Credit card use is growing more prevalent as cumbersome paper-based payments continue to lose favor with vendors and customers alike. A major push toward a cashless economy has been another key driver for this fast-growing trend. The Federal Reserve notes a six percent growth rate in the use of credit cards over other payment mediums. Incoming and outgoing online payments have exacerbated this growth as merchants look to make payments easier and faster than ever.
But these developments have also compelled businesses to sort out more complicated financial management issues. In order to reap the benefits of credit cards, finance and accounting need a process to handle discrepancies and fraudulent errors, which, when not caught in time, can result in greater financial troubles down the line. That’s why credit card reconciliation is such an elemental activity underpinning proper expense management practices.
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What Is Credit Card Reconciliation?
The end of your company’s accounting period marks the beginning of a strenuous “clean up” activity for finance and accounting departments. Every penny spent whether on travel expenses or as an operating expense is compared against the general ledger for accuracy. When transactions incurred through a corporate credit card are involved, this is referred to as credit card reconciliation.
Credit card reconciliation reveals accidental or intentional discrepancies in your credit card statement. If unexplained spending behavior is present, employees and financial managers may need to provide more details to help account for the spend. If accounting is satisfied with the outcome after reconciliation, they can proceed to close the books for the month, quarter, or financial year.
Why Does Automated Credit Card Reconciliation Matter for Financial Managers?
Tracking down every expense is of significant importance for the financial manager. Credit card reconciliation confirms that expenses charged to the company card are authorized and compliant with the allocated budget.
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Corporate credit card fraud can take years to detect, as was demonstrated by the case Wescom Solutions Inc. v. Minetto. For nearly three years, Ms. Minetto purchased Apple products using Wescom’s corporate credit card without authorization. Matching each transaction to the credit card statement exposes negligent, accidental, and even fraudulent expenses.
But reconciliation does more than just track payments and company spending. It also ensures data is accurate and prepares your company for a future audit. Regularly audited and updated financial records are a reflection of your company’s true financial health and its readiness to comply with statutory auditorial procedures. Additionally, stakeholders can draw informed insights into the company’s financial health.
However, as the volume of transactions grows with increasing activity, human error tends to occur. An automated reconciliation process can handle large volumes of transactions while reducing human error and flag fraudulent or erroneous spend earlier.
A Typical Credit Card Reconciliation Process
Certain steps are followed to bring harmony between expense reports, corporate cards, receipts, and the general ledger.
- Gathering and sorting expense statements and receipts. Legitimate transactions are backed by receipts issued by vendors. These records act as evidence that transactions were indeed sanctioned by a representative of the company and that the vendor provided the product or service in exchange for payment. Companies with traveling employees expedite this activity with receipt-scanning expense tracking software.
- Reviewing transactions for validity and accuracy. At this stage, the accounting department goes through credit card statements to ensure that all the transactions are business-related. They also ensure that the transactions are valid, authorized, and of the exact amount indicated.
- Matching receipts to the corresponding card/bank statement. Each receipt is matched against its relevant credit card statement entry. Indicated on the credit card statement are the receipt amount, description, and date of the transaction. Unmarked items could be clear indicators of discrepancy.
- Identifying and investigating discrepancies. Differences in amounts between the credit card statement and the receipts are classified as discrepancies. Unrecorded transactions and items in the receipt are also potential discrepancies. Unauthorized charges and duplicate transactions also qualify as indicators of questionable transactions. All this should be investigated and the relevant supervisors contacted to clear the issue.
- Document the reconciliation process. As with other accounting procedures, transparency prevails with the documentation of all activities undertaken during reconciliation for future auditing purposes.
Corporate credit card reconciliation should be done, preferably on a monthly basis. This alleviates the potential buildup of errors, paperwork, and pressure on the accounting personnel come audit season.
>> Related: Corporate Credit Card Management Policy Best Practices <<
Why Doesn’t Manual Credit Card Reconciliation Cut it Anymore?
