliation side-by-side. How do they compare in terms of efficiency, scalability, compliance, and other key factors that affect your business's long-term health? 

Why is accurate payment reconciliation crucial?

Accurate payment reconciliation is essential for the financial health of your business. Over time, seemingly minor reconciliation errors can add up to a considerable dent in your bottom line. An optimized payment reconciliation process is essential in protecting your company against ongoing hidden losses. 

If reconciliation errors aren't promptly caught and fixed, you could run into a number of financial issues: 

• Inaccurate financial reporting. Reporting is essential for guiding your business to positive strategic outcomes. Accurate reporting is the backbone of effective financial planning and analysis (FP&A). Payment reconciliation errors can cause downstream issues in your company's strategic planning. Inaccurate financial reports also pose a compliance risk and can land you in hot water with regulators. 
• Cash flow management issues. In order to organize your cash flow between operational expenses, investments, and everything else, you need to be confident in your reconciliation process and its resulting data. Error-prone reconciliations make that difficult since you're constantly second-guessing your decisions and overall cash flow picture.  
• Budgeting and forecast errors: Payment reconciliation errors skew your starting data for forecasts and budgets. It's tough to blaze a trail toward lasting profits if your data has errors baked into it. You'll end up building faulty forecasts and crafting corporate budgets that go nowhere fast because your initial assumptions don't reflect reality. 

Let's take a closer look at the manual payment reconciliation process. What does it entail, and what are its advantages and drawbacks?

Manual payment reconciliation – process, pros and cons 

If you choose to tackle your company's payment reconciliations manually, the process will look something like this.

First, you export your transaction reports from the various PSPs your business works with, in addition to prepping your own records. Next, you compile all that payment data into a centralized spreadsheet and compare internal and external records to ensure they match.  

After that, you'll need to investigate and reconcile the discrepancies you've identified. Maybe it's an order that was canceled in your records but not on the PSP's side. Or it could be that a PSP lists a transaction for $200, but your records show $250 for that same payment. Whatever the case, you'll need to dig into the underlying problem and fix it. 

After reconciliations are done, the final step is to repeat this process at monthly or weekly intervals. This helps you keep everything accurate and squared away financially. As you can imagine, though, the manual approach requires an ongoing and significant time and labor investment. 

Here's a quick rundown of the pros and cons of manual payment reconciliation.

Advantages of manual payment reconciliation:

• Slight upfront cost savings
• Fewer steps to get started with

Drawbacks of manual payment reconciliation: 

• Requires significant time investment
• Higher rate of uncorrected accounting errors
• Inaccurate reports and compliance slips are more likely
• Your team has less time to focus on strategically valuable work

You can indeed access minor upfront savings by not using a reconciliation tool and handling things manually. However, those small-scale savings are soon outweighed by all the hidden costs and inconveniences of manual payment reconciliation. That's why businesses are switching to reconciliation software to solve these problems and simplify PSP reconciliation. 

How does automated payment reconciliation stack up?

Now that you know more about the hidden costs of manual reconcilations, let's look at the other side of the coin. Payment reconciliation software can connect to your back-office data and your PSP's transaction records, and rapidly find discrepancies or inconsistencies. This saves a tremendous amount of time and cash, and increases reconciliation accuracy. 

Just as importantly, an automated approach saves time and money across your entire organization. When reconciliation errors occur, various steps might need to be taken in other departments to resolve the issue. For instance, if someone on your customer success team has to open a support ticket associated with a payment error, an entirely different department at your company is now impacted by the problem.

Let's examine a few more benefits of automated payment reconciliation. 

1. Scalability

When you use a reconciliation platform rather than relying on manual workflows, you instantly solve the problem of transactional scalability. With a manual approach, you'll need to hire more employees to help you handle your transaction load as your business keeps growing, which eats into your quarterly and annual profits. 

When you make reconciliation software part of your accounting department, those bottlenecks are eliminated. You'll be able to handle large-scale transaction volumes with thousands of customers and 10+ PSPs just as easily as smaller transaction loads. 

2. Overall cost

A common misconception about reconciliation software is that it's more expensive than just rolling up your sleeves and reconciling payments manually. As we mentioned, that's not the case once you factor in the manual headaches and hassles you'll have to deal with.

However, there's more to it than that. You can access even deeper savings using a reconciliation software provider offering subscription services. The software-as-a-service (SaaS) business model tends to be less costly than paying for a licensing fee.

3. Accuracy and efficiency

Reconciliation solutions offer sizable advantages in terms of accuracy and financial process efficiency. When we talk about accuracy in the payment reconciliation process, it's essential to break that into two distinct pieces: 

1. The number of errors that are found and fixed

2. The number of errors that slip through and produce financial losses

By automating the process of scanning for discrepancies, reconciliation software ensures that errors are found and fixed promptly. Automating your reconciliation workflows can dramatically increase accuracy and help you correct problems before they result in tangible financial consequences. 

And in terms of efficiency gains, a reconciliation platform could save you hours of manual work each month. That's valuable time that you and your team can direct toward strategic initiatives. 

4. Compliance

If left uncorrected, reconciliation errors can cause serious inaccuracies in financial reporting. Depending on the severity of the situation, this can result in non-compliance penalties and even legal consequences. 

An automated reconciliation tool can give you lasting peace of mind around compliance. Reconciliation software reliably flags errors for quick fixing, so they don't have the chance to become a compliance risk.

Optimize your payment reconciliation

Even if manual payment reconciliations worked well for you at first, you'll eventually hit a point of diminishing returns. Every company reaches a point where the costs of manual reconciliations outweigh the benefits. One of the most common ways of dealing with that problem is to accelerate hiring as transaction volumes increase. But there's a better (and much less expensive) option on the table. 

Reiterate helps finance teams automate and optimize payment reconciliation and other accounting workflows.