The manual credit card reconciliation process is time-consuming. Yet 68% of invoice data is manually entered into ERP software by accounting teams, and less than 32% of teams have an automated process (source). Personnel in the accounts and finance departments drain several hours just to uncover even minor discrepancies – hours that would have been spent more productively.
While manual reconciliation may not feel like your biggest problem, dismissing the true cost of a manual reconciliation process often carries consequences that can be destructive to the company’s financial health.
- Manual credit card reconciliation slows down the company’s operations towards the end of the fiscal period. You may have noticed the slumped activity at the end of the fiscal year. Frequent calls from merchants supplying critical inventory, flawed financial reports, and excruciatingly long reimbursement periods for traveling employees are just a few of the challenges that often trace back to manual credit card reconciliation.
- Businesses using manual credit card reconciliations can be hit with penalties when discrepancies are not caught early on. Corporate fraud can be blamed on negligence, ignorance, and active saboteurs. Regardless, errors that fly under the radar in a manual reconciliation process may subject the company to hefty fines.
- Manual credit card reconciliation dampens the company’s agility. Manual processes are subject to error, and more resource investments are required to sort out inaccurate reports. A lot of employees’ time is spent on the cleanup process rather than on more productive tasks. This can send ripples into the decision-making process and alter the company’s ability to adapt to the changes in the business environment.
What Challenges Do Finance Teams Face with the Corporate Credit Card Reconciliation Process?
The credit card reconciliation process presents a lot of challenges to the accounting team, especially when done manually. The process is more complex than it should be and time-consuming.
Handling large volumes of credit card transactions may prove challenging for a stretched team with heaps of paperwork at the end of the accounting period. Automating the reconciliation process makes it easier to handle large volumes of data with significantly less effort.
Transaction receipts may be missing, which further complicates the reconciliation process. With some receipts missing, it is impossible to match transactions with the corresponding expenses. Proper documentation underpins the reconciliation process by providing the necessary data. Any merchant receipts, invoices, and relevant documents can be made available through centralized expense tracking and management software.
When insufficient details about a transaction are provided, finance controllers may find it difficult to explain the nature and purpose of the expense. At the very least, receipts should provide important dates, vendor names, descriptions of the items/services purchased, and mode of payment. In this regard, itemized receipts can help break down the transaction.
Finally, the credit card reconciliation process is prone to human error. Incorrect data entry and mismatch of amounts can result in inaccurate financial records. Errors can be reduced by division of duties amongst employees involved in the reconciliation process. Periodic audits of the credit card reconciliation process should be conducted to identify areas of weakness.
How Does Automating Credit Card Reconciliation Save Time and Minimize Errors?
A worthwhile solution for a smooth reconciliation process is through the adoption of automated credit card reconciliation.
In response to the hardships managers face while tracking employee expenses on company cards, TravelBank was designed to provide a centralized dashboard listing all transactions on the company’s account. Managers can import transactions from over 48,000 personal and corporate cards and gain deeper insights into employee spending.
TravelBank takes responsible employee spending behavior to the next level by enabling finance managers to automatically sync transactions and card information and reconcile them in one place. Rather than pulling data from multiple sources, user spending and card statements can be accessed on the TravelBank dashboard.
Frequently Asked Questions
What does reconciling a credit card mean?
Reconciling a credit card means matching credit card transaction statements with your general ledger. Periodic credit card reconciliation detects errors and misuse of company funds and paints a clear picture of the company’s financial health.
How do I reconcile my credit card expenses?
Reconciling credit card expenses starts with gathering and sorting individual receipts and expense reports. Once all transaction details have been extracted and categorized, they can be matched against the corresponding account statements for accuracy. Any discrepancies flagged during the reconciliation process should be investigated.
How do you automate the credit card reconciliation process for business?
The credit card reconciliation process can be automated with expense tracking software. These programs are able to centralize transactions in one place, allow users to capture receipts on the go, enable managers to approve expenses, and even extract transaction details. Powerful expense tracking software automatically matches each transaction with its corresponding receipt, reducing human error and the workload on the financial manager’s plate.